Danaher Corporation F3Q08 (Qtr End 09/26/08) Earnings Call Transcript

 |  About: Danaher Corporation (DHR)
by: SA Transcripts


Welcome to the Danaher Corporation third quarter 2008 earnings results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Andy Wilson, Vice President of Investor Relations.

Andy Wilson

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 would like to point out that our earnings release, Form 10-Q, a slide presentation supplementing today’s call and reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on our Investor section of our website which is up and running at www.danaher.com, under the heading Earnings and will be available following the call. In addition the audio portion of this call will be archived on the Investor section of our website later today under the heading Web Events and will remain achieved until our next quarterly call.

A replay of this call will also be available until October 22. The replay number is 888-203-1112 in the US and 719-457-0820 internationally, and the confirmation code is 2942719. I will repeat this information at the end of the call for any late arrivals.

During the presentation we will describe certain of the more significant factors that impacted the year-over-year performance. Please refer the accompanying slide presentation and other related presentation materials supplementing today’s call as well as the MD&A section of our third quarter Form 10-Q for details regarding additional factors that impacted year-over-year performance.

Also, all references in this presentation to earnings, revenues and other company specific financial metrics relate only to the continuing operations of Danaher’s business unless otherwise noted.

Our earnings for the period include the results of operations of Tektronix, which was acquired in the fourth quarter of 2007. Included in our earnings are certain non-cash charges related to the Tektronix acquisition for fair value adjustments to recorded inventory and deferred revenue, which reduced total net earnings by approximately $10 million or $0.03 per diluted share in the third quarter and approximately $39 million or $0.12 per diluted share year-to-date.

These charges are included in our reported results for the third quarter and year-to-date 2008, but are excluded from the adjusted earnings per share guidance that we will provide at the end of the prepared remarks.

The amount of these non-cash charges related to the Tektronix acquisition is expected to reduce our earnings by approximately $0.01 per share in the fourth quarter and approximately $0.13 per share for the full year 2008. Throughout the call all references to non-cash acquisition-related charges for Tektronix relate to these items.

I’d also like to note that 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 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 are made and we do not assume any obligation or intend to update any forward-looking statements.

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

Larry Culp

Andy thank you, good morning everyone. Today we reported third quarter earnings per diluted share of $1.11 representing an 8% increase over last year. Adjusted earnings per diluted share for the third quarter was $1.14, a 13% increase over last year.

Revenues for the quarter increased 17.5% to $3.2 billion with core revenues up 4%. Acquisitions contributed 11% and we had a positive currency effect of 2.5%.

Continued strength in our water quality and med tech businesses and improved performances in motion and Gilbarco Veeder-Root was partially offset by continued soft demand at Fluke Networks and at Accu-Sort.

Year-to-date revenues are up 20.5% to $9.5 billion as core revenues grew 4%. Year-over-year gross margins for the third quarter improved approximately 140 basis points to 47.1% primarily due to the impact of higher gross margin in the newly acquired businesses, leverage from higher sales volumes, as well as ongoing cost saving initiatives.

In addition higher commodity costs incurred in the quarter were mitigated somewhat by price increases.

SG&A expenses were 25.1% of sales compared to 24% a year ago due primarily to higher SG&A levels in our newer businesses and incremental investment in emerging market sales resources.

R&D spending as a percentage of sales for the quarter was 5.7% as compared to 4.8% a year ago. This increase was largely due to the impact to Tektronix as well as investment in our med tech businesses.

Operating profit for the quarter was $522 million representing a 13% increase over last year. Adjusted operating profit for the third quarter increased 15.5% compared to last year.

Year-to-date operating profit was $1.4 billion, a 13.5% increase over last year and year-to-date adjusted operating profit increased 18.5% compared to the same period a year ago.

Our operating margin in the third quarter was 16.3%, a 70 basis point decrease from last year. The impact of newer businesses, including the non-cash acquisition related charges for Tektronix negatively impacted margins by approximately 65 basis points.

Adjusted operating margin in the third quarter was essentially flat compared to the adjusted operating margin last year as fall through from core revenues was offset by investments in R&D and sales force initiatives, continued restructuring, and hopefully a high watermark for commodity prices.

Our effective income tax rate for the third quarter was 24.5% as compared to 23.6% in the prior year period. Our overall tax rate was slightly less then we experienced in the first half of 2008 as a result of the mix of domestic and international earnings.

We expect our effective tax rate for the fourth quarter to be approximately 24% which would include the benefit of the research and experimentation credit which was recently extended as a result of the emergency economic stabilization act.

Net earnings were $372 million for the quarter, an increase of 11% compared to the prior year. Year-to-date net earnings were $1 billion, an increase of 13%.

Adjusted net earnings for the third quarter and first nine months improved 16.5% and 18.5% respectively compared to the prior year.

Our operating cash flow for the first nine months was $1.3 billion, 19.5% higher then the prior year. Year-to-date free cash flow was $1.2 billion representing a 20% increase.

Our free cash flow to net income conversion ratio was 108% for the third quarter and stands at 122% for the first nine months. We are optimistic about our ability to deliver free cash flow in excess of net income for what would be our 17th year in a row.

Our ability to generate free cash flow during these challenging economic times has allowed us to continue to strengthen both our balance sheet and our portfolio by way of strategic acquisitions. During the quarter we made four acquisitions, comprising about $150 million of revenue making key additions to our environmental, test and measurement, and dental platforms.

We believe the acquisition environment continues to become more attractive and that we are well positioned to capitalize on strategic acquisition opportunities.

We believe we are in terrific financial shape. Since the beginning of the year, we have reduced our outstanding debt by approximately $1 billion and our debt to total capital ratio at the end of the quarter was 21%. In addition we had over $285 million in cash and cash equivalents at quarter’s end.

Now turning to some of the highlights from the operating segments, professional instrumentation revenues were up 38% for the quarter and 48% year-to-date with core revenues up 4.5% for both periods.

Our operating margin for the third quarter was 20.1% as compared to 22.7% last year as the dilutive impact of recent acquisitions and the non-cash acquisition related charges for Tektronix essentially accounted for the difference.

Year-to-date operating margins decreased 290 basis points to 19% when compared to last year due principally to these same factors.

Environmental revenues grew 9.5% with core revenues up 6% in the quarter. Year-to-date sales increased 18.5% with core revenues contributing 6.5%.

Water quality core revenues grew at a mid single-digit rate in the third quarter as our Hach Lange business continued to see solid demand in both their process and laboratory product lines including healthy growth in consumables and service revenues.

Geographically a strong performance in Europe and continued double-digit growth in China drove this performance. ChemTreat achieved low double-digit revenue growth in the quarter representing their best quarter of this year.

During the third quarter we completed the acquisition of Arcan Environmental, a manufacturer of UV or ultraviolet treatment solutions which will compliment Trojan’s existing low flow product offerings.

At Gilbarco Veeder-Root core revenues grew at a high single-digit rate in the quarter as increased sales of payment and point-of-sale systems was partially offset by soft dispenser sales. Veeder-Root is awaiting final California Air Resources Board or CARB, approval for its enhanced vapor recovery solutions which helps retailers reduce hydrocarbon emissions and comply with state regulations.

We anticipate receiving this approval in the fourth quarter of this year.

During the third quarter we completed the acquisition of Autotank Group based in Finland which we highlighted during our last call.

Moving to test and measurement revenues grew 94% in the quarter and approximately 100% year-to-date with core revenues up 1.5% in each period. In Fluke core revenues grew at a mid single-digit rate for the quarter led by strong emerging market growth and continued demand for our lower price point thermography products.

Our green initiatives aimed at increasing energy efficiency helped drive low double-digit growth for our indoor air quality and digital multi meter products this quarter. Additionally Fluke was awarded more than $20 million of government contracts in the quarter.

During the third quarter we also completed the acquisition of Janos Technology which added to optical component design and manufacturing capability to Fluke’s high growth thermography business.

Fluke Network sales were down double-digit during the quarter resulting from continued soft sales to telecom carriers as well as the effect of slower IT spending which has impacted our higher end enterprise performance management products.

As we indicated on our last call we expect FNET results to remain challenging for the balance of this year.

At Tektronix revenues were down at a low single-digit rate in the quarter as double-digit core revenue growth at TEK Communications was offset by weaker demand in our instruments business. Recent product launches in our Oscilloscope product line drove low double-digit growth in the distributor segment of that business.

Our network management business grew more then 20% in the quarter due in part to a multi million dollar contract win. Telstra, Australia’s leading telecom and information services company will deploy TEK’s market leading unified assurance network management suite which will provide end to end monitoring solutions throughout Telstra’s high-speed wireless broadband network.

We are very pleased with TEK’s performance particularly regarding their high teens operating margin in the quarter which excludes the non-cash acquisition related charges. It is a testament to the hard work of the TEK team and the impact of DBS. It’s been a very good first year together with Tektronix.

Over at med tech revenues for the quarter increased 12.5% compared to 2007 and core revenues were up 5.5%. year-to-date revenues increased 14% with core revenues growing 6%.

Med tech operating margin for the third quarter was 12.3% compared to 13% a year ago due to increased spending on growth initiatives, which has driven above market growth at both Leica and Radiometer, higher costs at our cable operation and the impact of lower operating margins from some recent acquisitions.

year-to-date operating margins also declined 70 basis points to 11.5% compared to the prior year; a result of these same factors.

Core revenues in our dental business grew at a mid single-digit rate in the quarter. Sybron was up at a mid single-digit rate led by demand for general dentistry consumables and strength in both our SybronEndo and [Odonic] and our total care infection prevention product lines.

SybronEndo was up a at high single-digit rate in the quarter due to strong sales of their new Twisted File product line as well as the launch of RS1, a resin based bond used to protect the root canal wall and prevent infection an endodontic or a root canal treatment.

Also during the quarter we acquired [Pentron Corporation] which provides complimentary consumable products for endodontic and other restorative applications at Sybron.

KaVo grew to low single-digit rate in the quarter as continued strong demand for our imaging products was partially offset by a general slowing of instrument and treatment unit sales.

At Radiometer core revenues grew at a mid single-digit rate for the quarter driven primarily by strong consumable sales across all major geographies. Instrument places grew at a mid single-digit rate with particular strength in portable applications due in part to the launch of the ABL80 Analyzer.

Leica core revenues grew at a high single-digit rate in the quarter driven by compound microscopy demand as well as more then 20% growth at Leica Biosystems, our pathology diagnostics business.

We experienced growth across all major geographies with solid demand in both Asia and Europe. During the quarter we launched the new DCM 3D [confocal] microscope, which provides fast and accurate surface assessment required for metrology applications.

Customer demand for the launch has been very positive.

Moving to industrial technologies, revenues increased 6% for the quarter with core revenues up 3.5%. year-to-date revenues increased 6% with core revenues contributing 2%. The operating margin for the third quarter was 18.2%, a 120 basis point increase compared to the same period last year, a result of restructuring efforts undertaken earlier this year.

year-to-date operating margins decreased 40 basis points to 16.7% due primarily to a prior year gain on indemnity proceeds from a litigation matter and the sale of real estate which benefited 2007 margins by approximately 60 basis points.

Product ID core revenues were down 3% in the quarter, our traditional marking and coding business grew at a low single-digit rate in the quarter led by strength in consumables. Offsetting this performance was the continuation of large parcel project delays and the reduction in traditional US PS projects at Accu-Sort.

Year-to-date product ID sales increased 3% with core revenues down 1.5% due again to the softness at Accu-Sort.

Over in motion, revenues were up 8% in the quarter with core revenues contributing 5% growth. Growth in our aerospace and defense, elevator, flat panel display and medical vertical markets were the key drivers to this performance.

Partially offsetting this growth was continued soft demand in the US and Europe for standard motor and drive products. year-to-date sales are up 6.5% with core revenues contributing 1%. During the quarter Kollmorgan announced an agreement with Volvo to produce electrical motors and drives for Volvo’s fleet of heavy duty hybrid vehicles.

These hybrid applications represent a multi million dollar strategic opportunity for the Kollmorgan team.

Finally moving over to tools and components revenues for the quarter and year-to-date are up 1% with core revenues contributing about half a percentage point in each period. operating margin for the quarter was 14%, a decline of approximately 190 basis points from the prior year largely due to increased commodity costs, principally steel, and the impact of lower production levels offset somewhat by price increases.

year-to-date operating margins decreased 60 basis points to 13% due principally to these same factors.

Mechanics’ hand tools revenues increased 1% in the quarter primarily due to the initial stocking order of our GearWrench brand of tools at Advance Auto Parts which we referenced during our last call.

year-to-date mechanics’ hand tools core revenues declined 2.5%.

So to wrap up our prepared remarks we were quite pleased with our growth, earnings, cash flow performance, and the strength of our balance sheet. We have continued our restructuring investments that we began late last year and believe these actions have helped our businesses deliver these good results.

But given the events of the last month more challenges are clearly on the horizon. We are keenly aware of the impact of the constrained credit markets and the effect the constrained credit markets are having and will likely continue to have on the global economy.

Accordingly we believe it is prudent to accelerate the pace of our restructuring activities. As a result we are currently estimating an additional investment of approximately $75 million or $0.17 per diluted share in the fourth quarter to fund additional cost reduction and restructuring activities.

These activities will likely result in the reduction of over 1,000 positions and the closure of a dozen facilities. We believe these actions which will affect a number of our businesses will better position us in 2009 and beyond.

With that as a backdrop we expect adjusted earnings in the fourth quarter to be in the range of $1.17 to $1.25 excluding the non-cash charges related to the Tektronix acquisition and before the restructuring charges.

We expect our full year 2008 adjusted earnings per share to be $4.29 to $4.37 which excludes the acquisition charges related to TEK, the benefit of the $0.03 per share of discrete tax items realized in the second quarter, and again the fourth quarter restructuring charges.

The mid point of our full year adjusted guidance represents a 13% increase compared to prior year’s earnings per share and a 9% increase after taking into account a $0.17 per share impact from the anticipated fourth quarter restructuring.

We have often said that Danaher is positioned to outperform during difficult times and now is certainly one of those times. We believe that the composition of our portfolio, combined with our disciplined execution, via DBS, and the strength of our balance sheet will help us achieve positive results going forward.

I am confident that our talented and seasoned team can execute on the business plans we have in place. In turbulent times we believe our ability to be nimble and to react quickly to changing market conditions will help us capture additional market share from our competitors and to set us apart from many of our peers.

We are now ready for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Robert Cornell – Barclay’s Capital

Robert Cornell – Barclay’s Capital

You gave the fourth quarter guidance and earnings but not the core growth comment, what is the core growth contribution in the fourth quarter that drives the fourth quarter earnings you mentioned?

Larry Culp

I think if you look across the portfolio and the way we finished the third quarter we’re actually continuing to see a good level of strength across many of the businesses. But as we look to the fourth quarter clearly we’ve got a rather tempered outlook in light of the headlines and the concerns about the macro economy. I think right now when we look at the fourth quarter we think core will be positive but at a rate below the 4% year-to-date number that we’ve registered.

If you take a quick run through the segments I think instrumentation will be up low to mid single-digits, we would expect T & M and water to continue to set the pace. I think we’ll see some softness at Gilbarco again because of the soft dispenser demand. Obviously with prices at the pump coming down that means margins are good, maybe there’s a little bit of year end money there, we’ll see.

At med tech I think we’re probably in the same range there, low to mid. We just had a few weeks back we were over in Europe with a number of the businesses for their strategic reviews. I feel very good about the share take at Leica, at Radiometer, I think we’re also very pleased with where Sybron is. Obviously work to do at KaVo. I’d say at KaVo clearly the 179 tax incentive is a bit of a wildcard here in the fourth quarter, we’ll see how that plays out.

And keep in mind I think with instrumentation and med tech we’re talking about two-thirds of Danaher today. Industrial tech is probably pretty much inline; maybe slightly below where they were in the third quarter, call that low singles. And I think tools will be down probably low singles again, largely because of the retail softness and what may come in that regard.

Robert Cornell – Barclay’s Capital

When did you start putting together the $75 million plan and maybe give a little more detail, it sounds like a lot but then in the environment we’re in, its sort of understandable so maybe flush out how you evolved the $75 million restructuring plan and how much it might benefit 2009 and 2010?

Larry Culp

It’s hard to pick a date as to when we began simply because as you know we’re always in this mode. We’ve been on a steady pace I think of restructuring since the second half of last year when we began to have concerns about the trajectory of the economy. Obviously couldn’t call what’s happened here in the last month, but certainly given recent events we’re of the view that we should accelerate the plans that have been on the drawing boards as we get ready for 2009.

So what we’re really talking about doing in essence is pulling forward many of the plans, thoughts, what have you that were under discussion and were likely to have been put in place over the next say four to eight quarters. So we’re pulling those in, we’re accelerating. Clearly we want to be respectful to our associates, these are plans that are still being worked through and finalized so I want to be careful about the specifics that we provide externally until we complete our internal communications, but as you would guess the businesses that are going to be perhaps most impacted are those with lower margins currently, those that are feeling or likely to feel the impact of the economy most directly.

But again its widespread and even some of our higher margin, better performing businesses we’ll be taking some actions here to get ready for what may come. So again we are talking about 1,000 or more net positions being reduced, a dozen facilities and we’re looking at that as again a $75 million number approximately. There’s a band there of plus or minus $5 or $10 million given what we can get done this year.

The majority of it will be a cash charge and we would expect to get more or less a one year pay back on what we do. We’ll keep you very well apprised of the details once we get through budgets in November at our Analyst Meeting in early December in New York and we’ll give you a full update at that time. But that’s really where we are right now. I think it’s the right thing to accelerate these actions given the environment we’re in.


Your next question comes from the line of Deane Dray - Goldman Sachs

Deane Dray - Goldman Sachs

Can you give us a quick update on the current financing status; it looked like just to clarify on where you stand on commercial paper, your ability to term that out and if you’re also on the other side seeing any stresses on the credit situation on your customers today?

Dan Comas

We’ve really in the first nine months have done a lot to really substantially improve the balance sheet. We’ve paid down $1 billion of debt; our debt to total cap is all the way down to 21%. At the end of September we had approximately $500 million of commercial paper. That’s backed up by a bank facility that’s three times the size of that and a facility that does not expire until 2012. in terms of CP we’re really benefiting from two things, one is we’re a top tier credit and A1/P1 credit but two as importantly in this environment just the absolute size of our program is relatively modest.

So we’ve had not issues accessing capital. We just paid off yesterday our $250 million US bond. We did that entirely with CP. We had no issues accessing that capital and we also have a favorable interest arbitrage on that. We paid off the bond which was at 6%. We were able to issue CP with about a month duration at approximately 2% today. So at least to date, we’ve had no issues accessing the CP market.

Deane Dray - Goldman Sachs

And then the comment about the how the credit cycle now is affecting your customers?

Larry Culp

We can’t point to a distinct trend in any way. I think what we’ve seen thus far has been a methodic, as we mentioned in our prepared remarks clearly the consumer facing businesses, small part of Danaher of course but that’s where we’re seeing softness. You can relate that to what’s happened here. I think we’re seeing some of our larger corporate customers delay, push out in some cases cancel some higher ticket discretionary purchases. I’m not sure that’s as much a function of their inability to access capital as much as it is them taking actions unlike our own.

I think we have seen a number of situations though, this is episodic where I think some of our businesses that go-to-market through distribution are picking up some share and partnership with some of our larger distributors who clearly are able to finance their operations. Probably taking share from some smaller distributors, smaller businesses who are having, on the front lines if you will of what we’ve all been reading about.

Deane Dray - Goldman Sachs

On the med tech at 5.5% core revenues are you immune from some of the headwinds, hospital CapEx freezes, because of the price points on the Radiometer products and so forth and are you feeling any sort of pressure there?

Larry Culp

I wouldn’t say that we’re immune either at Radiometer or Leica, that would be sheer [inaudible] on our part but obviously the performance of the business speaks for itself. But I think we have seen in the US certain projects, purchase decisions being pushed out, taking a little longer to get approved but we haven’t seen wholesale cancellations or anything getting hung up because as you point out our instrument price points are rather modest and again particularly at Radiometer, 70% of that business are the consumables that are really a function of procedure and patient flow not capital financing.


Your next question comes from the line of John Inch - Merrill Lynch

John Inch - Merrill Lynch

If you could put this charge into a context, how does this compare given you’ve done some restructuring action earlier last year throughout this year, and then how does this compare with 2001 the charge you took then, and then the portfolio today, what sort of a backdrop does this assume? Are you assuming as bad a recession as then because we obviously want to know what are the obvious risks that you’re going to have to do this again in six months if the economy continues to deteriorate?

Larry Culp

I think again this is an acceleration of the work we began in the second half of last year. Without trying to pinpoint our outlook for 2009 I think you should interpret the announcement here this morning as has Danaher accelerated a program well underway, Danaher doing as much as it can here in the short-term to get ready for what I think will be a very challenging 2009. we’ll take the businesses through budgeting as you know here in the month of November and come out of those sessions and brief you on the detailed outlook for 2009 because we’re always in the mode of taking cost out by way of DBS, taking these sorts of actions. I don’t think this is necessarily the sum total of what we’re going to do but we’ll take you through any additional updates or actions in December.

But what we do in 2009 will fall short of what we’re talking about here this morning.

Dan Comas

What we did six, seven years ago was a number that was a little bit smaller then the $75 million but of course the business was about a quarter of the size. I would add that over the last four quarters through the end of the third quarter we’ve probably done approximately $40 million restructuring, averaged about $10 million a quarter during the last four quarters and almost regardless I would expect that pace to continue in 2009.

John Inch - Merrill Lynch

So the $75 doesn’t pull forward all you’re anticipated restructuring in 2009 you’re saying that’s in response to the environment. You’re still going to do this continuous pay as you go restructuring--?

Dan Comas

And there will likely be some tails in some of the restructuring that we’re doing right now, but there’ll be other pay as you go, that is the normal course here for us particularly in any sort of challenging environment.

John Inch - Merrill Lynch

So as we think about the environment tools obviously the core growth could go negative there next year, but how are you thinking about the rest of the portfolio. Do you believe that despite what is obviously a big drop off in the last few weeks, do you think that the rest of Danaher can sustain positive organic growth through 2009?

Larry Culp

That would certainly be the head set we would take into budgeting. I think we all recognize that we are in a rather unprecedented situation here as what’s happened on Wall Street spreads out to Main Street. I don’t think our crystal ball is any more clear in this regard then anyone else’s. I think we’re pleased with the way the businesses performed in the third quarter and while there’s uncertainty we think we’ve got a much better portfolio going into tougher times then we did back in 2001. These med tech businesses for example, with all of them recently for our strat reviews and just walked away feeling very good about the investments they want to make, the opportunities they have and that’s not to sell short anything we have going on in instrumentation or elsewhere. I think our businesses are going to play offense in this environment. We’re going to play offense with respect to M&A but I think it would just be sheer folly for us to sit back and not be in a mode where we’re accelerating this activity, this restructuring activity, preparing the cost structure while protecting our investments for what could be a very challenging period here in the months to come.


Your next question comes from the line of Nicole Parent – Credit Suisse

Nicole Parent – Credit Suisse

Could you characterize what you felt September looked like for us, meaning you were more conservative throughout the year in terms of just bracing for a downturn, we heard a lot about Europe falling off a cliff in July and August and then also with the credit crunch what happened the last two weeks of September, give us a sense by geography what you saw?

Larry Culp

I think for the quarter we saw positive growth across all geographies. The US hung in there and even there at the end at a low single-digit rate. Europe certainly decelerated and came in at a low single-digit rate. I think in the spring I may have said that Europe may be a year behind the US, they’re catching up fast. It was very rocky as things decelerated there. And obviously a lot of companies have shared with you the so called emerging markets, by and large were still very strong, we were up double-digit with that group.

September specifically was in line, slightly lower then July and August were. But I think we were pretty pleased with what we saw. I think where we see the weakness tends to correlate pretty well to the headlines, consumer soft, discretionary spending for big companies clearly getting more attention but we have a lot to be pleased with. We’re taking share at Leica, Radiometer, Fluke, water; all had very good quarters coming in with record backlog at Trojan. Don’t forget we’ve got a third of our mix now in consumables and after market. Didn’t have much of that, that’s 2X on a relative basis to what we had last time. I think we are navigating cautiously here as we end 2008 and get ready for 2009.

But I feel very good about our ability to outperform in what may come here.

Nicole Parent – Credit Suisse

On M&A you mentioned there’s lots of attractive things out there, you’re well positioned to capitalize as you sit here and think about just the environment in general, do you feel like you’d be more inclined to wait just given the market environment rather then Danaher’s own liquidity situation given how much cash you have and fire power and as you step back and just think about the market, it is reasonable to think that you’ll step in now that we’ve seen prices fall off a cliff?

Dan Comas

As you know, as you can tell with our cash flow statement we’ve been pretty quiet the first nine months of the year and I would say that a number of assets, companies we were talking to those businesses have not traded and they’re by and large at lower prices today. And we don’t try to pick the bottom here but we’re obviously close to the bottom then we were six months ago and we feel very good about the opportunities right now. We have a fair amount of discussion going on. We’re obviously trying to make some judgments here on when bottom might be in some of these businesses but I think we feel very good about the balance sheet right now and I think you could expect us to be relatively active here.

Now whether it’s this quarter or 2009 time will tell, but we’ve done a lot to put the balance sheet in a position so we can be active here.

Larry Culp

You’ll remember that back in 2001, 2002 we basically built out product ID with the Videojet acquisition and between [Veredore] and Gilbarco we’ve doubled up the size of the environmental business. I think history is a bit of guide or a lesson here for us as we think about the opportunities that should present themselves in the months and quarters to come.

Nicole Parent – Credit Suisse

On the pay as you go restructuring can you give us a sense in terms of just obviously you are always continuously DBSing everything and proactively restructuring the businesses, can you give us a sense of what that number has been that you’ve absorbed over the last couple of years?

Dan Comas

I’d say over the last four quarters we’ve averaged about $10 million a quarter, probably $35 to $40 over the last four quarters but I would say 2007 other then the fourth quarter that was a lower amount.


Your next question comes from the line of Jeff Sprague - Citigroup

Jeff Sprague – Citigroup

Is that using CP to take this bond out, what that kind of your normal transitional funding our are you making a proactive decision here to actually play CP a little more actively?

Dan Comas

No, I think was more a discrete event. It was $250 million bond; it was not a huge bond we were taking out. As well as the fact that we expect pretty strong cash flow here in Q4, so maybe sort of a timing issue where we could end up back a [sort] of sub $500 million CP levels, that’s not necessarily a goal, but that could happen by the end of the year.

Jeff Sprague – Citigroup

What is your appetite or thought about testing the market with longer term bond offering here if an acquisition materializes or should we think about smaller scale things where you would be using some transitional CP and cash flow?

Dan Comas

I think that being an A1/P1 commercial paper issuer is very important to us. Its always important but I think particularly in this environment so I think because of our cash flow, because of where we’re at ratios that [would] even suggest a rating probably a notch above where we are, I think we have a fair amount of latitude though it does suggest probably in the near-term something very large would be less likely.

Jeff Sprague – Citigroup

It sounds like great progress at TEK so you jump off 2008 with high teens margins can you give a sense of the confidence level there in a down revenue environment continue to take the margins up in 2009 to what degree is revenue an important part of the equation or is it still just a lot of heavy cost out and redundancy out that can take the margins up.

Larry Culp

I think you’re right we are rather bullish on where we are with TEK; we’re about a month away from the one year anniversary. It’s been an excellent year. I think as we look at 2009 we’ve generated a lot of momentum here, yes it’s been kind of a flattish revenue year at TEK but I was very much in line with our expectations, obviously a number of good things going on, the emerging markets have been good high single-digit growers for TEK. I mentioned the new scope line, what we’re doing in network management. Clearly DBS has had a lot of impact. We’re probably up over 300 bps at the Op margin line this year. But I don’t think we’re any where close to being finished with respect to that cost structure. But that said, I think as we move forward clearly we’ve got a growth expectation unchanged from what we said when we bought this company. We think this is going to be a contributor, an adder to Danaher on a stand alone basis let alone in concert with Fluke where we continue to see and gain traction with the synergies.

I think with everybody we’re going to be somewhat conservative as we think about revenues for 2009 so we’ll continue to push those growth programs but at the same time make sure that we’re using DBS to lean TEK to the extent possible and I feel that the team there has embraced DBS, has a year in place that we really can build on.

Jeff Sprague – Citigroup

You called out cost, are you actually behind on price cost year-to-date so theoretically we have a narrowing of that negative spread or are you just thinking in aggregate obviously cost has downward pressure and therefore we just naturally get some help.

Dan Comas

I think in the tool business price is definitely behind cost year-to-date. I wouldn’t say that for the other segments. We should get some relief here starting this quarter in commodities, the offset here is I think we’ll continue to see volume declines.


Your next question comes from the line of Scott Davis – Morgan Stanley

Scott Davis – Morgan Stanley

One thing that hasn’t come up and you talked about distributors getting share but what’s you sense on the inventory levels through the system, do you sense as you walk through early October, end of September that there’s any panic in the system where people are starting to destock or the inventories were built up pretty aggressively ahead of price increases, anything that leads you to believe we might see some change there?

Larry Culp

I haven’t seen panic but I think in a number of instances we’ve got some well run distributor partners who are looking at all aspects of their business as they think about 2009 just as we are. So I don’t think we’ve seen anything radical take place but at the same time we want to make sure that we’re working with our distributor partners to set their inventory levels in the right way for what’s going to be a tough 2009.

Scott Davis – Morgan Stanley

Given the wealth destruction at the consumer level, can you talk about dental mix, has your view changed as far as the cyclicality of this business at all from 2Q, are we really at risk here of seeing a big decline in that business?

Larry Culp

I think the business to the extent that it has that exposure to patient flow; those patients obviously are consumers has held up rather well. The bread and butter type procedures that result in products, our general products businesses be it restorative, be it endodontic and the like and that’s held in there pretty darn well. Clearly when you look back over 3.0, 40 years through a number of downturns, dental spending has continued to chug along and that’s US government data. I think a lot of people look to that as a foundation for being optimistic around the space and its ability to not swing wildly with the economy.

That said clearly on the KaVo side where we do sell some higher ticket items be it our 3D imaging systems or our operatory treatment units and the like I would not be surprised to see dentists be somewhat conservative relative to their capital spending and not only in the US but also in Europe in light of the uncertainty out there. I think in the US at year’s end we’ll be working against a very tough comp. I think the positive albeit a wildcard is the 179 incentive that will be out there and everyone I’ve talked to is still somewhat unclear but that’s really a short-term measure. I think as we look at the business that we’ve built out with Sybron those businesses KaVo and the related equipment business we are very pleased to have these businesses on board. Clearly Sybron has made great progress. We’ve got work to do at KaVo on the margins specifically. This business will outperform in its market as we go through this tougher period and be a very strong contributor Danaher for years to come.

Scott Davis – Morgan Stanley

On the order patterns, I know in 2007 you had some big telecom orders, is that something, lumpiness there particularly in telecom, is that something that comes around every two, three years, is there some sort of pattern or was that a bit of a one-off?

Larry Culp

Clearly the win at Telstra is exciting for us but that is, in the network management business that I mentioned the orders may be big tickets but in essence or the revenue recognition is more of a steady Eddy type situation and that’s, we celebrate the Telstra win but we like the network management growth because it is not lumpy at the revenue level. That’s a business that was growing before and we’ve been able to go in and as we not only have improved the margins I think we’ve also been able to improve the quality, delivery, execution, at network management and free up some resources to continue to fund the growth potential the team continues to see there.


Your next question comes from the line of Stephen Tusa - JP Morgan

Stephen Tusa - JP Morgan

On price, I don’t recall the Qs previously having all the detail on almost every segment you talked about, how much price you’re getting, but can you talk about the dynamic of, yes its great raw material costs are coming down, how quickly does this pretty positive front end inflation environment turn on you.

Dan Comas

I would say that if I could exclude tools for the moment our ability to get 1.5% to 2% price in our other businesses is largely driven by our consumable business and that tends to be less commodity and more of the ability to just kind of get that year on year. So I think we have done a much better job on price outside commodities outside tools and I think our ability to sustain that is much better then it’s been at any point in our history. I think we’ve just got better processes better approaches and better execution. I think within tools that is a risk where we will get less price however price has not been offsetting the significant rise we’ve seen here through August in commodity so we may get less price but I’ll take that in tools because we’re going to get some commodity benefit and are starting to see that.

Stephen Tusa - JP Morgan

Can you talk outside of tools about on the commodity front how much that base is as a percentage of whatever sales or costs or even throw tools in there and then what you’re talking about, you have highlighted these commodity pressures pretty specifically so I’m wondering if you can put some metrics around that to help us better analyze the dynamics?

Dan Comas

I’d have to look at it and come back to you.

Larry Culp

Outside of tools what has been the most insidious pressure that we faced hasn’t been in any single commodity per se but really in transport and logistics surcharges.

Stephen Tusa - JP Morgan

That was my question, the base of what you’re talking about here.

Larry Culp

We’ll come back but it’s that T and L dynamic that has been most challenging and there will be a lag effect obviously from price per barrel to the surcharges but it’s by and large formulaic. We didn’t get much of that in the third, we’ll get a little bit in the fourth, but I think come the new year that should be a positive for us.

Stephen Tusa - JP Morgan

You have always had pretty good insight into what’s going on in China, could you comment on what you’re seeing specifically in China, there’s a lot of debate around the economy there.

Larry Culp

I’m headed over there in a couple of weeks so I’ll be more current then, but going through with the team a few days ago, I think the team had a good quarter across the board. They’re optimistic that they’re going to continue to perform but recognize even China is not immune to what’s happening globally and we may see a decell but at this point that’s really the team extrapolating from headlines as opposed to conversations with customers let alone order books.


Your next question comes from the line of Nigel Coe - Deutsche Bank

Nigel Coe - Deutsche Bank

Obviously you’re a different company to 2001, 202 have you done some work pro forma in that period in your [inaudible] portfolio and how the organic growth trended over that time given Danaher as it is now?

Dan Comas

I’m not sure I have the math in front of my but a period where we were down high single-digit, different mix if we kind of would layer in the med tech businesses that by and large were slower then they, mid single-digit but were still positive in an environment where we were down a number of our other peers were down double-digit, that number might have been low single-digit to flat. I don’t know you can ever say what’s a comparable environment but it would have been 500, 600, 700 basis points probably better core growth.

Nigel Coe - Deutsche Bank

If revenues do go negative next year which is, sounds like its possible, do you think you can still growth margins in that kind of environment and do you have any sense of how much margin you’ve lost in the last four or five years from negative price commodity inflation?

Larry Culp

We’d certainly be of the view that on a net basis we’ve been reducing material cost spend for like items. So while we’ve been dealing with metals and tools and some other pressures here and there we’ve also been accelerating our low cost region initiatives, sharpening our purchasing capabilities as well and that’s been helpful to us. How much on a gross basis, how much pressure we’ve seen, how much of that may be relieved here over a four, five year period we don’t have that for you this morning.

Nigel Coe - Deutsche Bank

Do you think you can still grow margins next year if we have say a negative $0.02 revenue growth?

Larry Culp

Give us the time to get the businesses through budgets but clearly we are taking the actions that we’re announcing this morning as well as other activities to make sure we’ve got the best top and the best bottom line we possibly can deliver come next year.

Nigel Coe - Deutsche Bank

For 4Q, what FX rate are you baking in for 4Q?

Dan Comas

I think the euro if we used it as a proxy averaged about 145 a year ago, its 135, 136 today so that would be probably a negative 2%, 3% hit to revenues. That will be a headwind here in Q4.


Your next question comes from the line of Ajit Pai - Thomas Weisel Partners

Ajit Pai - Thomas Weisel Partners

On your cash flows and use of cash flows just looking at your share authorization, at what point do you start finding the shares so attractive that you start buying your own shares relative to what’s happening in the broader market and potential acquisitions and then you haven’t made a large acquisition for a while which means that you do have a lot of fire power right now, so the scale of acquisitions that you’re looking at, do you have something that potentially could be significantly larger then the scale of Tektronix?

Dan Comas

On the buyback as you know we do not have a systematic buyback program. We tend to be opportunistic. At the end of every earnings period Larry and I and the team sit down, evaluate the situation and obviously maybe a little bit more opportunity today then in the past, but we do not for a variety of reasons foreshadow what we may or may not do in the open market.

Regarding acquisitions and potential size I think we will be very active in this environment. There is a lot of good small, medium sized bolt on adjacency type opportunities across med tech, test and measurement, product ID and water that I suspect our activities will be not unlike what it was during the last downturn. Not one very large opportunity but a series of small and medium sized opportunities that would build up our existing platforms.

Ajit Pai - Thomas Weisel Partners

On the share buyback you still have an authorization there, are there any plans to expand that authorization and what drives the math on that decision? When you sit down after the quarter and you decide whether to do a share buyback or not is it more to do with opportunities out there or is more to do with acquisitions and other use of cash or is it more to do with the accretion that you’ll have if you actually buyback your own stock.

Dan Comas

It’s a function of all of those but its largely a function of what we think our return on invested capital is on that buyback and again we will be sitting down here shortly to discuss that.


Your final question comes from the line of Richard Eastman - Robert W. Baird

Richard Eastman - Robert W. Baird

As we’ve tracked through the September quarter the trends geographically but certainly in North America as well as the emerging markets seem to be relatively consistent where they were in the first half, it appears to me that obviously Europe has turned down fairly quickly, you mentioned it decelerated fairly quickly, has caught up to the US, is Europe the primary reason that we’ve accelerate the cost reduction efforts and then the strength in the dollar, it would appear it will be a minus 2% or 3% hit to revenue, that would at a conversion rate of 12%, that would look like maybe $0.04 of adjustment to the fourth quarter guidance due to currency?

Dan Comas

I did the math and came up with $0.03 in terms of year on year.

Larry Culp

You’re right, Europe is decelerating here. We saw that through the summer, we saw that in September. But I think what we’re talking about this morning the ongoing restructuring activities is primarily a function of our macro call that there is great uncertainty, the risks clearly are at the downside and our balance here really has to be more weighted toward making sure the cost structures across the portfolio are in place to allow us to invest, to allow us to outperform in what could be a very tough economy here for awhile. I think Europe is one manifestation of that. The headlines and some of the early signs of the credit crisis that we’ve seen, is another representation. Maybe we’re wrong, maybe this will all pass, maybe the government’s activities here will make this a short-term event but I don’t think we do shareholders, we don’t do our team or our customers any favors by looking for the silver lining here because its an operating environment I don’t think any of us have ever been in. So we want to make sure we’re ready. And I intend to make sure we are very ready.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Larry Culp

Thank you for joining us today.

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