Danaher Corp (DHR) 2006 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Danaher Corporation 2006 third quarter earnings results conference call.

Today's call is being recorded.

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

After the speaker's remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS].

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

Mr. Wilson, please go ahead, sir.

Thanks, Matt.

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.

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 Webcast presentation supplementing today's call can be found under the same heading, "web events."

This call will be replayed through October 23rd, and the audio portion will be archived on our website later today, and will remain archived until our next quarterly call.

The replay number is 888-203-1112, and confirmation code is 9244163.

I'll 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 the 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 competition, our ability to develop and successfully market new products and technologies, our ability to expand our business in new geographic markets, our ability to identify, consummate and integrate appropriate acquisitions, litigation, and other contingent liabilities including intellectual property matters, our compliance with applicable laws and regulations, our ability to achieve projected efficiencies, cost reductions, sales growth and earnings, economic conditions in end markets we sell into, commodity costs and surcharges, currency exchange rates, tax audits and general domestic and international economic conditions.

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

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

These forward-looking statements speak only as of the date that they are made, and we do not intend to update any forward-looking statement.

With respect to any non-GAAP financial measures provided during the call today, the accompanying information required by SEC regulation G relating to those measures can be found on our website, Danaher.com, under the section, "investor news."

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

Thanks, Andy.

Good morning, everyone.

We're very pleased to report this morning that our third quarter earnings per share were $0.83, a 19% increase over last year's third quarter earnings per share of $0.70, representing another record third quarter.

Revenues for the quarter increased 24% to $2.4 billion, revenues from businesses that we have owned for at least 1 year, also described as revenues from existing businesses or core revenues, were up just over 6.5%.

Acquisitions contributed 16%, and currency effects added 1.5%.

Revenues for the first 9 months of 2006 increased 21% to $6.9 billion.

Core revenues were up 7%, acquisitions contributed 14.5%, and currency had a negative impact of 0.5%.

Gross margins in the third quarter of 2006 were 45.1%, a 200 basis point increase compared to the same period last year.

Gross margins were positively impacted by leverage on the increased sales volume, generally higher gross margins on recently-acquired businesses, ongoing cost improvements, our low-cost region initiatives, and increases in selling prices.

Selling, general, and administrative expenses for the third quarter were 29.1% of sales versus 26.6% a year ago, driven primarily by the higher SG&A levels in our recent acquisitions, the expensing of stock options in the current year, and additional spending to fund growth opportunities, offset somewhat by leverage from higher revenues.

Year-to-date, SG&A expenses as a percentage of sales were 28.8%, an increase of 140 basis points over the first 9 months of last year.

Operating profit for the quarter was a record $392 million, a 23% increase over the same period a year ago.

For the first 9 months of the year, operating profit was $1.1 billion, 17% higher than last year.

Operating margins for the third quarter were 16.1%, a 20 basis point decline over 2005.

Included in the third quarter results this year is a negative impact of over 70 basis points related to the expensing of stock options, as well as the dilutive effect from net lower operating margins in our recently-acquired businesses, primarily Leica Microsystems, of approximately 25 basis points.

Absent these items, third quarter operating margins improved approximately 80 basis points on a year-over-year basis.

For the first 9 months of 2006, operating margins were 15.4%, a decrease of 60 basis points compared to the prior year.

Operating margins for the first 9 months of 2005 benefited a total of 25 basis points from a gain related to the sale of real estate, a gain on the sale of a business, and the collection of a previously reserved note receivable and related interest.

Lower operating margins from recently-acquired businesses impacted margins in the first 9 months of 2006 by 70 basis points, while the impact from the expensing of stock options impacted margins by 60 basis points.

In addition, a second quarter 2006 gain related to the sale of shares in First Technology contributed approximately 20 basis points to 2006 year-to-date margins.

Absent these items, year-to-date, margins improved approximately 75 basis points, a result of ongoing cost reduction initiatives, low cost region sourcing, leverage from higher revenue growth, and increases in selling prices.

Net interest expense for the third quarter was $26 million compared with $6 million for the third quarter of last year.

The increase in interest expense is primarily due to higher debt levels, related to borrowings utilized to fund the acquisition of Sybron.

Our effective income tax rate for the third quarter was 26.9%, versus 27% in the third quarter of last year.

We anticipate our effective tax rate for the fourth quarter of 2006 to be 27%.

Net income for the quarter was a record $268 million, a 17% increase over the third quarter of 2005.

For the first 9 months of 2006, net income was $798 million, an increase of 24% over last year.

Included in the 9 month results is the benefit from a reduction of approximately $52 million of previously provided tax reserves during the first half of 2006.

Operating cash flow for the first 9 months of 2006 was $1.1 billion, 20% higher than the same period last year, primarily the result of higher earnings growth.

Gross capital expenditures through the first 3 quarters of 2006 increased to $99 million, representing a 14% 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 $985 million for the first 9 months, and represents a 21% increase versus 2005.

Our free cash to net income ratio for the first 9 months of 2006 was 123%.

For the year, we believe our free cash flow will be approximately $1.3 billion.

We remain on track to deliver free cash flow in excess of net income for the fifteenth year in a row.

Our balance sheet remains strong, with a debt-to-total capital ratio of 27% and $264 million in cash and cash equivalents at quarter end.

Turning to our operating performance, and starting with our Professional Instrumentation segment, revenues increased 47.5% for the quarter to $1.3 billion.

Core revenues were up 11.5%, acquisitions contributed 34%, and currency effects contributed 2%.

For the first 9 months of 2006, revenues increased 39% to $3.6 billion.

Core revenues were up 8%, acquisitions contributed 31.5%, and currency had a negative impact of 0.5%.

Operating margins for the quarter were 17.3%, essentially flat versus the prior year.

The dilutive effect of the acquisitions and the year-over-year impact of stock option expensing negatively affected margin by approximately 120 basis points.

Operating margins otherwise improved as a result of leverage from higher revenues, as well as cost reduction initiatives across the segment, with significant margin improvement generated in our dental businesses, primarily KaVo.

Year-to-date, operating margins decreased 130 basis points to 16.7%.

When compared to 2005, the decrease is due primarily to these same factors, as well as to the previously mentioned charge related to the write-down of a minority interest in the first quarter of this year.

Operating margins from existing businesses, excluding these items, improved approximately 100 basis points versus the first 9 months of 2005.

Environmental revenues for the quarter improved 18%.

Core revenues were up 14.5%, acquisitions contributed 2%, and a positive currency impact contributed 1.5%.

Water quality delivered another notable performance, and as expected, we saw sequential strengthening of the top line at Gilbarco Veeder-Root.

For the first 9 months of 2006, sales increased 10.5%, core revenues were up 8.5%, acquisitions contributed 2%, and there was a negligible currency impact.

Water quality core revenues grew at a high single-digit rate in the third quarter, led by another positive performance from Hach/Lange.

Hach/Lange core revenues were up double-digit, driven by growth in both process and laboratory instrumentation.

Hach Ultra Analytics core revenue in the third quarter also grew double-digits, led by solid performances in North America and in Europe.

Of note during the quarter, Hach Homeland Security received certification from the U.S.

Federal Government for our bioalert line of air parcel detection products, paving the way for anticipated funding of Homeland Security projects at both the state and municipal level.

Gilbarco Veeder-Root's core revenues grew 20%, driven by demand in North America and in Europe.

Mexican regulations requiring all retail dispensers to be tamper-proof by the end of 2006, as well as somewhat easier year-over-year comparisons resulting from a shift of shipments from the third to the fourth quarter a year ago, helped drive the exceptional growth this quarter.

Sales of our new Encore 500 series dispenser and passport payment systems also contributed to this outstanding performance.

Our air and water environmental solutions are performing well at Gilbarco Veeder-Root with our vapor recovery products generating year-to-date sales in excess of $20 million.

Earlier this month at the National Association of Convenience Stores Show, we introduced the Guardian Leak Prevention System, the only continuously monitored tank to hose Class 1 leak detection and containment system available.

Moving over to electronic tests, revenues grew 14.5% in the quarter, core revenues were up 7%, acquisitions contributed 6.5%, and currency had a positive impact of 1%.

We saw continued strength from our Fluke business, while Fluke Networks was somewhat softer due to a difficult comparison resulting from the timing of new product introductions in the third quarter of last year.

For the first 9 months, electronic test sales increased 14%, core revenues were up 7%, acquisitions accounted for 8%, and currency accounted for a decline of 1%.

Fluke's double-digit core revenue growth was the result of increased demand in the U.S., Asia-Pacific, and Latin America, driven by demand for a number of our new products, including our thermography and power quality test products.

Fluke Networks core revenue for the quarter was flat, with growth in cable test products offset by softness in network test equipment revenues, due primarily to the timing of new product introductions.

In August, we acquired the assets of Amprobe, a well respected brand of hand-held electrical test products for professionals in the electrical, maintenance, construction and HVAC markets.

Amprobe adds a strong value position to the Fluke product lineup.

Integration of their operations into Fluke's existing Everett facility is already nearing completion.

Turning to Medical Technologies, revenues grew 115.5% in the quarter, core revenues were up 12.5%, acquisitions contributed over 100%, and currency accounted for 2.5% of growth.

For the first 9 months of 2006, sales are up 111%.

Core revenues are up 8.5%, acquisitions accounted for 103%, and currency accounted for a decline of 0.5%.

Within our dental business, equipment revenues grew at a mid-teens rate in the quarter, led by a solid performance in both instrument and imaging sales, as the new Gendex and Dexis digital imaging products continued to take share and are quickly growing market.

Strong global demand for new products, including KaVo's Gentle Silence hand piece, introduced in the middle of last year, and favorable comparisons resulting from prior year restructuring activities, KaVo also contributed to this performance.

Our new dental consumables business, anchored by the current Ormco franchises, grew revenues at a low double-digit rate in the third quarter compared to 2005 results as a standalone company, with broad-based growth experienced across all core product categories.

We recently completed our 100-day strategic plan review at Sybron, standard work for us for all new acquisitions, and came away more excited about the growth prospects of this business, and quite pleased with the quality and the caliber of the management team.

Leica Microsystems core revenue growth was at a mid single-digit rate during the quarter, with two-thirds of the quarter's performance represented as acquisition revenue.

Continued demand for stereo and surgical microscopes, as well as strength in specimen preparation products contributed to third quarter growth.

Geographically, strength in North American and Europe offset slower growth in Japan.

DBS activities continue to gain traction, with operating margins expected to improve over 200 basis points this year.

Last week, we announced our intention to acquire the outstanding shares of Vision Systems Limited, a $100 million global leader in instruments and consumables serving the anatomical pathology laboratory market.

We like Vision for 3 reasons.

First, the pairing of Vision and Leica, we believe, represents a stronger offering in the pathology lab.

Second, the consumables and after market mix of the Vision business, we believe, upgrades significantly the Leica business model, along the lines of what we see at Radiometer, Hach/Lange, and Videojet.

And third, we believe the increased exposure to life sciences generally, and oncology diagnostics specifically, represents a growth accelerator for Danaher.

The offer is subject to tender of a majority of the Vision shares on a fully diluted basis into the offer, and certain other customary closing conditions, and if consummated would likely close late in the fourth quarter of this year.

Due to the ongoing public process and Australian regulations, we unfortunately will not be able to address questions related to the details of the process today.

Radiometer grew core revenues at a low double-digit rate driven by strong instrument placements in Europe, as well as robust consumable sales in Europe and in the U.S.

Moving over to Industrial Technologies, revenues increased 5% for the quarter to $766 million.

Core revenues were up 3%, acquisitions accounted for 0.5%, while currency contributed 1.5%.

For the 9 months, revenues increased 7.5% to $2.3 billion, core revenues were up 7%, acquisitions contributed 1%, and currency negatively impacted sales by 0.5%.

Operating margins for the quarter were 16.2%, a 10 basis point increase versus the same period last year, in spite of a stock option expense dilution of 60 basis points.

For the first 9 months of 2006, operating margins increased over 50 basis points to 15.3% compared to 2005, as leverage from higher sales growth and continued benefits from low cost region sourcing and production, particularly in Motion, more than offset the impact of stock option expensing and other prior year first-half items discussed earlier this year.

Product identification revenues declined slightly during the quarter on a year-over-year basis, with core revenues declining 2.5%.

Acquisitions had no impact, and currency contributed 1.5%.

For the 9 months, product identification sales increased 5%, essentially all core revenue growth.

As we mentioned on last quarter's call, the decline this quarter is attributable to the completion of several large United States Postal Service projects by both Videojet and Accu-Sort.

We continue to gain traction with our TTO and laser products, which together are up double-digit year-to-date at Videojet.

In addition, we again improved profitability, with third quarter operating margins up over 100 basis points versus a year ago.

During the quarter, Videojet introduced their new EXCEL dual nozzle CIJ printer, improving our leading position in the high volume coating market that addresses the high speed requirements of customers in the food and beverage markets.

Moving to Motion, year-over-year revenues grew 6% in the quarter, core revenues were up 4%, acquisitions were negligible, and currency added 2%.

In the first 9 months of this year, year-over-year sales increased 5%, core revenues were up 5.5%, acquisitions accounted for 0.5%, and there was a negative currency impact of 1%.

Growth in the quarter was due primarily to broad-based standard and custom motor and drive sales, particularly in elevator and electric vehicle markets, offset somewhat by softness in certain tech end markets.

Our mini motor business performed well, ramping production on recent design wins, including several opportunities within surgical hand tools.

Finally, the business also experienced continued growth in sales of its linear and industrial actuator products for both the quarter, and on a year-to-date basis.

Turning to Tools and Components, total revenue was $330 million for the quarter, up 2%.

Core revenues were up 1.5%, and there was a favorable impact from currency of 0.5%.

For the first 9 months, revenues increased 3.5% to $979 million, essentially all of which was core growth.

Operating margins for the quarter were 15.6%, a decrease of 140 basis points over the prior year due to a 60 basis point impact from the expensing of stock options, a 40 basis point impact as a result of the exit of a small product line during the quarter, as well as from higher freight and the impact of negative mix in our Asian export business.

Price increases partially offset some of the decline.

For the first 9 months of 2006, operating margins decreased approximately 140 basis points to 14.3% compared to 2005, due to these same reasons, as well as the positive impact in the first quarter of 2005 of the gain on the sale of real estate of approximately 55 basis points.

Mechanics hand tool revenues improved 2% during the quarter, all of which represented core growth.

For the first 9 months of this year, sales increased 3.5%, again, all of which was core growth.

As expected, our sell-in to Sears improved in the third quarter, the result of higher promotional activity.

Our sell-through at Lowe's continued to grow at a double-digit rate, while Asia export sales declined in the quarter.

Matco core revenues grew mid single-digits in the quarter, despite a double-digit growth comparison in the third quarter of last year.

So to wrap up, our performance through the third quarter and on a year-to-date basis, and in particular, the strength experienced in our professional instrumentation segment is very encouraging.

As we look to the remainder of this year, we continue to see strength across most of the portfolio and in all major geographies, giving us confidence in our ability to deliver both top and bottom line growth.

We continue to anticipate 5% plus core revenue growth for the balance of this year, with continued year-over-year improvement in profitability, the result of our growth and cost initiatives.

Given this outlook, we expect our earnings per share in the fourth quarter to be in the range of $0.89 to $0.94, representing a year-over-year increase of 14% to 21%, including the impact of option expensing in both years.

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 $3.15 to $3.22, to $3.19 to $3.24, which still assumes the 27% tax rate for the balance of 2006.

Thank you, Larry.

That concludes our formal comments.

Matt, we're now ready for questions.

[OPERATOR INSTRUCTIONS] John Baliotti, FTN Midwest Securities.

Larry, you mentioned strength in water primarily at Hach/Lange, and I was wondering if you could talk maybe about what you're seeing through your Trojan business in terms of projects.

I know other companies have talked about raw materials pushing out some projects.

I am wondering if you have any color on that?

Sure.

Well, I think as you highlight, John, we had an exceptional quarter, I think, in environmental, broadly on both sides, both in water and at Gilbarco.

I think we're very pleased with what happened at Hach/Lange.

I think the color there is really just a continuation of what they have seen all year long here, in Europe, certainly in Asia, as well.

Both on the process and on the lab side.

I think we also, as we highlighted, had an excellent quarter at Hach Ultra.

I think Trojan clearly, is seeing a tougher market for the UV disinfection products this year.

I'm not sure that is really a raw material input cost issue, as much as it is just a slower rollout of the projects that had been anticipated for this year and next year.

We were with the team earlier this week.

In fact, the win rate, the share figures, I think, are quite strong.

The order book is very encouraging with respect to '07 performance.

But clearly Trojan is not going to make the -- not going to have the contribution to our core growth this year that we had anticipated.

But you still feel the market is -- there is that pent-up demand still for the disinfection market?

Well, there's no question, John.

I think you're going to see disinfection technologies broadly, UV specifically, enjoy I think very healthy growth over the next decade.

I think there are some schools of thought that perhaps the LT2 regulation impetus that some would have thought would have been more helpful here in the short-term, perhaps is going to take a little longer to play out.

But I think on balance, we believe in that market, that UV market, and particularly have a lot of confidence that Trojan is going to win that game.

Okay, thanks, Larry.

Robert LaGaipa, CIBC World Markets.

Just a few questions.

I guess one on the core growth rate.

Obviously, the comp gets a little bit tougher in the fourth quarter, specifically in Medical Technology.

Can you maybe just talk about what areas you're expecting to accelerate from here on out for the remainder of the year?

And which areas that you're a little bit more concerned about?

I think the way I would characterize it is that the businesses that have lagged a little bit here, like tools, perhaps product ID a bit should sequentially be more helpful here in the fourth quarter.

I'd love to see it.

I'm not sure Professional Instrumentation is going to continue to be white hot.

Particularly at Gilbarco Veeder-Root, we tried to flag in our prepared remarks that it was an exceptional quarter, unlikely to continue at that blistering pace.

So we continue I think to be optimistic about our collective core growth trajectory here.

I think the folks that have lagged a little bit will help a little bit more.

Some of the folks that have been leading the charge will probably still do so, but perhaps come off some outstanding performances a bit.

But on balance, I think we feel very good about the outlook here in the near term.

Terrific.

Secondly, just on the operating margin front, I remember from the investor meeting last year, you had highlighted a few areas -- a few businesses that were obviously below the corporate average.

Can you maybe just give us an update through the third quarter here, Motion, Gilbarco, dental and Leica, kind of where the margins stand at this point relative to last year?

Sure, Bob.

This is Dan.

On Leica, we bought that last year as a mid single-digit operating margin business.

That will be up more than 200 basis points this year, and maybe even a little bit more than that.

So I don't think we'll be at 10 at the end of the year, but we'll be sort of high single-digit.

On KaVo where we exited about 7 -- and the dental equipment about 7%, we've been up about 300 basis points year-to-date, and we're confident we'll be a 10 and maybe a little bit better 10 for the full year.

So good progress there, as well.

And as we've talked about the past 5 or 6 quarters, very good progress at Motion and I think for the full year, we'll be up 150 basis points there, as well.

And lastly, just on the acquisition front, obviously with Sybron, more recently Vision, I know you can't talk specifically about Vision, but where do we stand in terms of the pipeline, your willingness to continue to acquire larger businesses versus the bolt-ons?

Can you tell us what the pipeline looks like, and if you have some sense, or can give us some sense of the size of the acquisitions that are potentially in the pipeline and the areas, that will be helpful.

Sure, Bob.

I'll take that.

I think that as you have seen, we've been quite active this year, both in making major moves, Sybron, Vision, along those lines, in addition to continuing our bolt-on activity.

I would say the outlook and strategy is unchanged.

We continue to talk to a lot of folks, look at a lot of opportunities.

We obviously want to be selective both with respect to strategic fit and value creation, but by no means with Sybron and Vision here are we pausing.

I think we'll continue to look at all good opportunities that come our way.

And if we see the strategic fit, we see the opportunity to create value, and we see ourselves as having a bandwidth to tackle those opportunities, you should expect to see us do that.

Terrific.

Thank you very much.

Chris Kotowicz, A.G. Edwards.

I guess to clarify on the core growth, your 5% plus target, is that a fourth quarter target or is that a full-year target?

Fourth quarter.

And on the Leica Micro, I know you said the margins are -- look like they are going to be up about 200 basis points or so for the year.

Usually you guys see, I guess, a lot of expansion, I guess what, year 2 and year 3, right?

Once you get past the initial work?

I think we're looking at both top line and there kind of steady improvement.

We didn't, over the next couple of years.

I don't think we'll see the step function there that we saw in dental equipment, that wasn't quite as a significant amount of restructuring.

Having said that, we've made more progress year 1 in margins than we did in dental equipment.

So you think 100 to 200 basis points for next year is pretty reasonable, though?

I think that's what we would like to continue to see out of that business for the next couple of years.

Okay.

And then I guess 1 last one.

Now that Markham is off the table with Dover having bought that, is product ID still a place where we should expect to see deal activity for you guys?

Yes.

Okay.

Fair enough.

Thanks.

Ajit Pai, Thomas Weisel Partners.

A couple of quick questions.

The first is in terms of geographies.

Just looking at your -- I think in the tools business, you mentioned that Asia was weak.

Could you give us some color as to what you're seeing right now in Asia?

What the softness was due to, and whether it's a broader-based moderation in the base of growth over there that you are seeing?

And then comment on Europe, as well.

Sure.

Just to clarify, the comment on tools was really meant to target the Asian export business, which primarily goes -- those are products manufactured in China.

They are sold in North America and in Europe.

I would say broadly I think China continues to be a very healthy country for us, really without exception, Ajit.

I think there are in a couple of instances, signs of some of the government's attempts to try to slow down some of the project spending.

We see that.

But that's really on a one-off basis as opposed to anything that is roiling through the order books right now.

I think of course, in the quarter, Europe was another strong performer for us, again, really across the businesses.

I think we indicated a couple of businesses were particularly strong, Hach/Lange and Gilbarco in the environmental platform.

But I think we continue to see good growth, good order book trends in Europe, as we do obviously here in North America.

Okay.

And in China, would you care to break out approximately what percentage of your business is now based in China, and what it's growing at?

Our China business is clearly in the high teens, close to 20% on a core basis.

And obviously, with that sort of growth outstripping the export growth, we're probably now close to maybe -- .

6, 700 million.

Yes, in country.

Okay.

Thanks so much.

Ann Duignan, Bear, Stearns.

A quick question on Gilbarco Veeder-Root, as E85 ethanol expands throughout the United States, and given the changes that have to take place at the retail pump in order to accommodate E85, is this an opportunity for Gilbarco Veeder-Root?

Is it big enough to be material to that organization?

Ann, it's a good question that we continue to ask ourselves.

I think the current view is that it is an opportunity.

We do today sell an E85 compatible product, and it's not just the dispenser, it's frankly all the hardware on site.

How material an opportunity that is, I think is still under review.

I don't think we've baked a lot into the 3 year strap plan that we recently completed with them for ethanol-based growth.

But it clearly is an opportunity, that were it to take material shape, Gilbarco Veeder-Root would be poised to capture unlike anybody else in that business.

Okay.

So maybe incremental in the '07 time frame and maybe growing from there?

Yes, that's probably a good way to think about it.

Okay.

And then I just wanted to ask a question on the organization structure on the Medical Technology side.

Larry, does Radiometer still report directly to you?

And then how might you think about the organization structure if indeed you do -- are successful in your Vision acquisition?

Ann, with respect to Radiometer, I'm sure much to their delight, they no longer report directly to me.

I'm sure.

Don't say that.

No, you don't want the CEO -- reporting to the CEO.

Radiometer reports in to Tom Joyce.

As you know, Tom also has responsibility for our other instrumentation businesses, Hach/Lange principally.

So his experience and expertise with that business model I think is very appropriate and applicable to Radiometer.

I think if -- hopefully we'll get Vision done.

We're optimistic.

When that is completed, I think we'll have a couple of options as to how we think about running the businesses at that level.

So it's a fair question.

But clearly, what we want to do more than anything with Vision, is make sure we bring that team and that business onboard, do nothing to harm their outstanding trajectory, but really look to how we most smartly pair the Leica spec prep or pathology diagnostics business with Vision, to put together that powerhouse we think we'll be able to build in the path lab.

Okay.

So Leica and Vision will be kind of joined at the hip maybe a year or 2 from now if the acquisition goes through?

Yes, Wolf Reuter, the gentleman who heads the Leica business for us today, has spearheaded our efforts in and around the division transaction, and will have lead responsibility, obviously, to make sure we bring them onboard in a way that is very on point relative to the strategy.

Okay.

Thank you, that's helpful.

I'll get back in line.

Thanks.

[OPERATOR INSTRUCTIONS] Deane Dray, Goldman Sachs.

A question on pricing.

So if organic growth rate just above 6.5%, looks like you've got 2 percentage points from pricing.

If you take us a tour across the platforms, just at the high end and the low end, where are you getting the most pricing power?

And then on the lower end side, is there any cases where pricing is negative?

I think if you look across the 3 segments, Deane, they're all between a 1.5 and 2 points of price in the quarter.

And it was a little bit under -- just so we were clear on what we communicated, it was a little less than 2 points of price and basically sort of 5% on volume.

It added up to more than 6.5, but rounded down to 6.5.

But across the segments, it's been pretty consistent point at 1.5 to 2 points of price.

And if you look within the platforms themselves, where do you have the most pricing power?

I think in the areas where we have consumable element, we've gotten price.

Matco continues to do a good job getting price.

Motion, despite the fact it's more of an OEM business, has also done a very good job in getting price.

Okay.

And then how about in terms of guidance?

In years past and quarters past when Danaher has a quality quarter like we're seeing today, there have been cases where you've given a positive preannouncement, say we'd come in at the high end or slightly above.

We didn't see that this quarter.

Is that a change in how you want to give guidance, or is there anything different about this?

Or did the upside come towards the end of the quarter?

I wouldn't read that into that, Deane.

I would say a couple things. 1, typically, if we're at an investor conference very late in the quarter, it's hard not to talk about the quarter.

I think in the case of Q1, we were -- 2 weeks before earnings we announced the Sybron acquisition, so I think it would have been difficult to talk about the acquisition without talking about the quarter.

So I think it was more the dynamics around those situations that drive it.

We had solid growth throughout the quarter, so I wouldn't read too much into that.

Good, that's fair.

And then I know you're limited on what you can say about Vision.

But how does this fit in terms of, it's not a new platform, it's not necessarily a bolt-on to like -- and the reason I ask, is I know you have different return on capital hurdles based upon how these businesses fit in terms of strategic or new platforms.

The way we would look at this would be kind of a large, strategic adjacency, and would give ourselves 5 years to exceed our cost of capital in terms of a return.

And that's roughly something above 10%?

Correct.

Terrific.

Thank you.

Nigel Coe, Deutsche Bank.

First of all, I would like to start off with some housekeeping questions.

Does full-year guidance include anything at all for Vision?

No.

I mean, if we close the transaction, it would be very late in the fourth quarter.

Okay.

So you don't think we'd see any inventory set up charges or any material dilution from that?

No, I mean, there could be something small, but we'd have to look at it at that time.

It will depend when it will close, but right now it does not include anything.

Okay, great.

Just a follow-up on Deane's question on pricing.

It does seem that pricing is stepping up quite materially.

Do you expect to be able to push that up to maybe 2.5%, 3%?

I think something in the -- where we're seeing right now in the 2% range feels appropriate, and maybe gets a little bit better.

But I think as we've seen the step function from kind of 1% to 2%, I think that's probably the big move.

Okay.

And just a follow-up on your comments about Gilbarco Veeder-Root coming down, obviously it's had a great quarter.

But would you expect that to be a step function down towards more normal mid single type digit type growth rates in fourth quarter, or more of a gradual decline over the next couple of quarters?

I think more the former, Nigel.

Right, right.

Okay.

And just finally, on the -- so obviously, an active quarter.

The comps are pretty tough for next I think till about mid-2007.

Would you expect that to be negative until that time?

Or do you expect to maybe break into positive territory?

I think the platform could be flat to down again in Q4.

We'll talk more about '07 in December.

Again, as we talked about, both this quarter and we expect for next quarter, overall margins are up.

And in fact, operating profit dollars are up, as well, even though revenues were down this quarter and might be down next quarter.

But obviously, an indication that the business that did not repeat was relatively low margin.

Sure.

Great, thanks.

Nicole Parent, Credit Suisse.

This is [Russell Lane].

Our question is a big picture question here.

Basically we want to know your outlook for the remainder of the year in terms of big picture industrial.

And then going into '07.

First off, you don't sound like Nicole Parent.

Are you there?

Yes, I am.

Could you repeat the question, please?

Sure.

Basically, we're looking for a big picture question in terms of industrial outlook for the remainder of this year and your view into '07.

I think what Larry said today was regarding the fourth quarter, things continue to be strong.

And we don't see a change in that outlook, and we'll talk more about '07 in December.

Jeffrey Sprague, Citigroup.

Larry, you mentioned a small divestiture.

I was wondering if you could tell us what that is.

And more broadly, we've had this conversation in the past about your niche businesses and how they're a breeding ground for talent.

But kind of, just given the M&A environment out there, is there a little bit more of a focus on maybe trafficking in some of those noncore assets, looking for opportunities to monetize those.

Interest -- unsolicited interest from other parties towards those assets, et cetera?

Jeff, with respect to the specific question, it was a small product line that was part of our Delta storage business that we exited during the quarter.

To the broader question, I wouldn't say there's a change.

As you pointed out, clearly, a frothy market in some cases is a seller's market.

I think we listen to anybody that might have a reasonable proposition as we think about the portfolio going forward.

But again, I think we look at our businesses first with respect to their strategic strength and the positioning they have in their markets.

And if they have that competitive advantage and we have confidence in their trajectory going forward, we think they have a home in Danaher.

Obviously, if someone has a different point of view or puts a premium on those assets, we're all about shareholder value here, and we'll have that conversation.

But I wouldn't say that we have stepped up our ongoing review of the portfolio, or any -- or that we've taken any actions deliberately to shed anything that would be material.

Great.

And just wondering on the options, it seemed like it was probably just some timing on how things kind of vest, but it was higher in the third quarter.

Is there a step back down in the fourth quarter?

Is there anything to be aware of there as we think about the margins in Q4?

Jeff, we do our large grant across the Company in July.

So you do see a little step up mid year for us.

And you'll see some of that impacting Q4, as well.

Okay.

And then I guess, just finally for me, I was just unclear when you were talking through the puts and takes on med tech and dental in particular.

Was the comment that the consumables business overall, including Sybron, if you looked at it on a pro forma basis, had kind of low double-digit organic growth?

You bet, Jeff.

They had a terrific quarter, terrific start to their Danaher tenure.

And just as we think about a very large -- I don't know if you roll it up this way, but whatever the number was, 16% acquisition growth in the quarter.

Do you have a view of just kind of overall what the pro forma organic growth rate of that is?

Really my point is kind of thinking about as that rolls off and becomes part of the core, do we see a little bit of a kickup here in the next few quarters?

I think on a combined basis, the acquisitions could -- Leica had a good July and August which did not get counted in core.

We were probably close to double-digit in terms of the acquisition growth.

Thank you very much.

Robert Cornell, Lehman Brothers.

You mentioned that you were encouraged in your strategic planning view of Sybron in terms of the growth outlook.

Maybe you could just expand on what was it that was so encouraging.

Sure.

Bob, I think as we went through that process, it really was an excellent effort for them, and I think for us.

Obviously, with the performance we were just talking about with Jeff, you go into that conversation, first of all, wanting to do no harm.

But I think as we got into the Ormco, the orthodonture franchise, we clearly saw opportunities to invest more heavily in the real growth drivers there.

Their Damon franchise is just a world beater, but with still relatively low penetration.

So we see that as one of the better opportunities.

And I think also as we looked at that business, we see opportunities to help them internationally, whether it be on the back of the KaVo infrastructure or frankly, other parts of Danaher in ways they haven't done historically.

And I think you wrap all that together, obviously Ormco is an outstanding business.

We think one that has a great future ahead of it.

On the Kerr side, pretty much the same story.

That's the general dentistry product offering.

I think a lot of opportunity to really double down on the better product category positions that they have, play the international card as well.

It's obviously early in both cases.

But I think we have a lot of momentum right now, and as I indicated to Jeff, I think we're quite happy to have consummated that transaction and have that team onboard.

Would you remind us, I think the gross profit margins are good, but the SG&A at Sybron is pretty high.

What's your perspective there?

And is it at appropriate levels, or can it be brought down, or what's the runway?

Bob, as a public company it was running at high 50s, close to 60% gross margin and 20% operating margins.

Admittedly, one of the reasons our SG&A as a percentage of sales rose this quarter, was we had them for a full quarter at 40% SG&A.

But like a lot of businesses that we acquire with high gross margins, we think there's an opportunity both on the gross margin side, as well as leveraging the SG&A over time.

Moving over to Motion, Motion is doing better and better.

And I was pleased to see that the Thomson business doing well.

But going back now relative to a couple of years ago, there's more of a component feeling about that business relative to the big systems wins you were getting a couple of years ago.

Maybe you could -- is that by design, or is that something else going on?

Bob, I wouldn't say there has been a shift per se.

Clearly as you point out, the Thomson franchise has been improving and that's principally a component business.

I think that we recognize that there are system or subsystem opportunities there, but they really need to be the icing on top of the cake.

And a lot of those products within the platform are sold on a one-off basis, and we need to make sure we've got competitive products and are smart about how we take those products to market.

And I think we've gotten better along both of those dimensions over the last couple of years, and you see that in the performance.

Not to mention, obviously, the good work the team has done on the cost side, driving those op margins up during that same time.

One final question from me.

I mean, you answered the pricing question a couple of times, but not the price cost delta.

And where are you with regard to the price cost trade-off and how would you look in terms of '07?

I think in most of the businesses, it's been favorable.

Tools has probably been a little bit more of a challenge through the first 9 months in that regard.

We're not commodity forecasters, but I think we've got some -- we've got some -- made some progress here on the price side.

And obviously if things kind of temper a little bit, at least from a commodity inflation perspective, that should be a benefit in '07.

Was price cost a net positive or a negative in this quarter?

It was a positive.

Okay, thanks, everybody.

Steve Tusa, JPMorgan.

Just a question on the -- I'm sorry if I missed this, but the strong free cash flow.

What was the main driver?

I noticed on the cash flow statement it was -- the core working capital was pretty good, but was there anything else in there that contributed?

We've got more goodwill amortization, so that obviously helps the ratio, stock option expense.

Our cash -- our tax provision was higher than our cash tax payment, so that was less of an impact.

And as you noted, Q3 last year, working capital was a big use of cash.

And this quarter we did a better job, it was a use of cash, but it was pretty modest.

Okay.

Great, thanks.

And at this time with no further questions, I'd like to turn the call back over to management for any additional or closing comments.

Thanks, Matt.

I want to thank everyone again for joining us this morning.

As a reminder, the replay number for today's call is 888-203-1112, with the confirmation code of 9244163.

In addition, as usual, Dan and I will be available for the balance of the day if you have any additional questions.

Thanks for joining us.

And that does conclude today's conference.

Again, thank you for your participation.

Have a good day.