Danaher Corp (DHR) 2007 Q3 法說會逐字稿

Good morning, everyone.

My name is Melissa and I'll be your conference facilitator today.

At this time I would like to welcome everyone to the Danaher Corporation 2007 third quarter earnings results conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS)

At this time, I would like to turn the call over to Mr.

Andy Wilson, Vice President of Investor Relations.

Please go ahead, sir.

Good morning, everyone, and thanks for joining us.

On the call today 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 earnings.

Access to our webcast presentation supplementing today's call can be found under the heading, web events.

In addition, we have included the Webcast presentation, materials, supplemental documentation detailing the impact of acquisitions and currency translation on company and segment revenues, as well as additional information identifying factors impacting company segment margins for the relevant periods.

This call will be replayed through 11:00 a.m.

eastern time on October 23, 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 888-203-1112 in the U.S.

and 719-457-8020 internationally, and the confirmation code is 8349054.

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

I would also like to note that in order to help you understand the company's direction, we'll be making some forward-looking statements during the call including statements regarding events or developments 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 set forth in our SEC filings.

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

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

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 in the investor section of our Web site, www.danaher.com, under the subheading, earnings.

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

Andy, thanks, and good morning, everyone.

Before we get into the details of the quarter, I would like to provide you with a few highlights.

We had a record third quarter and as expected, we delivered sequential and year-over-year revenue growth and operating margin expansion as we continued to see strength across most of our businesses.

I'll talk about some of the details here in a moment.

We also announced earlier this week our tender offer to acquire all outstanding shares of Tektronix Inc.

for $38 per share or $2.8 billion.

Based in Beaverton, Oregon, Tektronix is a leading supplier of test, measurement, and monitoring products and services for engineers in the communications, computer, consumer electronics and education industries, as well as military, aerospace, semiconductor, and a broad range of other industries worldwide.

We are very excited about this opportunity and believe that Tektronix will be an excellent complement to our Fluke and our existing electronic test platform.

I will be speaking more about Tektronix later in this call.

Turning to the details of our third quarter financial results, I'm very pleased to report this morning that our third quarter earnings per share from continuing operations was $1.03, a 25% increase compared to last year's third quarter earnings per share of $0.82, and represents another record third quarter.

For the quarter,our tax rate was 23.6%, which benefited from a more favorable mix of U.S.

and non-U.S.

earnings, as well as certain discrete tax benefits within the quarter.

The benefit of this lower tax rate as compared to our previously-forecasted tax rate of 27% was approximately $0.05 per share in the quarter.

Revenues for the quarter increased 14.5% to $2.7 billion, with revenues from existing businesses, also described as core revenues, up 5%.

This excludes the revenue growth from our recently-acquired Vision and ISI businesses, which together grew approximately 25% during the quarter.

Year-to-date, revenues increased 15.5% to $7.9 billion, with core revenues growing 4%.

Our gross margin in the third quarter was 45.7%, a 50 basis point increase when compared to the same period last year.

Gross margins were positively impacted by leverage from higher revenues and ongoing cost saving initiatives and from higher gross margins in our recently-acquired businesses, primarily Vision Systems.

Selling, general and administrative expenses for the third quarter were 24% of sales, a decrease of 30 basis points compared to the same period a year ago, and were also primarily the result of leverage from higher revenues.

Year-to-date, SG&A expenses were 24.7% of sales, an increase of 60 basis points over the first nine months of 2006.

This increase was due primarily to higher SG&A structures in our recently-acquired businesses.

Research and development spending as a percentage of sales for the three and nine months ended September 28, 2007 were 4.8% and 4.9%, respectively, comparable to the same periods a year ago.

Operating profit for the quarter was $463 million, a 20% increase over the same period a year ago.

For the first nine months of the year, operating profit was $1.3 billion, 21% higher than last year.

Operating margins for the third quarter were 17%, a 90-basis point improvement over 2006.

Operating margins from existing businesses contributed 120 basis points of improvement for the quarter, with particular strength in electronic test, water quality, product ID, and Leica.

The impact of recently-acquired businesses, including Vision and ChemTreat, had a 30-basis point dilutive impact on the quarter's operating margins.

Year-to-date operating margins were 16.2%, an increase of 70 basis points compared to the prior year.

Margins from existing businesses contributed approximately 90 basis points, with recently-acquired businesses negatively impacting margins by 20 basis points.

Net interest expense for the third quarter was $25 million, slightly lower than the third quarter of last year.

As I mentioned, our effective income tax rate for continuing operations for the third quarter of 2007 was 23.6% compared to 26.9% in the third quarter of 2006.

The effective tax rate was lower than the rate used for the first six months of the year, due primarily to the recording of cumulative year-to-date benefits of a change in the expected mix of earnings between our U.S.

and non-U.S.

subsidiaries.

In addition, income tax expense for the third quarter benefited from a reduction of deferred taxes, a result of tax law changes in certain foreign jurisdictions.

For the balance of the year, we anticipate an effective tax rate to be approximately 26%.

Net income from continuing operations was $335 million, a 26% increase over the prior year.

For the first nine months, net income from continuing operations was $894 million, an increase of 13% over the first nine months of last year.

Operating cash flow from continuing operations for the first nine months of this year exceeded $1.1 billion, 5% higher than the same period last year.

Gross capital expenditures here to date increased to $100 million, representing a 2% increase over the first nine months of last year.

Our full year estimate of capital expenditures is 150 to $175 million.

Free cash flow from continuing operations, defined as operating cash flow from continuing operations less capital expenditures for the first nine months exceed $1 billion, representing a 6% increase as compared to 2006, despite $112 million of incremental, year-over-year tax payments.

Our free cash from continuing operations to net income from continuing operations conversion ratio for the first nine months of this year was 115%.

For the year, we remain on track to deliver free cash flow from continuing operations in excess of net income from continuing operations for what would be our 16th year in a row.

Turning to our operating performance and starting with our Professional Instrumentation segment, revenues increased 21% for the quarter to $880 million.

Sales from existing businesses increased 6.5%, driven by strength in our water quality and electronic test businesses.

For the first nine months of 2007, revenues grew 16% to $2.4 billion, with revenues from existing businesses up 7%.

Operating margins for the quarter were 22.7%, up 210 basis points versus the prior-year performance.

Margins from existing businesses contributed 290 basis points, driven by ongoing cost reductions, leverage from higher sales, and by the mix of revenues from our higher-margin water quality, and electronic test businesses.

This improvement was partially offset by the impact of the acquisition of ChemTreat, which diluted margins by 80 basis points.

Year-to-date, operating margins increased 70 basis points to 21.9% when compared to last year.

Prior-year margins were positively impacted by a 20-basis point gain from the collection of previously-written off receivables, as well as a 10-basis point gain on the sale of real estate.

This improvement was partially offset by the impact of the acquisition of ChemTreat, which diluted margins by 35 basis points.

Absent these items, adjusted core operating margins improved approximately 135 basis points in the first nine months of 2007.

Turning to the businesses, environmental revenues for the quarter improved 21.5%, with core revenues up 5.5%.

For the nine months, sales increased 14%, with core revenues growing 6%.

Water quality core revenues grew at a low double digit rate in the third quarter, primarily a result of strength in Hach/Lange.

Sales in North America and Europe grew at a high rate in the quarter, while Asia continued to grow at double digit rates, reflecting expanded penetrations in that market.

We're continuing to see very positive signs in China, which has been stepping up its enforcement of environmental water laws around water testing.

Infrastructure improvements for the upcoming 2008 Olympic games in Beijing are also contributing to our double digit sales growth there.

Sales at Trojan were up double digit as well in the third quarter, a result of continued strength in North America in both drinking water and waste water applications.

During the quarter Trojan was selected for a major drinking water project for the city of Oakville, Ontario, just outside of Toronto, as well as for the city of Antwerp, Belgium.

Combined, these two projects total over $6 million of anticipated revenues.

In the quarter, we completed our acquisition of ChemTreat, a $200 million leading provider of water treatment solutions for commercial and industrial applications.

We believe ChemTreat nicely complements our existing water treatment offering and brings with it an attractive consumables and service business mix.

Gilbarco/Veeder-Root's core revenues declined at a slow double digit rate for the quarter.

And year-to-date, Gilbarco/Veeder-Root's revenues are up at a low single digit rate.

The business continues to experience strong demand for its retail automation solutions, which grew double digit in the quarter, however this strength was more than offset by softer equipment sales, primarily the result of difficult prior year comparisons due to regulatory changes in Mexico.

In the third quarter, we won a large tender for the supply of gasoline to Spencers to BPCL, a state-owned oil company in India.

We will begin shipping the order in the fourth quarter, with the majority of the revenue to be realized in the first quarter of 2008.

We see significant growth opportunities in India for all of GBR's product lines.

In electronic test, revenues were up 21% in the quarter, with core revenues contributing 9%.

Sales increased 19.5% for the first nine months, with core revenues up 9%.

Continued strength in the North American electrical and industrial channels driven by new product offerings in thermography and power quality test as well as strength in cables test in both Europe and North America drove this performance.

Asian and Latin American sales were both particularly robust, both up in the mid-teens.

Fluke Network sales grew at a mid-teens rate in the quarter, and grew at a low double digit rate for the first nine months.

During the quarter, F Net launched MetroScope, a new network performance assessment system used by ethernet carriers to test the quality of their voice, data, and video services provided to subscribers.

Utilizing our I2E, or Ideas to Execution tools, the F Net product development team conceived, designed, and completed this new product in just 8 months, a record time to market for the business.

As I mentioned earlier, we announced on Monday or tender offer for Tektronix Inc.

This offer is subject to customary conditions, including the tender of a majority of the outstanding shares into the offer, regulatory approvals, and the absence of a material adverse change with respect to Tektronix.

We expect to complete this transaction in 2007.

With approximately $1.1 billion in revenue, we believe Tektronix is an outstanding company with a great brand, a number one position in over 80% of its revenue base, excellent global reach and technology leadership in its served markets.

We believe Tektronix would be a tremendous strategic fit with our existing Fluke and Fluke Networks businesses, adding increased scale to our electronics platform, more than doubling our served market, significantly diversifying our portfolio of market-leading brands, and offering exciting potential market adjacencies for future growth.

The acquisition is also expected to provide a significant opportunity to lever DBS, expand our position in key Asia-Pacific markets, and deliver strong financial returns.

The early response from associates and customers has been very positive and we look forward to welcoming Tektronix to Danaher and to working with this talented team.

Moving to medical technologies, revenues for the quarter were up 19.5% to $741 million.

Core revenues contributed 7.5% to this growth.

Year-to-date, sales were up 40% to approximately $2.1 billion, with core revenues contributing 7.5% growth.

Medical technology's operating margins for the third quarter were 13%, 50 basis points lower than the same period a year ago.

Operating margin improvements at Leica were offset by lower operating margins in the dental equipment businesses, as well as the impact of recently-acquired businesses, primarily Vision, which reduced margins for the third quarter by 90 basis points.

Dental equipment margins were adversely impacted by the cost associated with a product recall, a facility closure, and spending and investments on growth initiatives.

Operating margins for the first nine months increased 170 basis points to 12.2% as compared to the first nine months of 2006.

Year-to-date, margins from existing businesses contributed 55 basis points of improvement.

Recent acquisitions improved year-to-date segment operating margins by 15 basis points as the higher overall margins associated with Sybron more than offset the dilutive impact of Vision's lower operating margins during the period.

Year-to-date, margins also benefited from lower prior-year comparables as a result of inventory charges at Sybron in the second quarter of last year, which adversely impacted margins for the first nine months of 2006 by 70 basis points.

Core revenues in our dental business grew at a mid-single digit rate for the quarter.

Dental equipment core growth improved sequentially, driven by a solid performance in both our instrument and treatment unit product offerings.

Geographically, we experienced strength in North America, which was partially offset by softness in Asia, reflecting weak overall Japanese market demand and the timing of certain product approvals in south Korea.

As I mentioned earlier, our Imaging Sciences International business, ISI, acquired earlier this year, had a very strong performance with year-over-year revenue growth of more than 20%.

Early customer feedback on ISI's next generation ICAP 3D dental x-ray system, which provides higher image quality and faster turnaround times has been very encouraging.

The growth rate of our dental consumables business was impacted by difficult comparisons in the third quarter of 2006, which was formally Sybron's year end, which corresponded with many of its annual sales incentives.

This timing change is expected to positively impact fourth quarter comparable growth rates.

In October, we hosted the European Damon symposium in Barcelona, highlighting Sybron's Damon system.

The event attracted more than 1700 European dental professionals and generated more than $8 million in new orders.

Year-to-date, Damon revenues have grown more than 20% and I remain a very happy patient.

Radiometer grew at a core revenue rate in the low double digit range in the third quarter driven by strong instrument placements, primarily in Europe and Asia-Pacific.

Clinical trials began this month for our new AQT product, which we mentioned briefly at our medical technologies conference last month.

This new product line would expand radiometer's scope to include not only blood gases, but also cardiac markers at point of care, and will double our served market.

Leica Microsystems grew at a low double digit rate driven primarily by increased demand for con focal microscopes and Leica's pathology diagnostic products.

We launched several new products in the quarter, Leica's CM-1950 is a rapid sectioning cryostat used for routine pathology diagnostics.

And those of you that attended our medical technology conferences last month may remember seeing one of these sections instruments.

We also launched two products within our new series of high performance stereo microscopes, one of which offers the largest zoom range combined with the highest image resolution available on the market today.

Both microscopes are modular in construction and are available with a wide range of accessories so they may be configured for optimal use in both industrial and life science applications.

Our Leica Biosystems business continued to experience strong growth, driven in part by 20% growth in our recently-acquired Vision Systems business.

This growth resulted from robust sales of bond instruments and reagents, which are used by pathology labs to stain tissue samples, facilitating tissue-based cancer detection.

Moving to the industrial technologies segment, revenues increased 5.5% for the quarter to $773 million, with core revenues up 2%.

For the first nine months of 2007, revenues increased 5% to approximately $2.3 billion.

Core revenues grew 1%.

Operating margins for the quarter were 17%, a 90-basis point improvement versus the same period last year, as a result of improving operating margins in our existing businesses, particularly product identification.

Year-to-date, operating margins increased over 170 basis points to 17.1%, as margins from existing businesses improved by 110 basis points with the majority of the balance due to a gain relating to the collection of the indemnity proceeds related to a lawsuit in the second quarter of this year.

Product identification revenues increased 6% during the quarter with core revenues contributing 1.5%, reflecting in part the residual carryover of the year-over-year U.S.P.S.

comparison.

Excluding the U.S.

postal comparison, Revenues grew at a mid-single digit rate, reflecting strong marketing and coding sales and aftermarket sales growth across all major geographies.

Sales increased 2% for the first nine months with core revenues declining 2.5%.

Again, primarily the result of the tough prior-year U.S.P.S.-based comps.

During the quarter, we acquired Prism Incorporated, based in Duluth, Georgia, with annual sales of $15 million, Prism adds software capability for video jets track and trace initiative, which provides our customers the ability of tracking products through their manufacturing and supply chain processes.

In motion, revenues declined approximately half a percentage point in the quarter with core revenues declining 4% due to continued softness in semicon, flat panel, and electronics assembly.

Strength in aerospace and defense and commercial and construction, particularly elevators, was offset by reduced customer demand at Portescap, our miniature motor business.

In the first nine months of 2007, motion sales increased 1.5% with core revenues declining 2%, primarily again a result of the softness in our tech end markets.

In July we completed the sale of the power quality business for $275 million, net of transaction costs, resulting in an after-tax net gain of $150 million.

We have reported the sale of power quality as a discontinued operation and have reclassified the prior period to reflect this treatment.

Turning to tools and components, total revenue was $337 million for the quarter with core revenues increasing 3%.

For the first nine months of 2007, revenues were $972 million, with core revenues essentially unchanged from prior-year levels.

Operating margins for the quarter were 15.9%, an increase of 30 basis points over the prior year, primarily due to higher sales volumes, favorable mix and cost-saving initiatives offsetting the impact of the lower sales levels at our Jacobs Vehicles Systems business.

Year-to-date, operating margins declined approximately 70 basis points to 13.6% compared to last year, primarily because of JVS, which we expect to adversely impact revenue growth and operating margins in the fourth quarter.

Mechanics hand tools revenues increased 3% during the quarter.

For the first nine months of 2007, sales increased 1.5%.

There were 11 new product launches in the quarter, which we anticipate will generate approximately $10 million of new revenue next year.

Double digit growth at Lowes and our Asian export businesses more than offset declines at Sears and K-Mart during the quarter.

Overall, we are encouraged by our performance thus far in the year.

We continue to make significant progress in both our core businesses and our recently-acquired businesses, as both growth and cost-saving initiatives continue to build momentum.

Despite some areas of softness during the quarter, we believe our businesses and end markets remain healthy and our outlook for the remainder of the 2007 continues to be positive.

We expect earnings per share from continuing operations in the fourth quarter to be in the range of $1.09 to $1.14, representing a 16 to 21% increase over prior-year continuing operations before one-time items.

We are increasing our full-year earnings per share guidance from continuing operations from $3.74 to $3.82, to $3.80 to $3.85, up 18 to 20%, respectively, compared to last year.

This estimate excludes approximately $0.02 per share from favorable discrete tax items and $0.02 from indemnification proceeds received in the second quarter of this year, as well as any impact associated with the pending acquisition of Tektronix.

Thank you, Larry.

That concludes our formal comments.

Melissa, we're now ready for questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll go first to Nicole Parent with Credit Suisse.

Good morning.

Good morning, Nicole.

Larry, could you give us a little bit more color or quantify the cost of the product recall, the impact of the facility closure, and the additional spending on the growth initiatives in dental?

Nicole, I think what we flagged in the prepared remarks hopefully is consistent with what we've said before relative to the -- what I would term the aggressive spending on the growth and innovation side across dental, particularly in dental equipment right now.

We obviously, while we saw some sequential improvement, are still improving the margins in that business.

We got a bit of a curve ball, if you will, with the product recall.

We think that while that negatively impacted us, we think that is now behind us, Nicole, and I would say with respect to the facility closure, that effort at this point is fundamentally behind us as well.

So I think as we look into the fourth quarter with respect to the margins in MedTech, which are quite good, obviously, that we'll see dental equipment step up their contribution to both that sequential and that year-over-year margin improvement.

Nicole, another way to perhaps look at it is absent the costs associated with the product recall and the restructuring, dental margins would have improved year on year despite the increased growth spending.

Okay.

I might have missed it in the Q.

What is the product recall?

And could you also give us a sense of when year-end sales bonus change was decided upon and what the impact of that was?

Well, the recall is with respect to a KaVo product that's involved in their instrumentation product line, the hand pieces and the related recycling of that equipment.

The sales comp that we referred to is really with respect to Sybron.

They drove a fair bit of their sales comp like most companies around their fiscal year end and obviously as we transition them from a fall fiscal year end to a calendar year end, the comps programs change in concert with that.

So we're anticipating, as we went through the forecast reviews in the last week, here, Nicole, the softer-reported third quarter at Sybron will be more than offset with a very strong fourth quarter and we would anticipate that Sybron in the second half will have the very strong core growth that they showed us in our calendar first half of 2007.

Great.

And just one last one on Motion.

Could you just maybe put a little bit more color around the weakness that you are seeing on the semi, flat panel, and assembly, and what your longer-term view for that business broadly is?

I think the good news there, Nicole, is the preorder scuttlebutt has actually turned, I would say, somewhat encouraging, but what matters most to us is shipments and we've had a tough year with respect to most of our tech and market exposure in Motion.

I think that is likely the case for the most part here in the fourth quarter as well.

So we'll see as we get through budgets next month if indeed 2008 will be a positive for at least within that part of the Motion business.

At this point, frankly, I'm somewhat optimistic.

Okay, great.

Thank you.

Thanks, Nicole.

We'll go next to Steve Tusa with JPMorgan.

Steve, are you there?

I think we lost Steve.

We'll go next to John Inch with Merrill Lynch.

Good morning.

Good morning, John.

Good morning, Larry.

So if you do about 5% core growth this quarter, to get to your 5% plus target for the year, I'd think it implies about 6.5 for the fourth quarter, just roughly.

Larry, with all the puts and takes, does that make sense, particularly given some of the concerns that have kind of been flushed out this quarter for other companies in terms of the U.S.

industrial economy?

I think we would expect to see another quarter of sequential core growth in the fourth quarter of improvement, John, from what we see right now, but I think that softness in the U.S.

industrial space is certainly something we saw and was probably the swing factor for us in the third quarter as we noted in the prepared remarks.

We saw some softness there in Motion.

I would also say that we saw some new softening in our sensors and controls business, and both of those are kind of OEM, automate-oriented businesses.

I think the other thing we saw in the third quarter that was news was softer demand at Gilbarco.

We noted the dynamic in Mexico.

We also saw a slowdown in investment particularly around retail upgrades here in the U.S.

as margins at the pump have tightened considerably.

And those are going to be the challenges for us in the fourth quarter.

Obviously, the math you just outlined creates a challenge for us but I think the swing factor for us at this point is going to be Gilbarco, because we are monitoring the situation in Mexico closely right now, but net/net, to do 6.5, we'll improve sequentially.

But that's going to be a stretch for us.

Okay.

So the big picture here core is probably just under 5.

Is that roughly the takeaway?

I think that's --

Without splitting hairs.

As Larry said, I think we'll do north of 5.

I think it's too early to tell whether it's 5.5 or 6 or 6.5.

It's just too early in the quarter.

But we'll be in that zone.

Okay.

What was Motion if you exed out the tech businesses, out of curiosity?

It obviously got worse sequentially, but do you have any numbers around that?

It was flat to up slightly versus the prior quarter which was up more like single digits.

Okay.

Big picture question, Larry.

Which are you more excited about, Tektronix or Sybron?

Or another way to ask it, if you could only own one, which would you rather own?

Given the number of people listening in in Beaverton and Dallas this morning, I will not answer that question.

But thanks for asking.

You're welcome.

Thank you.

We love our businesses and are keen to get Tektronix on the team before the year's out.

Thanks very much.

Thank you, John.

We'll go next to Deane Dray with Goldman Sachs.

Thank you.

Good morning.

Good morning, Deane.

Just to clarify, Dan, when you interjected on that last answer, you said north of 5% for core revenue growth.

That was for the fourth quarter, right?

That's our current expectation, right.

Good.

I don't know what it is, it's more of a statement than a comment, but it's probably because Danaher is in the precision measurement market that you get put to that microscope for that tenth of a decimal on your core revenue growth.

As long as it's a Leica microscope.

Exactly.

Larry, in your prepared remarks, you cited a new product by F Net which is essentially a triple play product, voice, data, video, and so --- it's interesting from the timing but exactly with Tektronix and one of their core competencies is.

Can you expand a bit here on what synergies you're most excited about in terms of immediate and longer-term for Tektronix?

Deane, we obviously went to the board with a view that there were a number of synergies, both at Tex' core instrument business and on the communications side, from a go to market perspective, both in Europe and North America, where we share distribution in a number of instances.

In Asia-Pac particularly where their presence in Japan and India is superior to ours and obviously in China where we'll double up.

But I have to say after spending a day in Beaverton on Monday and a day in Dallas on Tuesday, the product synergies, which we didn't bank a lot on, are getting me more excited with each passing day.

I was overwhelmed and I think others on the team were as well, by how quickly the sparks began to fly, both amongst the engineers in Beaverton and Dallas, as well as, frankly, the folks on the Fluke and F Net side of things.

I think we're going to do a number of things.

And you're right to point at triple play.

While we're excited about Metroscope, it was in no way meant to be a foreshadowing of the tech deal.

But this whole idea of internet protocol IP really blurring the border between the enterprise and the network, we think sets us up to do some things in combination F Net and Tech which is pretty exciting and obviously drives some good growth going forward.

So more to come, hopefully, as we get those teams together and lay out some product roads.

Great.

And just if I could follow up with one other Tektronix question.

The brand name, global brand name is well known, strength in bench top equipment is well known.

What's probably not as well known was a relatively recent acquisition.

It's been less than two years, is iNet from Tektronix.

That's the Dallas team I'm referring to.

Exactly.

Now, that is more software driven, it's more carrier-based, what we call OSS, operational system support.

But can you touch on the competencies of managing a software business, what kind of growth prospects you see there?

Sure.

Well, I think the iNet business, which was been rebranded Tektronix, we were with that team on Tuesday, you're right, it is largely a software business.

But frankly, so is F Net and the value add in a number of our businesses has been migrating over time to code.

And whether that code is resident in an instrument or in an open architecture configuration on a PC or another device, I don't see that as a challenge, I really don't.

Maybe I take that right up the middle of having started my career writing code as well, but I think we feel very comfortable in taking on that management challenge.

And most importantly, we were exceptionally impressed by the team down there and are excited to have them as part of Danaher here in a couple of months.

Great.

Thank you.

We'll go next to Steve Tusa with JPMorgan.

Hi.

Good morning.

Hey, Steve.

I just have a question on the environment.

You've taken this core growth rate down a little for the year, but when we look out to, in your end markets, I know you're not incredibly long cycle in your businesses, but is there a sense -- what's your degree of caution on the macro environment and as you look out maybe over the next three to six months, how do you feel about things?

Steve, I think we feel pretty good.

Obviously, we're not raising guidance here and looking forward to more sequential improvement in our core growth without that optimism.

Obviously, we read the papers and the headlines and see what's happening to some other folks.

I don't think we're immune to that.

We certainly see some of this industrial softness in the U.S.

We talk to that with respect to motion and sensor controls.

I think the anxious retail environment that some people point to, I think we see a little bit of that in the lower investment levels we're seeing at Gilbarco/Veeder-Root.

Perhaps some of that plays into the soft retail POS we see at Sears/K-Mart, but we've obviously been assembling a portfolio over time to drive strong performance through the cycle.

When I look at what's happening with water quality right now, certainly within electronic tests and medical businesses, really without exception, obviously product ID as well, where we serve some good growth drivers, just a lot of businesses firing on virtually all cylinders whether they serve the U.S.

market, Europe, or the higher growth markets in Asia and Latin America.

So on balance, I think we feel good, though like every other company out there, watching movements very carefully.

As I indicated earlier, we'll start our budget reviews here in two weeks.

We'll have everybody in between Halloween and Thanksgiving.

That will give us another good opportunity to make sure that we have as current a pulse on things.

But right now I think we'll finish strongly and are very optimistic about next year.

While it's early for '08, both Vision and ISI, which we talked about growing 25% in the quarter, they'll become core and both Product ID and JBS will face relatively much easier comps.

Right.

That was going to be my next question.

I didn't want to get into '08, because you're going to give that guidance in December.

But it doesn't appear to me, actually, you probably have some things going against you this year, so it wouldn't appear to me there was anything unusual that would make next year any less than your typical type of growth year, assuming that the macro environment stays where it is today.

Again, I think we'll talk more -- as you suggest, more about it in December, but those four businesses should be net positives next year.

Right.

On a steady state basis.

Right, right, right.

Okay.

Great.

Thanks a lot.

Thanks, Steve.

Thanks, Steve.

We'll go next to Jeff Sprague with Citi.

Thank you.

Good morning, everyone.

Hey, Jeff.

Just a few thing, maybe following up on some of what was already said.

Larry, I was a little surprised to hear you characterize GBR as a swing factor, and particularly relative to Mexico.

Was the swing factor comment encompassing the U.S.

also?

What's going on in Mexico that could really swing things so dramatically?

Jeff, I don't -- you may have seen a couple of weeks ago the Mexican government signed off on fundamentally a new tax regime.

As part of that effort, we had anticipated that there would be specific incentives with respect to the installation of our tamper-proof dispensers, primarily to support tax revenue collection.

That didn't happen.

We're really trying to get a good bead on when that will happen.

We thought that that would take place by now, and I think given that it has not happened, we're not going to bank on that, but obviously are working that in every possible way.

It's been anticipated for some time.

We've put some product in down there, as you know, as a result of that.

We would have thought we would have gotten a little bit more legislative help at this point.

It hasn't, we're still hopeful, but if we don't get it, that obviously puts a little bit more pressure on GBR in the fourth quarter.

What kind of revenue opportunity are you talking about, if this happens?

For GBR, it would be 10 plus million in the quarter.

It's probably less of a profit issue that be more of a kind of core growth swing factor in Q4.

Okay.

Because it is a lower contribution business than our instrument businesses.

Okay and then you guys called out product ID margins stronger in the quarter.

Is that just a function of the U.S.P.S.

comp, or is there something else going on in the margins in that business?

It would be both.

They've done a good job, they're both on their equipment and consumable business getting those gross margins up.

The absence of Postal helps as well.

And not to put too fine a point on it, but Larry, could you give us a little sense of kind of September organic growth versus July/August.

This little bit of uneasiness we're seeing, do you think it's a direct fallout of the credit market turmoil and other things, or is there some other kind of color you could put around maybe the change in tone that you've seen?

I think for us, we certainly -- we would look at September as a -- it was a good month.

We accelerated through the quarter.

I think it's hard to say, Jeff, right now if where we see softness, it's a direct result of some of the credit tightening or an indirect result.

I think there's a little bit of both, frankly.

But right now, I think we're just trying to take stock as to how people are looking at some of their year end spending, inventory levels with some of those OEM customers, and their CapEx plans, their budget plans for next year as we get ready for our own '08 budget exercise.

And then just finally, Dan, should we be using 26% tax as kind of a working assumption going forward into '08, or is that still moving around?

I think that's moving around.

We're a little over 26 for nine months.

It's a good assumption for Q4.

Some of favorable mix issues we have right now, there's some various tax changes going on internationally that could be a slight headwind for '08.

So a little bit early.

But something in that zone for next year.

All right.

Thanks a lot.

Thanks, Jeff.

We'll go next to Bob Cornell with Lehman Brothers.

Yes.

You mentioned the product launch of radiometer doubling of the served market, I think that's worth a comment or two.

Where is that launch and what sort of an impact can we expect in '08?

As we indicated, Bob, we're in clinical trials now.

For a number of reasons, we will launch in Europe before we launch in the U.S.

We would expect to launch that product before this year is out in Europe.

And come springtime, once we are through the FDA approval process here in the U.S., we think it will be a non-insignificant contribution next year.

With we hold to that schedule, we'll probably talk to that and try to quantify that in a little bit more detail when we see you in December, but as we look at the business model impact, not only because of the sales benefit we'll get in '08 and '09 from instrument placements, but like the rest of the radiometer portfolio, that's another instrument -- another installed base upon which we sell higher margin consumables for the life of that instrument.

As we look out ever time, we think it's going to be a real contributor, both to the top line and the bottom line radiometer.

Thanks.

I'm imagining that the opportunity to make the offer for Tektronix is a function of the private equity issues and the credit market problems that Jeff just mentioned.

How is your deal pipeline at this point and how active should we expect you guys to be over the balance of this year and '08?

Bob, I think probably a good analogy here is Sybron, which was previously our largest deal.

We went a period of about six quarters after that where we continued to do bolt-on and sort of significant adjacencies type acquisitions like Vision, like ChemTreat, but not any multibillion dollar acquisitions.

That's a good way to think about '08.

I think we'll continue to be very active, putting our cash flow to work, but I think it's less likely we would do something of Tex size in '08.

Final question.

Larry, you mentioned that you saw some preorder scuttlebutt in Motion.

Does that precursor possibly a better year there for that business in '08?

I think possibly is a good word right now.

We're going to work that as hard as we can and we've got some other things in the pipeline I think we are hopeful to be talking about with you about in December in more detail.

But I'll -- I'm from Missouri when it comes to some of those dynamics.

We'll pound the table a little bit more when we have the orders in hand.

One final thought for me.

Are you ticking the guidance up?

What incrementally is giving you the upside to guidance, or is it just a relaxation of some of that Danaher conservatism we're used to?

I think we were very pleased with the margin performance this quarter.

If you strip out the acquisitions on 5% revenue growth, we generated north of 15% operating profit growth.

I think at the margin, that margin performance and expansion gives us confidence going into Q4.

Okay.

Thanks, you guys.

Thanks, Bob.

We'll go next to Ajit Pai with Thomas Weisel Partners.

Good morning.

Good morning.

Good morning.

A couple of quick questions.

The first one would be just in terms of broad geographies, when you will become at North America, you look at Europe, and you look at Asia, were there any trends that you saw that were across your businesses that suggested that one geography was slowing more than another?

I would say -- I would say not.

I think we commented a moment ago about what we saw in terms of softness here in the U.S.

Fortunately for us, those are some of our lower margin businesses, but on balance we had a good quarter in that regard and I think Europe continued to stay buoyant for us.

Asia, we talked about a couple of things in dental in Japan and South Korea, for example, but as well, we like what we see.

Right, and when you talked about the motion business, you looked at the semicon end markets and the flat panel end markets and said they were still weak.

When do you expect those markets to start improving based on your current visibility and on your customers'?

We're optimistic about '08, but I think we want to work through the budget cycles and see if some of this chatter turns into orders with firm shipment days between now and when we see you in December.

Okay.

And in the commercial paper market, as well as in your ability to borrow, have you seen any material changes over the past, like, five or six months?

Is there any kind of widening of spreads for companies such as yours which has excellent cash flows and really good ratings, but has there been any change that you've observed, relative to what you would typically see?

We're fortunate as an A-plus credit, we're a top-tier issuer in the commercial paper market and really have not seen anything.

We saw a little bit of widening in Europe, but that's probably been offset by the reduction of rates here in the U.S.

So commercial paper rates have come down in the U.S.

for people like ourselves and they're up slightly in Europe, or they were three months ago.

Okay, thank you.

But we haven't had any issues in accessing capital.

Okay, thanks.

And we'll go next to Nigel Coe with Deutsche Bank.

Good morning.

Just a quick follow-on to the tax question.

They talked about some upward biases for next year.

I think maybe they're talking about 50 to 100 basis points, based on what you're seeing now, are you more comfortable seeing a 27% tax rate for next year?

If I had to pick a number, that would be closer to it.

We would be hopefully incorporating Tektronix, their operating at a little higher rate than we are today.

That could impact it.

There are some changes in some foreign jurisdictions that will put a little upward pressure on it.

It's probably as good a number as any right now.

Okay, great.

Dan, you talked about some noise on tax payments this year.

If you were to kind of normalize for that, what would your free cash conversion be this year or year-to-date?

Even with a higher tax payments, and you're looking continuing ops both cash flow to net income were about 115%.

So very good conversion, and that's despite the fact that on a continuing basis, putting aside the payments we made as part of the sale of Power Quality, our tax payments are up over $100 million versus prior year.

All right.

Okay.

And just finally, Larry, on the comment you made about the optimism next year in motion, was that specific to the technology verticals, or was that for the whole Motion complex?

I think to be consistent, Nigel, with our desire to talk about '08 in December, I was really limited my comments to what we're hearing in the Tech sector with respect to the order books toward the end of this year and obviously shipments in '08.

Just to clarify, what you're hearing right now, you're hearing that the worst semi cap declines are behind?

I didn't say that.

I said we were beginning to hear some encouraging talk, which we're hopeful translates into orders and then shipment, which would obviously improve our growth performance in motion.

Fair enough.

Thanks a lot.

Thanks, Nigel.

That does conclude the question-and-answer session today.

At this time I would like to turn the call back over to Mr.

Andy Wilson for any additional or closing remarks.

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and 719-457-0820 internationally with a confirmation code of 8349054.

And as always, Dan and I will be available after this call for any additional questions.

Thank you all for joining us.

Once again, that does conclude today's call.

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