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Danaher Corporation (NYSE:DHR)

Q4 2008 Earnings Call

January 26, 2009 8:00 am ET

Executives

Andy Wilson - Vice President Investor Relations

Larry Culp - President and Chief Executive Officer

Dan Comas - Executive Vice President and Chief Financial Officer

Analysts

Nicole Parent – Credit Suisse

Jeff Sprague – Citi Investment Research

Bob Cornell – Barclays Capital

John Inch – Bank of America-Merrill Lynch

Steve Tusa – JP Morgan

Ajit Pai – Thomas Weisel Partners

Scott Davis – Morgan Stanley

Nigel Coe – Deutsche Bank

Wendy Caplan – Wachovia

Richard Eastman – Robert Baird

Operator

(Operator Instructions) Welcome everyone to the Danaher Corporation Fourth Quarter 2008 Earnings Results Conference Call. I would now like to turn the conference over to Mr. Andy Wilson, Vice President of Investor Relations.

Andy Wilson

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, a slide presentation supplementing today’s call and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investor section of our website Danaher.com under the heading Earnings and they will remain there following the call.

Our year end Form 10-K has not yet been filed. We have included the part of the earnings release, the fourth quarter and full year income statement, year end balance sheet, full year cash flow statement. In addition, we’ve included data in the release reflecting our business segments as well as supplemental income statement data to facilitate your analysis.

Also, the audio portion of the call will be archived in the investor section of our website later today under the heading web events and will remain archived until our next quarterly call. A replay of the call will also be available until January 30. The replay number is 888-203-1112 in the US and 719-457-0820 internationally, with a confirmation code is 4986181. 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 to the accompanying slide presentation, our earnings release and other related presentation materials supplementing today’s call for 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 2008 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 $5 million or $0.01 per diluted share in the fourth quarter and approximately $44.5 million or $0.13 per diluted share for all of 2008. These charges are included in our reported results for the fourth quarter and full year 2008. Throughout the call, all references to the non-cash acquisition related charged for Tektronix relate to these items.

In addition, in 2007 charges for purchased in process research and development as well as fair value adjustments to acquired inventory and deferred revenue related to Tektronix acquisition reduced earnings in the fourth quarter and full year by approximately $66 million or $0.20 per diluted share.

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

Today we reported fourth quarter earnings per diluted share of $0.92 representing a 5% decrease from last year. Included in fourth quarter earnings were pre-tax charges of $82 million or approximately $0.18 per diluted share related to restructuring activities previously announced during the quarter as well as $0.01 per diluted share related to the non-cash acquisition charges for Tektronix. Adjusted earnings per diluted share for the fourth quarter were $1.11 essentially flat compared to last year.

We deployed approximately $82 million toward restructuring initiatives during the quarter of which approximately 60% related to SG&A activities and the remaining 40% impacted cost of goods sold. These actions resulted in the elimination of more than 1,800 positions and the closure of 13 facilities globally and are expected to generate in excess of $100 million of savings in 2009.

For the full year, earnings per diluted share were $3.95 which also reflect the $0.18 of restructuring charges and include the impact of non-cash acquisition related charges for Tektronix. Adjusted earnings per diluted share for the full year 2008 were $4.23 an increase of 10.5% compared to 2007.

Revenues for the quarter increased roughly 1% year over year to $3.2 billion with core revenue down 1%, acquisitions contributing 6% and a negative currency affect of 4%. Continued growth in our environmental, acute care diagnostics and life sciences businesses was offset by softening demand in certain segments of the portfolio including KaVo whose networks, product identification and tools. Our full year 2008 revenues were up 15% year over year to a record $12.7 billion with core revenues growing 2.5%.

Year over year gross margin for the fourth quarter decreased approximately 50 basis points to 45.7% primarily due to the restructuring charges. Gross margin for the full year increased 110 basis points to 46.8% due to the impact of higher gross margins in recently acquired businesses, primarily Tektronix, leveraged from higher sales volumes in the first three quarters of the year as well as the positive impact of cost savings initiatives which more than offset fourth quarter restructuring charges.

SG&A expenses were 27.1% of sales compared to 24.5% a year ago due primarily to fourth quarter restructuring charges, incremental investments and emerging market sales resources and higher SG&A levels in our newer businesses. For the full year SG&A expenses as a percent of sales increased 170 basis points to 26.3% primarily due to these same factors.

For the quarter, research and development spending as a percentage of sales decreased 160 basis points to 5.3% due to the write down of in process R&D or IP R&D in the fourth quarter of last year related to the acquisition of Tektronix. After this prior year charge adjusted research and development spending as a percentage of sales increased 30 basis points as we continue to invest for the future.

Operating profit for the quarter was $424 million representing a 9% decrease over last year which includes the approximately $82 million of restructuring charges. Adjusted operating profit for the fourth quarter decreased 4%. For the full year, operating profit was $1.9 billion a 7.5% increase over the same period a year ago. Adjusted operating profit increased 12%.

Our operating margin in the fourth quarter was 13.3% a 150 basis point decrease from 2007. Restructuring actions and related charges partially offset by the Tektronix IP R&D charges in 2007 accounted for the majority of this change. Core operating margin in the fourth quarter was essentially flat compared to the prior year despite a modest decline in core growth and the increase in R&D.

For the full year our operating margin was 14.7%, a 110 basis point decrease from 2007. Restructuring actions and related charges negatively impacted full year margins by approximately 65 basis points. Core operating margin was essentially flat compared to 2007.

Our effective income tax rate for the fourth quarter was 24%, that’s compared to 26.3% in the prior year period. Our fourth quarter tax rate includes the benefit of the research and experimentation credit which was extended as the result of the emergency economic stabilization act.

Net earnings were $306 million for the quarter a decrease of 4.5% compared to the prior year primarily resulting from restructuring charges, softer revenues and the negative impact of currency fluctuations. For the full year, net earnings were $1.3 billion an increase of 8.5% over last year. Adjusted net earnings for the fourth quarter were essentially flat compared to last year and were up approximately 13% for the full year.

Despite the difficult macro economy we continue to generate record operating flows in 2008. Operating cash flow increased 9.5% to $1.9 billion for the full year. Our free cash flow was $1.65 billion an 8.5% increase over 2007. Our free cash flow to net income conversion ratio was 126% making 2008 the 17th consecutive year in which our free cash flow has exceeded our net income. The Danaher business system is the driver behind this significant and sustained cash flow performance.

During the fourth quarter we purchased approximately 1.4 million shares of company stock at an average price of just under $54. There are currently 2 million addition shares remaining under the existing authorization.

Our ability to generate free cash flow during these challenging economic times has also allowed us to continue to strengthen our portfolio by way of strategic acquisitions. During the quarter we made six acquisitions comprising about $85 million of annualized revenue to strengthen our environmental, test and measurement and life sciences businesses. For the full year we completed a total of 17 acquisitions representing approximately $325 million of annualized revenue.

We believe the acquisition environment is becoming more attractive and that we are well positioned to capitalize on strategic acquisition opportunities. We remain in excellent financial shape. In addition to the acquisitions I just mentioned and the share buy back we deployed our robust free cash flow towards reducing our outstanding net debt position by more than $1.2 billion during 2008. Our debt to total capital ratio at the end of the year was 21%.

Let’s turn now to some of the highlights from the operating segments. Professional Instrumentation revenues increased 13.5% for the quarter with core revenues up 2.5%. For the full year revenues were up 37.5% with core revenues contributing 4%. Operating margin for the fourth quarter was 17.8% as compared to 16% last year driven primarily by core margin improvement of 130 basis points. For the full year operating margin decreased 140 basis points to 18.7% when compared to 2007 due primarily to the impact of new acquisitions principally Tektronix and the impact of restructuring actions and related charges.

Environment platform revenues grew 7.5% in the quarter and 15.5% for the full year with core revenues up 6.5% in both periods. Water Quality core revenues grew at a high single digit rate in the fourth quarter as our Hach Lange business continued to see solid demand across all major geographies. The team once again delivered stellar performance in China where our revenues were up by more than 20% in the quarter.

Sales of our Ultra Pure analytical solutions grew at a mid teens rate in the quarter the result of continued strength from new product sales including our new TOC or Total Organic Carbon analyzer utilized in pharmaceutical applications.

ChemTreat’s revenues grew at a mid single digit rate in the quarter as continued investment in ChemTreat’s best in class sales and service organization continued to drive share gains. Trojan’s revenues grew at a mid teens rate in the quarter with broad based strength across most major geographies and applications. In China, Trojan was voted the number one disinfection brand for the second year in a row by a leading trade group. Trojan is entering 2009 with another record backlog.

During the quarter we completed four acquisitions in water quality the largest of which was Sea-Bird Electronics with approximately $25 million of annualized revenue Sea-Bird Electronics provides connectivity, temperature and depth instrumentation and provides calibration services used by research institutions and government agencies to help explore and research the relationship between ocean dynamics and climate change. Sea-Bird more than doubles the size of Hach Hydromet business.

Gilbarco Veeder-Root’s core revenues grew at a mid single digit rate in the quarter due in part to increased sales of payment and point of sales systems particularly in the US. In October Veeder-Root received regulatory approval from the California Air Resources Board or CARB for enhanced vapor recovery solutions. Following this approval Veeder-Root shipped more than 1,100 vapor recovery solutions to retailers contributing to their mid teens growth in the fourth quarter.

Moving to Test & Measurement, revenues were up 20.5% in the quarter with core revenues down 3.5%. For the full year revenues grew 70.5% with core revenues coming in flat. Fluke core revenues decreased at a low single digit rate in the fourth quarter as robust demand for thermography products was offset by reduced sales of more traditional industrial products. Inventory reductions in distribution also negatively impacted the quarter and the currency exchange rate volatility in emerging markets particularly in Eastern Europe and in Mexico.

During the quarter we completed the acquisition of Hawk IR a manufacturer of infrared panel sight glasses and ports used in many of Fluke’s thermography products. Fluke network sales decreased at a mid teens rate during the quarter resulting from continued soft telecom demand as well as the affect of slower IT spending.

At Tektronix revenues declined at a low single digit rate in the quarter. At Tek communications our network management business grew at a high single digit rate with a large number of new carriers added during the fourth quarter. Tek is entering 2009 with the leading share position in network management solutions and the highest backlog level the business has ever experienced.

In instruments sales of oscilloscope declined at a high single digit rate primarily the result of softening market conditions and distributor partners working to reduce their inventories. In November we marked the one year anniversary of the Tektronix acquisition. Looking back over the past year we are very pleased with progress we’ve made on all fronts at Tek. The Tek team has embraced DBS and as a result we are now working a growth plan which should help us long term drive sustained growth.

We remain committed to investing innovation while at the same time actively managing our bottom line. We far surpassed our one year cost reduction objectives and improved operating margin by more than 400 basis points. Despite the challenges we face on the top line in the near term we continue to believe that Tektronix represents some compelling strategic acquisition to Danaher that will deliver excellent returns to our shareholders.

Moving over to Med Tech, revenues for the quarter decreased 2.5% compared to 2007 with core revenues essentially flat. For the full year revenues were up 9.5% with core revenues up 4.5%. Med Tech operating margin for the fourth quarter was 10.7% compared to 15.3% a year ago due largely to restructuring actions and related charges as well as the impact of newly acquired businesses.

Core operating margin declined 80 basis points in the quarter primarily due to lower volumes in our KaVo business. Full year operating margin declined 180 basis points to 11.3% compared to the prior year primarily result of these same factors.

Starting with Dental, Sybron grew to mid single digit rate in the quarter led by strong sales to SybronEndo twisted file and total care system products as well as continuing demand for our general dentistry consumables at Kerr. Sales of our traditional orthodontia products declined in the quarter as many patients postponed orthodontic procedures due to the general economic situation.

KaVo revenues declined at a mid teens rate in the quarter with a general slowdown across all major geographies in product categories. The economic downturn is significantly impacting sales of new dental equipment with many dentists delaying new investments in their practices. Notwithstanding this tough environment we experienced robust sales growth for the Gendex CB-500 our new medium field of view 3D imaging unit which we launched in Europe in the fourth quarter. For the quarter core revenues for all dental declined at a mid single digit rate.

Leica core revenues grew at a high single digit rate in the quarter driven by confocal microscopy demand as well as more than 20% growth at Leica Biosystems our pathology diagnostics instrument and consumables business. We experienced growth across all major geographies with solid demand both in Asia and in North America.

In 2008 Leica’s revenues surpassed the billion dollar mark more than double its revenue when we acquired the business in 2005. We are extremely pleased with this achievement and with the continued success of the Leica team.

During the quarter we acquired Surgipath Medial Industries with annual revenues of approximately $40 million. Surgipath is a manufacturer of consumables and things used in pathology laboratories. The acquisition broadens Leica Biosystems core histology offering at furthers its objective of becoming the leading provider of complete solutions for pathology labs.

Radiometer’s core revenues were at a mid single digit rate for the quarter driven by strong consumable sales. Instrument sales were also healthy growing at a mid single digit rate due in part to shipments of our new compact ABL80 analyzer which was launched during the quarter. Sales of AQT in Europe are progressing well with more than 100 units currently in the field.

Moving to Industrial Technology, revenues declined 4.5% in the quarter with core revenues essentially flat. For the full year revenues increased 3.5% with core revenues contributing 1.5%. Our operating margin in the fourth quarter was 13.7% a 260 basis point decrease compared to the same period last year due primarily to restructuring actions undertaken in the quarter. The core operating margin improved 80 basis points in the quarter. Full year operating margin decreased 90 basis points to 16% due primarily to our restructuring activities.

Product Identification core revenues were down 8% in the quarter and 3.5% for the full year. Continued growth of consumable sales and service in our install base was more than offset by slowing sales in new equipment as many customers delayed making purchases. Despite the challenges based in the broader equipment market we’ve been very pleased with the early results of Videojet’s new 1,000 series family of small character ink jet printers. These printers provide customers with industry leading up time and a more predictable maintenance schedule.

These products address a wide variety of coating applications in such verticals as food, beverage and pharmaceutical. Since launching the high performance CIJ 1510 in the third quarter we’ve seen strong demand with December being our highest shipment month thus far. During the fourth quarter we launched the lower price point CIJ 1210 which is ideal for lower volume printing needs.

Motion revenues were down 3.5% in the quarter with core revenues contributing a 1% offset by the negative impact of currency fluctuation. Our aerospace in defense elevator and flat panel display businesses benefited from backlog reductions during the quarter but were mostly offset by soft demand in the US and Europe for standard motor and drive products and in factory automation as a result of widespread capital spending reductions.

Due to the weakening of many of the major end markets we serve here we are not forecasting this level of sales performance in 2009. For the full year Motion sales increased 4% with core revenues up 1% with net positive currency affects.

Moving to Tools & Components, revenues for the quarter decreased 15% with core revenues down 14.5%. For the full year core revenues decreased 3.5%. Our operating margin for the quarter was 9.8% a decrease of approximately 200 basis points from the prior year largely due to increased commodity costs primarily steel and the impact of lower production levels as well as restructuring actions and related charges.

These negative factors were partially offset by insurance recoveries collected in the quarter related to a plant fire that occurred in 2007. In 2009 we expect some relief from these higher commodity cost levels as we have consumed the majority of inventory purchased in 2008 at these record price levels. Full year operating margin decreased 90 basis points to 12.2% due principally to these same factors.

Mechanics’ Hand Tools core revenues declined 14.5% in the fourth quarter primarily due to lower sales to both the consumer and profession channels. During the quarter we began shipping the general mechanics tool kit for the US Government, this is a contract expected to generate over $100 million of new revenue over the next five years. For the full year Mechanics’ Hand Tools core revenue declined 6%.

To wrap up, despite an unprecedented global economic slowdown we are pleased with the progress we’ve made over the last year. We enter 2009 with a stronger balance sheet having reduced our outstanding net debt by over $1.2 billion. We completed 17 acquisitions in 2008 strengthening our Med Tech, Test & Measurement and Water businesses.

Our restructuring investments that began in 2007 in which accelerated in the fourth quarter 2008 and our talented team many of who were part of the company in the last downturn have contributed to the solid results we delivered in the year and give us the ability to outperform in what we believe will be a challenging 2009.

With this outlook we expect earnings per share in the first quarter 2009 to be in the range of $0.70 to $0.80 and we are reconfirming our full year 2009 earnings per share guidance of $3.70 to $4.10.

Andy Wilson

That concludes our formal comments. We’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nicole Parent – Credit Suisse

Nicole Parent – Credit Suisse

You gave us some sense of Motion trends and what you’re thinking for 2009 versus the fourth quarter and full year ’08. How should we think about some of the other sub segments in terms of core growth relative to what we’ve been seeing? Could you give us a sense of margin performance as well?

Larry Culp

Within Motion core or more broadly?

Nicole Parent – Credit Suisse

More broadly. You gave us a sense in your comments that Motion was going to be below the current trend level.

Larry Culp

As we reconfirmed the full year guidance we’re probably not of a much different mindset then we were when we saw you in December. The core outlook for 2009 is still going to be in that down 2% to down 6% for Danaher with the first quarter representing a very challenging start, the first half likely to be tougher than the second half.

If you look at the full year for a moment, if you take the midpoint of that down 2% to down 6% what we would anticipate is that the dispense of businesses, the businesses that are clearly demonstrated already in the fourth quarter here their resilience it should be safe to call flat to slightly positive. Obviously Water, dental consumables, Sybron, Radiometer and Leica then you’re talking about $4 billion of our $12 billion in revenue.

The businesses that we would expect to be down low to mid single digits; Fluke, Gilbarco Veeder-Root, possibly KaVo, Product ID and certainly Tools. These businesses are going to be down mid single maybe a little bit more. F Net Tech and the company mentioned in your question Motion given what we know and given what we don’t know right now.

Dan Comas

From a margin perspective if we’re down in that core being negative 4% we would expect core margins to be down slightly year on year, 25 to 50 basis points.

Nicole Parent – Credit Suisse

Within the Test & Measurement sub-segment could you give us a sense of the end market strength and weakness that you’re seeing like you did in the Motion?

Larry Culp

What we’re seeing is on balance at Fluke general softness, as you know we’ve got a very hot product lineup in Thermography, it’s a new application across a number of verticals. As we look at the general industrial and electronic markets that we serve there customers have pulled back, channel partners are taking a cautious position in inventories as we’ve both ended the year and have started the year. At F Net we certainly have seen both a core telecom business there and more importantly the general IT spending get pushed out, get deferred which is why they were down so much and why we think they could have a very tough ’09.

At Tek we really have two different dynamics going on there. As we mentioned in the prepared remarks very good performance in our network management business. We think that’s a market space which has held up well. We believe we’re taking share. The team there is doing a very good job.

General purpose instrumentation where we have about two thirds of that business clearly a global slowdown that was pronounced in the fourth quarter which again is why we have the sober outlook for that business that we do here in ’09.

Operator

Your next question comes from Jeff Sprague – Citi Investment Research

Jeff Sprague – Citi Investment Research

On restructuring a minor nuance but I think you actually spent a little bit less than you were indicating. Any thoughts on that and the ability to find more to do?

Larry Culp

We spent approximately $82 million in the quarter. When we were together in New York we thought we’d be somewhere in the $90 million range. The other interesting data point there is we talked about 1,700 positions being eliminated as part of that. We actually got more positions out in the quarter. We ended up about 1,800. Probably the best way to characterize it we perhaps planned a tad conservatively. The business is on balance and they executed well.

We also stand by what we said in December relative to the commitment to do more in ’09. We set aside in our roll forward $40 to $60 million of additional restructuring spending this year. That of course is embedded in the guidance that we’ve offered up. I see no reason for us to pull back from that level of expectation given the uncertainties that are out there.

Jeff Sprague – Citi Investment Research

On M&A that’s done in the pipeline what type of revenue impact are we looking at just what you have on hand a point or two or not even that much now that we’ve lapped Tek?

Dan Comas

We added about $300 million annualized and if you took half of that so it’s probably about a point and a half benefit going into ’09.

Jeff Sprague – Citi Investment Research

On Dental, I missed what you said in Sybron could you repeat that and give us a little additional color on how weak Ortho was and the trends you’re seeing among some of the more discretionary items.

Larry Culp

Of the major pieces at Sybron the Ortho piece is probably the most discretionary but hopefully people still will invest in their children’s oral health. As we look at that business we were down modestly in the quarter but had some very nice offsets. We mentioned in the prepared remarks what we’re doing in the Endo field a number of new products there helping us drive share. Our disinfection business given all concerns in that space generally both in dental and in medical had a very good quarter. Some of the other smaller business at Sybron did as well.

All in balance we’re pretty pleased with the performance. Kerr, certainly in the general consumables business saw some slowing but it was not nearly as pronounced given that many people would look at those general products, if you will, more in the pain management category far less a discretionary item than something like orthodontia or implants.

Jeff Sprague – Citi Investment Research

To be clear then Ortho is down modestly or the whole Sybron franchise is down modestly?

Larry Culp

Ortho.

Dan Comas

Sybron was up mid single digit in the quarter.

Operator

Your next question comes from Bob Cornell – Barclays Capital

Bob Cornell – Barclays Capital

I wondered if you go back and flush out the sequence of the fourth quarter, remember we talked about October was up a little bit and November was flat then December started out so weak you guys understood the quarter was going to be negative, it came out negative just 1%. I was wondering if December finished better than it started. Maybe you could give us an idea of how January started?

Larry Culp

We did a little bit better than we thought relative to core in the quarter. When we entered December like most companies we had no idea when people were going to head home for the holidays customers. Things were not anything to brag about I think we did a little better than we anticipated so we were pleased with that. I do want to note as we mentioned a couple times already we were working down back log in a number of areas. We certainly saw orders weaken through the course of the quarter. That in large part is why we’ve offered up the type of framework, thinking about ’09 that we have.

Thus far while it’s early things haven’t been horrible but I wouldn’t say they’ve been anything to brag about by and large they have been in line with what we were thinking and what we were discussing in mid December.

Bob Cornell – Barclays Capital

Other companies talk about de-stocking as well as end market issues. Are you able to gauge what de-stocking effect you’re seeing as a depressant on your organic growth?

Larry Culp

It’s hard to quantify that on a pan Danaher basis. We certainly saw in a number of our businesses that go to market through distribution where our sales out the door were softer than the sell through at the counter at retail as a result of those inventory reductions. It definitely happened across a number of our businesses and I would offer up that I don’t believe that that has settled out yet.

Bob Cornell – Barclays Capital

What were orders up or down in the fourth quarter, if you referenced it I don’t remember hearing it what you said?

Dan Comas

They were down about two or three points more than the -1% on the shipments.

Bob Cornell – Barclays Capital

What’s going on with pricing and are you starting to see customers come back at you with lower commodity costs and the headlines and put pricing on you and how are you matching the price issues versus the commodity declines?

Larry Culp

We certainly are seeing isolated examples where that’s surfacing in our conversations with customers and our conversations with our businesses. I would suspect that will be an increased topic of discussion as we go out through the year just as we are with our vendor base. Given what’s happening in the commodity markets and obviously with the economy at large.

We continue to believe as we think about ’09 that we can get some positive price and get more than our fair share of the reduction in the decrease in commodity prices broadly across the portfolio. Net net that will be a positive for Danaher those two elements in 2009.

Operator

Your next question comes from John Inch – Bank of America-Merrill Lynch

John Inch – Bank of America-Merrill Lynch

To pick up on that last point and to dovetail with what you said about tools and raws. Assume raw material costs now that you’ve anniversaried the higher input costs, assume that raw material costs stay where they are today. What kind of profit benefit does that give the Tool segment in 2009?

Dan Comas

Across the company at current levels it could be a 20 to 30 basis point benefit to margins. Within Tools that would the lion’s share of it so it would probably be north of 100 basis points of benefit. The offset here is the continued challenges here on the top line.

John Inch – Bank of America-Merrill Lynch

Do you have to give some of that back in terms of price? When Larry is describing the price is going to be up is that disproportionately weighted to some segments then Tools you expect price to be down? How should we think about that?

Dan Comas

We got about two points of price in the fourth quarter that will prove more challenging though we think it will be positive here in ’09. The areas where I think price will be stickiest will be our consumable business across Product ID, Med Tech and it will be more challenging clearly to get price in Tools though right now we’re not looking to give up price.

John Inch – Bank of America-Merrill Lynch

Was Tools down in price in the fourth quarter?

Dan Comas

Tools we had positive price in tools as well.

John Inch – Bank of America-Merrill Lynch

Emerging markets you guys are a big company in China, what are you seeing there. I understand that you’re probably outperforming but could you give us a little more color on what you’re seeing in end markets specifically China. You read about the economy in India is taking a real hit. How about a little update in terms of what’s going on in these important economics.

Larry Culp

With respect to China we certainly saw solid performance across the portfolio really up until early November. Since then China has softened significantly. We mentioned in the prepared remarks certainly Eastern Europe and Mexico, other parts of South America have been wrestling with the currency issues as well. Some of that has stabilized but by and large the turmoil that you read about it certainly is more than what we saw toward the end of the year. It’s been reduced a bit in those places, India included here at the beginning of the year. We still have a cautious view about what we can expect from those geographies in ’09.

John Inch – Bank of America-Merrill Lynch

Worse than what you saw before or does it ultimately is it not that significant?

Larry Culp

The currency noise added to all the underlying macro weakness in December as you saw those currencies fluctuate as they did. On the margin we’re probably more cautious about emerging markets in ’09. In general as you heard us in December we’re trying to go sober about the environment that we’re wrestling with this year.

Operator

Your next question comes from Steve Tusa – JP Morgan

Steve Tusa – JP Morgan

On the working capital front you guys did a good job on the inventories and receivables. Can you talk about the dynamics there and was there anything unusual? Receivables was a particularly strong benefit.

Dan Comas

It’s a little bit of a softer top line can help a little bit but if you look at the last couple years we’ve been able to generate pretty good cash flow out of working capital. For the full year had about $100 million of working capital contributing to cash flow. That’s something we strive for every year.

Steve Tusa – JP Morgan

The bad debt reserve was up about $10 million on a flat receivables basis. Anything specific going on there or is that just mix from Tektronix?

Dan Comas

Its a couple things, it’s a little bit from the new acquisitions coming in adding some revenue but it’s also a function of the environment we’re putting a little more provision on the balance sheet to recognize a more difficult time.

Steve Tusa – JP Morgan

On M&A environment any high level comments there, is there anything that’s changed? Have the seller’s expectations come down or are they all still sitting out there thinking these valuations are actually low?

Larry Culp

Everybody is a little different. We view ’09 as the year in which we should have plenty of opportunity to make good smart investments to build out our portfolio. We know that in both public and private situations the havoc that this economy is laying in will create situations where valuations will come in; companies may lose some of the strategic options they once had and will make a conversation with Danaher attractive. Certainly that will be attractive to us as well. We’re optimistic that we’re going to be putting some capital to work this year to build out Danaher for the future.

Operator

Your next question comes from Ajit Pai – Thomas Weisel Partners

Ajit Pai – Thomas Weisel Partners

The first question is about Western Europe. You talked about Eastern Europe and China being weakening toward the end of the year. Could you give some color as to linearity in Western Europe and your expectations going into the first half of this year?

Larry Culp

We saw Western Europe not unlike the US flopping through the quarter. We’re slightly positive in Europe in the quarter but very much would expect Europe not unlike the US to come in in ’09 or at least Danaher in that context to come in that down 2% to down 6% range. I don’t think we’re expecting a wildly different ’09 in Western Europe then we are elsewhere.

Ajit Pai – Thomas Weisel Partners

About China, if you have the numbers handy could you give us what percentage of revenue that formed in the 2008 growth that we saw? You talked about things being weaker over there this year what kind of growth rate by you folks internally planning or expecting out of China?

Dan Comas

I’m not sure I understood the first part of the question.

Ajit Pai – Thomas Weisel Partners

The percentage of the overall revenues how material is China?

Dan Comas

It’s about 8%.

Ajit Pai – Thomas Weisel Partners

The growth rate the business experienced in ’08 and what you’d expect that to be growing, you’re Chinese business, sales in China and what you’d expect that to be in 2009?

Dan Comas

Through the first three quarters we’re probably up approximately low double digit. For the fourth quarter China was flat year on year. The expectation is for the full company Larry mentioned being down 2% to 6%. China could be in that range maybe a little bit better. We’re not expecting a lot of growth in any geography in ’09 right now.

Ajit Pai – Thomas Weisel Partners

Looking at your share buybacks you talked about varieties of cash could you walk us through right now how you’re looking at share buybacks at what point you’d be more aggressive there.

Dan Comas

We did buy back about 1.4 million shares in the fourth quarter. We do, as you know in our history, will find periods of time where we think it’s a very attractive opportunity, an opportunity to take some stock out of the system. Given our significant debt reduction in ’08 given the strong cash flow we expect in ’09 I would expect that the lion’s share of that liquidity goes toward building out the portfolio. Though there’s always the potential element for a small portion of buybacks.

Operator

Your next question comes from Scott Davis – Morgan Stanley

Scott Davis – Morgan Stanley

I want to dig a little bit into the M&A side and the question is where is the sweet spot now where deal multiples are coming down and there’s a reality among the seller that not only do multiples have to come down but the denominator also has to come down as far as what’s perceived as mid cycle earnings. Is there a certain sweet spot or do you have to go to larger or there are a lot smaller deals. What do you think there?

Dan Comas

I’m not sure I could give you a good generalization there. The market’s really been down here for two quarters. That helps. People are more nervous out there, that makes it more challenging for all of us here on the call. That bodes well for the environment where you have companies public and private both showing bad numbers but also forecasting tougher numbers as well. That tends to be where you begin to see a rational seller. I’m not sure we’re quite there yet but I think its coming.

Scott Davis – Morgan Stanley

On restructuring which segments do you feel like you still have some wood to chop to get capacity down to match up with the demand outlook?

Larry Culp

I think all the businesses still have opportunity. We talk about somewhere in the $50 million range being set aside in ’09. I would anticipate that that will be broadly distributed across the portfolio.

Operator

Your next question comes from Nigel Coe – Deutsche Bank

Nigel Coe – Deutsche Bank

On the acquisition question from where you sit now do you think you’ll do anything transformational this year or more bolt on nature?

Larry Culp

A lot of things in ’09 it’s a little hard to say given what may come. The general approach that we’ve used in the past is likely to be the one that you see play out this year. We put capital to work; we’re going to be focused on the bolt ons that you saw us do in ’08. I suspect the larger deals be it $500 million, $1 billion will be a larger part of what we do in ’09 then they were last year. Those are the situations that Dan was referencing a moment ago that will be good additions for us.

As we go through the year clearly the focus will be on adding to the environmental, the Med Tech, the T&M, the Product ID segments. Could there be another platform flag out there planted in ’09? It’s possible but I think there’s so much going on just in those four businesses where we do about $8 billion of our $12 billion revenue. That $8 billion is against the market back drop of about $50 billion. I suspect we’ll stay close to home.

The transformational situation those are always unlikely but if they’re going to happen it may be more likely to happen in a tumultuous environment like this. I suspect most of the capital if not all will be spent close to home.

Nigel Coe – Deutsche Bank

On the consumables, I was a little bit surprised to see that grow in the mid single digits given that IP is down 5% in both US and Europe. Do you think that continues to grow into ’09 or do you think it will weaken as we go through?

Larry Culp

The reference was to the consumables business at Sybron.

Nigel Coe – Deutsche Bank

No, this is at Videojet.

Larry Culp

That’s one we’re going to watch very closely. We thought that part of the Product ID portfolio was more defensive, more resilient. I think it’s demonstrated as much. It is one that we’re going to watch. Keep in mind that a lot of the verticals that we serve there are going to be a little bit more stable then IP just broadly defined food, beverage and the like. It’s a fair question.

Nigel Coe – Deutsche Bank

On FX it was little bit of a headwind from FX this quarter than expected. The Japanese Yen has been pretty strong you do have a bit more exposure to Japan. Is that going to be a slight positive factor for you in ’09?

Dan Comas

It is but it pales in comparison to the impact of the Euro. What we said in December it being about an impact of $0.05 or $0.06 in the first quarter. It may be more like $0.05 now but it’s pretty small.

Operator

Your next question comes from Wendy Caplan – Wachovia

Wendy Caplan – Wachovia

You mentioned in your prepared remarks that you’d gained some share at Tek. Can you talk about your strategy, your market share gain strategy in these tough times? Is it strictly new products or geographies or markets or does it say something about your willingness to address pricing share?

Larry Culp

We certainly don’t want to display the price card in any environment. We did a nice job in that regard in ’08 getting price and getting share in a lot of places. What we want to do in an environment like this is make sure we continue to stay focused first and foremost on the customer. When you’re taking a lot of costs out it easy to get focused internally. Much of what we’re trying to do with our sales and marketing team is make sure we still have that external orientation.

Much of what we’ve implemented around our I2E or Ideas execution initiative the last several years has been geared towards being more effective in the marketplace with our sales force, with our marketing messages and the like. When we’re at a point where we are in several businesses where our R&D investments are the last several years our delivering new products you see that at Tek, you see that at Videojet, Sybron’s got a number of nice offerings right now.

Those two come together and give us the ability to play some offence. We talked a little bit in New York as well around our dynamic resource allocation approach to funding. The key in this environment is to be tight on costs but not at the expense of the growth drivers in the business. We really do all we can to protect the short term investments around sales and marketing but longer term investments around R&D and go get the costs out elsewhere.

That’s the mindset, that’s the approach, the DBS approach to taking share in ’09 that we’re going to work all of our businesses this year.

Wendy Caplan – Wachovia

Do you anticipate, given all the restructuring any meaningful management changes in ’09?

Larry Culp

No. We just announced as you saw a few weeks ago a handful of group executive promotions which we were excited about. A number of people have grown up in the business taking on additional responsibilities and being so recognized. No. We’ve got a heck of a team here and we want to make sure this team stays together and does what we know we can do to outperform in ’09.

Operator

Your last question comes from Richard Eastman – Robert Baird

Richard Eastman – Robert Baird

On the Water business you bundled that into the Med Tech group in terms of an ability to show growth this year in ’09. Could you quickly walk through Hach and Lange, Trojan as the backlog still there, what gives you the confidence here that that business will grow?

Larry Culp

You’re right, when we talk about the most resilient parts of the portfolio we certainly look just to the fourth quarter and we see Radiometer doing what we thought it would do, certainly Leica as well, Sybron so we have most of Med Tech. Water has many of the same structural characteristics that’s held well. Those businesses are about $4 billion. There’s probably another billion of consumables at Videojet, after market businesses so we have about $5 billion of the $12 billion that you would lump together having that sort of resiliency.

As we look at Hach Lange whether its regulatory issues, whether it’s the optimization in efficiency initiatives that many of our customers are pursuing the emerging market trends all of that comes together and gives us the view that that business will do better than most of the portfolio in ’09. With what the President has proposed over the weekend with respect to waste water and drinking water funding if that comes about clearly both Hach Lange and Trojan should be well positioned.

Trojan is certainly well positioned from a backlog perspective. We came into ’08 with record backlog. We come here into January with a better level of backlog for ’09. We’re bullish about that. [Kentry] has continued to hold up well, continues to take share. A lot of good things going on in Water right now. We all know the type of environment we’re dealing with there are very few certainties. Those businesses in part led by Water should lead the way for us this year.

Richard Eastman – Robert Baird

From a macro economic context and maybe top down, when you look out into ’09 are you expecting a recovery in the second half globally? I know we’re talking about down 2% to 6% but does it graduate up do we end the year at flat to slightly up, does it take that type of macro perspective or are we pretty much assuming the economy stays down and flat.

Larry Culp

The framework that we’re offering here is really rooted on the comps getting easier for us in the second half at a minimum. Clearly a lot of government activity going on around the work trying to stop the hemorrhaging. At some point that has to take effect. As we mentioned in answer to your first question there are some things within our control. It’s really that framework that we offer up here as a way to think about 2009. We’re going to make sure that we continue to stay tight on costs given the uncertainties. We’re going to work to protect our downside so that we can outperform this year come what may.

Operator

That will conclude today’s question and answer session. For closing remarks I’d like to turn the call back over to Mr. Wilson.

Andy Wilson

As a reminder the replay number for today’s call is 888-203-1112 in the US and 719-457-0820 internationally with a confirmation code of 4986181. Thank you everyone for joining us. Have a good day.

Operator

Thank you everyone for your participation. This will conclude today’s conference call. You may disconnect at any time.

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Source: Danaher Corporation Q4 2008 Earnings Call Transcript
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