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Danaher Corporation (NYSE:DHR)

Q1 2009 Earnings Call Transcript

April 23, 2009 8:00 am ET

Executives

Andy Wilson – VP, IR

Larry Culp – President and CEO

Dan Comas – EVP and CFO

Analysts

Bob Cornell – Barclays Capital

Nigel Coe – Deutsche Bank

Jeff Sprague – Citi Investment Research

Steve Tusa – JP Morgan

Scott Davis – Morgan Stanley

John Inch – Merrill Lynch

John Baliotti – FTN Equity Capital Markets

Steven Whittaker – Sanford Bernstein

Richard Eastman – Robert W. Baird

Nicole Parent – Credit Suisse

Operator

Good morning. My name is Cecilia and I will be your conference facilitator today. At this time I would like to welcome everyone to the Danaher Corporation first quarter 2009 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions). Thank you.

I would now like to turn the call over to Mr. Andy Wilson, Vice President of Investor Relations. Mr. Wilson, you may begin your conference.

Andy Wilson

Good morning, everyone. Thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer, and Dan Comas, Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, Form 10-Q, 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 Relations section of our Web site danaher.com under the heading Earnings and will remain there following the call.

Also, the audio portion of this call will be archived on the investor section of our Web site later today under the heading Web Events and will remain archived until our next quarterly call. A replay of this call will also be available until April 29. The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally, with a confirmation code of 279-7420. I'll repeat this information at the end of the call for late arrivals.

During the presentation we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the accompanying slide presentation, our Earnings Release, Form 10-Q and other related presentation materials supplementing today's call for additional factors impacting year-over-year performance.

Please note that our EPS guidance to be provided at the end of the call excludes the impact of acquisitions completed subsequent to the end of the first quarter as well as the acquisition related costs resulting from the adoption of statement of Financial Accounting Standard 141R.

I would also like to note that we'll 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 that they are made and we do not assume any obligation to update any forward-looking statements. So with that I'd like to turn the call over to Larry.

Larry Culp

Andy, thanks. Good morning, everyone. I'd like to start this morning by providing some color around what we're seeing across our businesses and end markets so that to provide some context to the results we delivered in the first quarter and our outlook for the rest of the year.

We are clearly operating in a difficult economic environment. Geographically, both the U.S. and Western Europe are extremely soft. And most of the emerging economies have also experienced significant declines. For us, the exception was China where our business was down, but only modestly in the first quarter.

On the positive side, most of our Medtech businesses, which we did not own during the last economic downturn had solid performances in the quarter. In addition, both our Water Quality and our consumables businesses are holding up pretty well. Finally, despite an overall softer top line we delivered solid margin performance in the quarter while continuing to invest for the future.

Our motion, test and measurement and cable businesses have been the most significantly impacted by the global downturn. But none of these businesses have been immune. On the whole, discretionary corporate and consumer spending remains weak, particularly at higher price points or commitment levels.

So we're obviously in a share gain game right now. And we are accelerating our cost reduction actions. In addition to the 2008 cost reduction efforts and the $50 million of ongoing restructuring activities built in to our 2009 plan, the economic outlook has us digging deeper. Accordingly, we have begun taking $100 million to $120 million of additional restructuring actions throughout the Company. In total, these initiatives are expected to generate annualized savings of approximately $140 million.

I'm pleased to report that cash flow, the hallmark of Danaher was once again robust as we generated over $280 million of free cash flow in the quarter, down only slightly versus the same period a year ago. Despite the economy, we expect strong cash flow for all of 2009.

Financially, we are in terrific shape with more than $900 million of cash on hand and over $1 million of availability under our CP program. During the quarter, we completed a 10-year $750 million bond issuance. The proceeds of which will help ensure we are well positioned to be active on the acquisition front.

While we are not expecting a near-term improvement in current economic conditions, we do believe that our solid portfolio of businesses rooted in the Danaher Business System, which is the backbone of our operating model and the foundation of our culture, coupled with our seasoned leadership team will allow us to out execute our competition and as a result take share in the markets we serve.

So with that as backdrop, I'd like to move now to the details of the quarter. Today, we reported first quarter earnings per diluted share of $0.72, representing a 13% decline from last year. Earnings per diluted share declined 19% as compared to last year on an adjusted EPS basis.

Despite the challenging economic environment, we were able to deliver EPS within our guidance range, primarily due to the savings generated by the restructuring actions initiated last year as well as the ongoing hard work of driving material cost and operating expense reductions across the Company in the first quarter.

Revenues for the quarter decreased roughly 13% year-over-year to $2.6 billion, with core revenues down 10%. The impact of currency reduced revenues by 5.5% offset by acquisitions which contributed 2.5% to sales growth. Revenues also benefited from four extra days in the first quarter. The corresponding offset of days will be realized in the second and fourth quarters of this year.

Year-over-year gross margin for the first quarter increased approximately 110 basis points to 47.9%. Excluding the impact of prior year Tektronix charges, gross margins were up slightly despite the revenue decline. This was primarily due to the impact of recent restructuring activities and lower raw material costs.

SG&A expenses decreased 7.5%, but as a percent of sales were 28.8% compared to 27% last year primarily due to reduced leverage on our SG&A cost base as a result of the lower sales volumes.

For the quarter, Research and Development spending as a percentage of sales was essentially flat year-over-year at 6.1%. Operating profit for the quarter was $340 million, representing a 17.5% decrease over last year.

Operating margin in the first quarter was 12.9%, a 70 basis point decline from 2008, core operating margin in the first quarter was down 130 basis points compared to the prior year period due to lower revenues across most businesses and partially offset by the benefit of recent restructuring and other cost reduction actions.

Despite the tough top line environment, we continued to make significant progress on the cost front across Danaher. Our effective income tax rate for the first quarter was 25% as compared to 26.5% in the prior year period. For the balance of the year we anticipate our tax rate to be approximately 25% absent the impact of anticipated favorable discrete tax items.

Net earnings were $238 million for the quarter, a decrease of 14% compared to the prior year, a result of softer revenues and the negative impact of currency translations.

Operating cash flows were $317 million in the quarter, a 5% decline year-over-year. Free cash flow for the first quarter was $280 million and our free cash flow to net income conversion ratio was 118%. We anticipate that our conversion ratio will remain strong over the balance of this year and as a result we are optimistic about our ability to deliver free cash flow in excess of net income what would be our 18th year in a row.

Subsequent to quarter end, we completed the acquisition of three companies, comprising about $50 million of annualized revenue to strengthen our environmental, test and measurement and sensors and controls businesses. We believe the acquisition environment is becoming more attractive and that we are well positioned to capitalize on strategic acquisition opportunities.

Now turning to the operating segments, professional instrumentation revenues decreased 12.5% for the quarter with core revenues down 11.5%. Operating margin for the first quarter was up 120 basis points to 17.7%, reflecting the prior year impact of inventory and deferred revenue charges related to the acquisition of Tektronix. Core operating margin declined 45 basis points in the quarter, a significant restructuring and cost reduction activities helped to offset core revenue declines.

Environmental platform revenues declined 1.5% in the quarter, with core revenues up 1%. Water Quality core revenues grew at a low single-digit rate in the quarter. At Hach Lange, core revenues were essentially flat and solid growth in consumables and aftermarket service helped offset soft instrumentation sales. Despite the flat top line performance, Hach Lange's operating margin expanded more than 100 basis points in the quarter.

Trojan's core revenues grew at a high single digit rate in the quarter as we continued to see solid demand from China for our waste water and drinking water UV disinfection products.

During the quarter we began shipping product to New York City drinking water project which should positively impact Trojan's revenues for the balance of the year. Trojan exited the quarter with a robust backlog of more than $85 million.

At ChemTreat, revenues were up at a mid single digit rate as ChemTreat share gains across multiple vertical markets continued. Gilbarco Veeder Root core revenues were essentially flat year-over-year, a strong performance given the economy and a difficult prior year comparison due to a large tender in India.

Veeder Root grew at a double-digit rate in the quarter due to strong sales of its enhanced vapor recovery solution. Gilbarco enjoyed solid growth in our passport point-of-sale system where we continued to take market share. But that was offset by lower dispenser sales. Of note, in March we recognized a significant achievement when we installed our 5,000th passport PoS system.

Subsequent to quarter end, Gilbarco Veeder Root completed the acquisition of Postec, a New Zealand based provider of automation solutions and outdoor payment systems used primarily in emerging markets.

Moving to test and measurement, revenues declined 23% in the quarter, with core revenues down 22%. Fluke and Tektronix both declined by approximately the same amount. At Fluke, lower overall demand for our core test products and inventory reductions in distribution drove the majority of the decline. At Tektronix, we experienced lower sales across all product categories and geographies as customers continued to delay investments.

Electronics and computer end markets were particularly soft. The team has accelerated further cost reduction efforts to help offset this broad based market decline.

The bright spot in test and measurement was Tech Communications, our network management business which continues to perform well as telecom system providers rely heavily on our technology to keep their fixed and mobile networks running smoothly. We have seen especially strong adoption of our test and optimization solutions in the mobile space.

Subsequent to quarter-end, Tech Communications completed the acquisition of Aaron technologies, a Dublin based supplier of customer experienced management solutions for wireless carriers, enabling those carriers to provide high quality, uninterrupted service to their customers.

Moving to Medtech, revenues for the quarter decreased 5.5% compared to last year, with core revenues down modestly 1.5%. The addition of this segment to our portfolio since the last recession has clearly helped protect our top line during these difficult economic times.

Medtech operating margin for the first quarter was down 70 basis points to 10.8%. Absent acquisition impact and restructuring activities in the quarter, year-on-year operating margin was relatively flat.

Within our dental business, core revenues declined in a mid single digit rate in the quarter. Sybron grew at a low single digit rate, led by higher sales of our SybronEndo twisted files and Total Care's disinfection products. We also saw some modest sequential and year-over-year improvement at Ormco.

KaVo revenues declined at a low teens rate in the quarter as expected with a general slowing across all major geographies and product categories. The economic downturn continues to significantly impact sales of new dental equipment as many doctors are postponing capital investments in their practices.

Leica core revenues grew at a low single digit rate in the quarter, driven primarily by sustained demand in life science, research markets as well as low double-digit growth at Leica Biosystems, our pathology diagnostics and consumables business.

Industrial market demand slowed in the quarter. Clinical demand also softened due to reduced capital spending budgets and customer delays as hospitals attempt to better understand potential stimulus plan benefits.

Radiometer's core revenues grew at a high single-digit rate for the quarter driven by continued strong consumable sales primarily in Europe and Asia resulting from past success in growing our installed base.

Moving to industrial technologies, revenues declined 18.5% for the quarter, with core revenues down 12%. Operating margin for the first quarter was 13.7%, a 110 basis point decrease compared to the same period last year due primarily to lower sales volumes across the segment.

Product ID revenues were down 16% in the quarter with core revenues declining 8%. An increase in our service business and a modest decline in consumables was more than offset by weak demand for new equipment at Videojet.

Despite the top line being soft, Videojet's operating margin expanded by more than 100 basis points in the quarter. Our medium and low price point continuous inkjet printers which we launched late in 2008 are continuing to capture market share as we have now placed more than 1,000 printers with our customers in the quarter.

Motion revenues were down 31% in the quarter with core revenues down 23.5%. While we expect the Motion to be impacted as a result of the industrial downturn, we did not foresee a decline of this magnitude.

Our elevator business was down more than 30% in the quarter, and flat panel display revenues were down more than 50%. We expect this softness to continue and as a result we are deploying significant cost reduction efforts here.

Post quarter's end we completed the acquisition of Diagnostic Monitoring Systems in the industrial technology segment, headquartered in Glasgow, Scotland. DMS is the leading management actuary of diagnostics smart grid technology used by electric utilities to better manage and monitor their large grid based assets.

Finally, moving to tools and components, revenues for the quarter decreased 21% with core revenues down 20.5%. Operating margin for the quarter was 6.6%, a decline of approximately 510 basis points from the prior year, largely due to lower sales volumes, particularly in our higher margin Matco and Hennessy businesses.

The impact of litigation settlements also negatively impacted operating margin. Absent planned restructuring charges, we anticipate operating margin improvement in tools sequentially as we move through the year.

Mechanics hand tool core revenues declined 14% in the quarter, primarily due to lower sales to both the consumer and professional channels. Sales of our domestic China tool brand were also soft although we saw sequential improvements through the quarter.

In March, we were awarded a new multi million dollar contract from the U.S. Marine Corps to supply tool kits which we will begin shipping in the second quarter of this year.

So to wrap up my prepared remarks, we are all aware these are unprecedented economic times. But it is during times like these that we believe we have the ability to outperform. And when the economy and our end markets improve, we do believe we will emerge an even stronger and more competitive Company.

As I mentioned earlier, given the environment, we are accelerating our cost reduction and restructuring activities, which now total $150 million to $170 million this year. These initiatives will result in the elimination of 2,300 positions and 16 facilities and provide annual cost savings of approximately $140 million. This is in addition to the more than $100 million of savings we discussed with you during our year-end call.

In addition, we anticipate a reduction in our tax reserves of approximately $100 million resulting from the favorable settlement and our statute expirations of certain international and domestic return years.

Our expectation is for the second quarter core revenues to be slightly worse than the first. And for the full year, we are forecasting core revenue declines approximately in line with our first quarter decline of 10%. The $100 million to $120 million of additional restructuring charges are expected to reduce EPS by approximately $0.08 per share in the second quarter and $0.25 per share for the full year.

We expect the reductions in our tax reserves will increase EPS by approximately $0.18 per share in the second quarter and $0.30 per share for the full year. As a result, our earnings per share guidance for the second quarter will be in the range of $0.85 to $0.95. For the full year, our earnings per share guidance will be in the range of $3.30 to $3.70. These ranges include the tax and additional restructuring items just mentioned.

Andy Wilson

Thank you, Larry. That concludes our formal comments. We're now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And our first question today comes from Bob Cornell with Barclays Capital.

Bob Cornell – Barclays Capital

Yes, thanks. Couple of things. One is, in the volume declines, you didn't mention anything about destocking. I know it's hard to measure it, but maybe give us an idea of what you see there.

Larry Culp

Bob, good morning. We certainly saw I think both our channel partners where we go to market through distribution and a number of our OEM customers take stock down during the course of the quarter. I think given some of the uncertainties out there, I don't think we would declare that today that, that resetting, that destocking that has been going on is finished. I suspect we're still going to see the effect of that in our order books and in our shipments during the course of the second quarter and perhaps some of that will play out in the second half. But it certainly had an effect. It's hard to say when that will conclude but we saw that in many businesses to be sure.

Bob Cornell – Barclays Capital

You didn't make a specific comment on the impact of price on the volume in the quarter. Maybe you could comment there. And are you guys seeing an increase or decrease in price competition and how are you on the whole price cost issue?

Larry Culp

Well, I think with respect to price, we had positive price in the first quarter about a 0.5, a little less than we saw obviously in the fourth quarter and during the course of last year. So, it's clear in many markets given the volume declines that competition is heating up. But I think by and large, there are lots of ways to manage price, like the work that we're doing. But as we look forward, certainly mindful that, that competitive pressure will remain, if not heightened, we would expect that the price will be a lesser positive impact for us, but a positive impact for us as we go through the year.

With respect to cost, obviously a lot of prepared commentary, maybe some additional follow-on questions relative to the additional restructuring. But the other cost activities whether it's around procurement, commodities, other things that we buy and the like, I like where we are. I think you see that play out both in the core margin performance, down 130 BPs on 10% revenue declines, I think is indicative of that progress as is the cash flow performance.

Bob Cornell – Barclays Capital

One final question from me, Larry. I think you said just now the organic growth you saw in the second quarter will be worse than the first, but the year will end up at 10, can you just flesh out that thought, please?

Larry Culp

Sure. Well, I think given that – given the way the year has started and given what we see here in the near-term, I think the idea that we're going to not benefit as we did perhaps from a couple of extra days in the quarter and a number of our businesses still wrestling with tough demand conditions leads us to offer up that guidance today relative to the sequential decline or the increased decline. But for the full year, Bob, I think as we wrestle the second quarter, we know we have a couple of offsets there. It is our toughest comp given we were up 5% a year ago. Obviously, that's less of an issue for us in the second half. We get to the fourth quarter where we have I think the easiest comp that we will work against. So that's what we think we'll wrestle with in the second quarter. I think that's the way the second half will play out at this point. So net it all out for the year, we think we'll be in and around that core performance that we registered in the first quarter.

Bob Cornell – Barclays Capital

Okay. Thanks, Larry. Lots of really questions, but I'll let other people ask them.

Danny, I thought –

Dan Comas

I was just saying, with the guidance of the full year being down in line with the first quarter, we're basically not sort of expecting any sort of recovery here in the second half. Very difficult to call. I mean, I think if we do get some stabilization in the second half, we obviously would do better than the numbers we just talked about.

Bob Cornell – Barclays Capital

Lots of questions but I'll let other people ask them. Thank you.

Dan Comas

Thanks, Bob.

Operator

And our next question comes from Nigel Coe of Deutsche Bank.

Nigel Coe – Deutsche Bank

Yes. Thanks. Good morning.

Larry Culp

Good morning, Nigel.

Nigel Coe – Deutsche Bank

Just wanted to pick up that thought from Bob. We don't know how much inventories impacted the first quarter performance but let's assume they did. So – and basically flat lining the organic growth of full year, assuming some benefit from comps in 4Q. You're not really assuming any moderation of inventory declines or are you seeing some of the stronger performances, such as Leica and Radiometer will start to turn.

Larry Culp

Well, I think again, it is hard to call the inventory resets but we have to be closer to the end of those than not given what we saw play out in a number of our businesses. Many of which go to market in part or largely through distribution. So I don't think that we would claim to have a clear crystal ball at this point, Nigel, but I do think that moderates for us during the course of the year, particularly so in the second half.

Nigel Coe – Deutsche Bank

Okay. Obviously it's difficult to forecast in this environment, but can you just give us a bit more color on how the quarter trend in terms of core growth and maybe on some of that throw in some book-to-bill ratios?

Dan Comas

Overall, Nigel, in terms of bookings, it was pretty linear during the quarter, not much of a change. In terms of shipments, January was a little bit better just because we had a little bit of backlog. As you know, we're primarily a book and ship business but we do carry some backlog here and that benefited us in January. In terms of overall orders, it's been pretty steady.

Nigel Coe – Deutsche Bank

Okay. And then just one more from me. The tax rate of 25%, I think Larry called out some discrete items in that number, but the $100 million you talk about in the 10-Q, that's not within the 25%.

Dan Comas

That is correct. The 25% is our expected ongoing provision. The $100 million is a discrete item that we expect to book this year.

Nigel Coe – Deutsche Bank

Okay. Thanks a lot.

Larry Culp

Thanks, Nigel.

Operator

And we'll go next to Jeff Sprague of Citi Investment Research.

Jeff Sprague – Citi Investment Research

Thanks. Good morning. Just put a finer point on the sales comps. The four extra days, do you think about that as on a calendar basis or kind of work selling day basis, just want to understand if we're kind of calling kind of really the core of Q1 down, what 14% or 15%?

Larry Culp

Jeff, I don't think it would be that much. I mean, it's very hard to tell in a number of our businesses, I think, just how much impact we would have had. But it's probably couple hundred basis points in that range, which is part of I think what we're suggesting here that will continue, not worsen as we look at the second quarter.

Dan Comas

I think for – two-thirds of our business being kind of equipment and instrumentation, days tend to have less of an impact. We also had January we had so many customers just shut down. So it is I think harder in this environment to sort of kind of quantify the impact. I think with our consumables, roughly a third of the portfolio that's where we probably saw some impact, Jeff, from the extra days.

Jeff Sprague – Citi Investment Research

And there was a couple consumables comments laid through your prepared remarks there. And it sounds like except maybe for Videojet they were up across the board but could you give us a little more color on is there any inventory destocking or anything going on as it relates to consumables also that kind of colors your view?

Larry Culp

Well, I think, Jeff, you got a pretty good feed there. You look at Medtech where we had I think good performance, particularly with consumables, principally at Radiometer and at Sybron to a lesser degree at Leica. I think we did see – those are largely direct businesses. We did see I think hospitals or even specialty dental professionals reducing what they got in their stock rooms and their closets. But nonetheless, I think we enjoyed good performance there. In environmental, instrument sales were soft as you would expect. People were still running plants, still complying with clean water rules. That was a pretty steady business for us and even at product ID where we saw plant shutdowns as Dan just alluded to and I think some destocking in inventories just as the year got off to a sluggish start, that held in pretty well, again despite some of the capital equipment purchases being pushed out a bit. So I think where we have that consumable exposure, that 1/3 that we referenced very good performance.

Jeff Sprague – Citi Investment Research

And just finally from me, I know there's a lot of macro questions but to drill on to something micro here, this small deal in Motion that you said plays into the grid in smart grid, where are you going with that and are we opening the door maybe to a new sub-platform here?

Larry Culp

We'll walk before we run there, Jeff. What we're really doing is adding some additional remote diagnostic and monitoring capability to our Qualitrol business. One of our really nice niche instrumentation businesses inside of sensors and controls. They got an excellent worldwide position with the electrical utilities, particularly around transformer instrumentation and this gives them a nice additional play, obviously, if the smart grid initiatives play out.

Jeff Sprague – Citi Investment Research

Thank you.

Larry Culp

Thank you, Jeff.

Operator

And our next question comes from Steve Tusa of JP Morgan.

Steve Tusa – JP Morgan

Hi, good morning.

Larry Culp

Hey, Steve.

Steve Tusa – JP Morgan

Just on the, getting back to the price cost, you said that the raw material costs were actually down in the quarter. I think you got about a point, point half of price. Can you just maybe talk about how you see that playing out for the rest of the year, maybe how much of a benefit was it to the margin this quarter?

Dan Comas

Well, Steve, you saw that over – if you factor out some of the Tektronix noise from a year ago, overall gross margins were flat which was pretty impressive performance given the top line. I think that's a reflection of both getting some price, the commodity reductions and particularly our Q4 restructuring benefit. As Larry indicated, we think price will be positive, but it will – I think it will decline somewhat during the course of the year, but both because of the restructuring and the commodities, we should do pretty well on the gross margin line throughout the year. But I can't quantify more than that.

Steve Tusa – JP Morgan

Dan, and then free cash flow, there were some relatively big swings in receivables and payables. Is anything going on there?

Dan Comas

Primarily I would say it's just a reflection of the lower core growth. I think I've also noted we funded about $50 million of restructuring in the quarter that was part of Q4 expense but actually got funded in the first quarter. So actually year on year absent restructuring, our free cash flow would have been up.

Steve Tusa – JP Morgan

Okay. And then one more just on Tektronix. How is the business from a profitability's perspective running relative to where you ended the year last year?

Dan Comas

We were slightly north of 15% in the first quarter, which was down from the high teens we were running in the fourth quarter. Adjusting for the volume, we had terrific margin performance in the quarter, but clearly getting impacted by volume there.

Steve Tusa – JP Morgan

And you would expect that to kind of bleed lower through the rest of the year or you expect to sustain that?

Dan Comas

I think we would be at that sort of level which would be a decline year-on-year, but nowhere near what you would expect given the revenue decline as they have done such a good job on the cost side and we are working on other actions as we speak.

Steve Tusa – JP Morgan

Okay. Thanks.

Operator

And we'll go next to Scott Davis of Morgan Stanley.

Scott Davis – Morgan Stanley

Good morning, guys.

Larry Culp

Hey, Scott.

Dan Comas

Good morning, Scott.

Scott Davis – Morgan Stanley

Is there anyway – I know it's hard, but is there anyway to kind of quantify the payback time period of the restructuring when you think about maybe the tailwind you could see in 2010?

Larry Culp

Well, I think that certainly when we talk about spending the 150 to 170, we're still trying to pin down a few things. But as we have accelerated that list of projects, got clearly we're incorporating a few that have a little longer payback in them. But again I think it's probably $140 million that by and large we should walk into '010 with. We're clearly not going to try to get too far ahead of ourselves. We typically talk about the next year in December, not April. But I think when I step back and look at what we will have accomplished on the cost side exiting 28 facilities, 4,000 positions between what we did last year and what we keyed up for this year, in addition to all the other cost reduction measures that have put in place, couple that with some of the revenue dynamics that we talked about, the channel destocking, some of the share gains – and note, we're not a big backlog Company so we're not working off a lot of backlog here. I think the reality of the economy is kind of front end center for us right now, not to mention the billion dollars of cash sitting there earning less than 1%, that I would hope that we deploy this year in some smart acquisitions. So whenever this economy flushes itself out, I like where we're going to be. I think when those end markets come back we're going to be well positioned to be full beneficiaries.

Dan Comas

Scott, it's obviously early, but our best look of what we plan to do for the balance of the year, as Larry mentioned, it will be $140 million annualized benefit. We think we'll get about 50 of that primarily in the second half so a net benefit going into 2010, we're about looking around 90 million.

Scott Davis – Morgan Stanley

Okay. Good precision. And maybe I'm just tense here on Thursday morning but I didn't understand the tax credits. Can you just remind us where they come from again?

Dan Comas

Sure. We've kind of highlighted on our filings the potential reduction of tax reserves over the last couple years and then our K we thought we have up to about $150 million of reduction of tax reserves. These relates to the expectation of a favorable settlement of prior year audits or the statute of limitations on audits and other reviews. We've been able to sort of kind of fine tune in our best look, obviously it could change a little bit, over the next couple quarters we think we'll book about a $100 million after-tax benefit of reduction of prior year tax reserves.

Scott Davis – Morgan Stanley

Okay. And then last question, just more specifically on product ID, the 8% down volumes wasn't really that bad when you look at your comps, better than comps. Was there any timing issues of contracts or share shifts, anything that kind of explains your outperformance there?

Larry Culp

Well, it would appear – it's early obviously and looking at the full comp set, I think the Calypso printer is doing well at BJ. I think our consumables business seems to have held in better than perhaps it has elsewhere. And it was a positive quarter four exactly so relatively to the timing of some of their programs so I really roll those three together, Scott.

Scott Davis – Morgan Stanley

Okay. Thanks, guys.

Larry Culp

You bet. Thank you.

Operator

And our next question comes from John Inch of Merrill Lynch.

John Inch – Merrill Lynch

Thank you. Good morning.

Dan Comas

Good morning, John.

John Inch – Merrill Lynch

Good morning, guys. So Dan, you called out the linearity of your order trends, but if you guys were to look at the more cyclical components of Danaher, they call it motion, some of the other companies have called out economic or end market stability in March and April. Are you seeing that kind of a trend of stability in some of the more economically sensitive or non-consumable pieces of Danaher, just maybe talk a little bit about that progression through April?

Larry Culp

John, I think we're optimistic about where we stand from a competitive perspective there, but I'm not sure we would declare stability given the storm that we're in here on the back of a couple of weeks worth of orders. But I think the rate of decline clearly seems to be moderating. I think the sense that we have, particularly in those businesses, as we sit here in mid-April is different than it was in mid-January. That may well be more commentary, John, frankly on January, where it was very hard to determine where things were. Budgets weren't set. Folks were shutting down, slashing inventories and the like. So, I don't want to suggest that we're going to call a hard bottom here and now, but because we don't work through a lot of backlog, we think we are dealing with the reality of things here now in our shipments. We like the fact that we see some of that – those declines moderating and if that indeed continues for a while then perhaps we have found that bottom. But again, as you see in our guidance, we are expecting the corporation at large to decline through the course of the year on balance with the rate that we registered in the first quarter.

John Inch – Merrill Lynch

So, okay, just to make sure I understand what you're saying. You're basically – we know you're conservative. You're effectively saying the rest of the year is going to be based off of what you saw in the first quarter. But that if – is it – would it be fair to say if the trend toward the end of the quarter continues, maybe you do a little better, is that fair?

Larry Culp

Well, I think that that's certainly possible, John.

John Inch – Merrill Lynch

Okay. Want to ask you just about Videojet. I guess Dover talked about the prospects of improvement method, going into the second half. I know that you guys have called out some sort of pushback on higher ticket items. A lot of those equipment, lot of those machines aren't that expensive. Do you think that business as you think about your businesses stands a better chance of improving as the year goes on or perhaps there is some other businesses that you would like to call out.

Larry Culp

I think there's a lot of things that team is doing with respect to new products, some things we're doing in the channel, some very smart tactics around pricing, some things that we're doing internationally that give me confidence that we're going to continue to out execute during the course of the year. We got to do that and we've certainly have some good competition which we respect, but I feel good about our ability to execute the macro backdrop there, should I think be more clear as things play out, budgets are set, factories are running at more normal rates but that all still needs to play out.

Dan Comas

John, I mean it's – if you look at the last downturn and obviously probably a different downturn, but it's at least a plausible theory because we look back at our Videojet business, we did have three, four quarters of very weak instrument sales about the time we were buying the business but it did bounce back and pretty quickly. Probably quicker than some of our other kind of equipment type businesses.

John Inch – Merrill Lynch

Yes, that's what I was leading to. Nothing really different about this time around versus those other times if the economy plays out similarly?

Larry Culp

Again, that was our – the experience last time.

John Inch – Merrill Lynch

Okay. Let me just ask one more here, more strategically. I really want to hit on the Tektronix acquisition. Larry, one of the hallmarks of your tenure of CEO has been to generate a portfolio or shift the portfolio to become less cyclical. Clearly, you couldn't have anticipated this recession. On the other hand, Tektronix has put up some pretty weak performance that debatably makes Danaher more cyclical at the margin with respect to that acquisition. So I am curious as you think about your healthy balance sheet and these opportunities, have you shaped or reshaped possible opportunities within Danaher to think somewhat differently about where you want to be focusing your resources?

Larry Culp

Well, John, I think that we've always said that the focus on the acquisitions will be around our high growth, high margin businesses, with particular emphasis around Medtech, a business we built from scratch since the last downturn. Obviously, T&M is a bigger and I would argue stronger business over the long-haul with Tek on board. Environmental still a key area of interest for us and while it's small, I'd like to think that product ID continues to garner attention for us because we think the secular trends there are important, attractive and just have lots of legs going forward. So I think that that frame is something that by and large is intact as we look at how we spend the next billion, the next $5 billion that we've got. Clearly, John, as you highlight, we want to make sure that we have growth that is sustainable, growth that is predictable and is less cyclical, less volatile as we can. But it's one dimension, not the only dimension that we look at relative to how we create value for our shareholders over the long-haul. And while I appreciate you're saying it that none of us could have predicted what we've seen here, I think when we get to the other side, what Tek and what Fluke are going to be able to do on a global basis in the markets that they serve are going to serve our shareholders very well.

John Inch – Merrill Lynch

Maybe just the way to also frame that is simply has there been a lesson learned given this downturn that I mean Tektronix was the biggest deal you have ever done. As you think about other acquisitions that may apply to perhaps shaping some of those future transactions or the thought process.

Dan Comas

Well, I certainly think that we – I like to think that we learn from every deal and we learn from every toss and turn of the ship in this storm whether it be that business or others. So, certainly as we look at assets, John, that we may want to bring in, how they are performing both at the top and at the bottom in this storm is something that we're analyzing very carefully.

John Inch – Merrill Lynch

Okay. Thanks very much.

Larry Culp

Thank you, John.

Dan Comas

Thank you.

Operator

And our next question comes from John Baliotti of FTN Equity Capital Markets.

John Baliotti – FTN Equity Capital Markets

Good morning, Larry.

Larry Culp

Good morning, John.

John Baliotti – FTN Equity Capital Markets

Seems like as we're listening to other companies report and kind of what John was alluding to earlier, it seems like a lot of the companies that are maybe calling the bottom are calling some stability to a degree actually supply into OEMs, some of them like you and also distributors that you sell into. I'm just wondering, is that inconsistent? I mean you said the rate of decline in the quarter lessened. Is that consistent what you're hearing? I'm sure you guys are monitoring some of the other quarters that are coming out from the other companies.

Larry Culp

Well, I think that – again, we're not going to try to get out too far here on the macro call. I think that we know we got hit disproportionately with some of the – I don't want to call them one-timers but the sorts of negative hits to volume like the channel destocks and the like that should moderate and the sooner we get back to end use demand, the better off I know our company will be. But as to when that occurs, we're certainly closer to it than not but I just don't think we're going to say that in the third week of March things have stabilized. But again, I would share with you that I think just the tone and the visibility to contrast mid-April here to mid-January is better. Doesn't mean we're still not talking about declines. We talked about the second quarter already but I do think that a little bit of – a little bit more clarity here though it isn't great, is going to be helpful to the psychology. And again, I think as we work through the quarter, I'd like to think when we're talking here at 90 days forward that we do have a better handle on that. But I'm cautiously optimistic in that regard, but not going to pound the table that we found that hard bottom in mid-March.

John Baliotti – FTN Equity Capital Markets

So you like to see a more sustainable trend than what you've been seeing recently?

Larry Culp

Maybe John is right relative to our posture being a bit conservative but certainly not the way we operate. Again, I think that as we look at the environment there's a lot of things that we can control that we're pleased with. It has been a rather fluid start to the year. I think there are some uncertainties still out there. A number of you had written about those. But by and large we know at a minimum those destocks are going to play themselves out here over the next quarter or so.

John Baliotti – FTN Equity Capital Markets

I mean, I think it's – I think given the environment, I think it's the right way is to not expect things to dramatically change given what you've just seen, especially given the history that your Company has and I don't think you want to change that playbook at this point.

Larry Culp

Thank you, John.

John Baliotti – FTN Equity Capital Markets

Sure.

Operator

And we'll go next to Steven Whittaker of Sanford Bernstein.

Steven Whittaker – Sanford Bernstein

Good morning, guys.

Larry Culp

Good morning, Steve.

Steven Whittaker – Sanford Bernstein

Hey. Just a few questions. First, back to Tek, could you lay out in a bit more detail how you're performing versus – in terms of DBS implementation, saving estimate, margin expansion in light of the volume deleveraging there, how should we think about that sort of from a return on capital perspective and where you're headed?

Dan Comas

I mean, couple points would be, if you look at the first quarter, we – I think just to kind of put it to the Street numbers and then try to talk to some other points, we missed the top line by $60 million clearly that was the lower core growth. But our earnings came – we were a penny short of consensus but including in that was $0.03 of restructuring. We also had about a penny from litigation settlement and expense as well. And our decremental margins were in the low 20s and with a business with gross margins in the mid-40s I think it gives you a sense of kind of the benefit of the Q4 restructuring. I think overall we were very pleased with sort of the payback we're getting at what we did in Q4.

Steven Whittaker – Sanford Bernstein

Okay. But – and then diving into sort of the DBS implementation at Tek and how it's on track, I was also looking at the 225 basis point take-out on the acquisition related costs for professional instrumentation that would have changed how I thought about those margins. Just trying to get a sense for is this on track and to what at Tektronix?

Dan Comas

Steve, the $225 million was the one-time charges from Tektronix a year ago.

Steven Whittaker – Sanford Bernstein

Yes.

Dan Comas

I'm not sure that's really (inaudible) DBS process.

Steven Whittaker – Sanford Bernstein

Yes, but I'm looking at sort of the fact that it was we're saying that it sort of performing better versus last year and once you take that out from last year, I'm just trying to understand is to what extent is any part of the DBS implementation at Tek off track or on track, given the much tougher top line environment?

Larry Culp

Steve, I would share with you that with respect to the integration and the embrace and the use of DBS at Tek, we are ahead of where we could have ever hoped to be at this point. Again, a difficult sales environment for the business, but I think across many functions at Tektronix at senior levels, at lower levels in the organization, this team has done a fantastic job, really learning the tools, understanding the methodology, and their implementation, have done a I think just a terrific job really putting them to good use at Tektronix. I was out there just a few weeks ago at their engineering conference. I just saw lots of examples where their new product development processes had been improved, certainly within manufacturing, selling, and back offices, just we could take the rest of this call talking about the job that they've done to improve deliveries, to improve efficiencies reduce costs, be more innovative. I like the way that business is performing from that perspective but obviously like more revenue. It would be more impactful on a call like this, but I think you should have no worries about where that team is with respect to DBS.

Steven Whittaker – Sanford Bernstein

Okay. And then on the restructuring, additional restructuring dollars, how are you thinking about – how should we think about allocating that across the different businesses?

Larry Culp

Well, I think that, again, we bit off quite a bit last year, Steve, and the execution has to-date been very good. So the further acceleration I think is timely for us, not to mention the economy. I think that as we look at the execution, all businesses are going to be impacted in one way or another. But as you might expect, those businesses that are feeling the brunt, the full brunt of the downturn are going to be more active in this next waive of cost reductions. So the spend and the benefit will correlate pretty well with the revenue that we turn in here in the first quarter and in turn what we're talking about for the rest of the year.

Steven Whittaker – Sanford Bernstein

And then just one final sort of more micro question in terms of the spending in municipalities on water quality and water infrastructure. Is the – how do you view sort of the trade-off between financing problems, lower tax base, et cetera and potential additional stimulus coming out there in your businesses?

Larry Culp

Well, certainly the – where we see that playing out today, we have really seen no impact whatsoever at Trojan, those big programs which by and large are hard to stop have continued well. I think we've seen some trimming, some postponing, some uncertainty around muni budget that have impacted some of the instrumentation sales. And I would say that's not only a U.S. phenomenon. We saw a bit of that in Europe as well and in parts of Asia. But consumable sales have stayed very steady. All those businesses I suspect will be beneficiaries not in big chunks but in more subtle, more persistent, and consistent ways from any stimulus spending that we may see, again, not only here, but elsewhere around the world.

Steven Whittaker – Sanford Bernstein

Okay. Thank you.

Larry Culp

Thank you, Steve.

Operator

And we'll go next to Richard Eastman of Robert Baird.

Richard Eastman – Robert W. Baird

Just a quick follow-up again on Tektronix. Did you say or did Dan say that the operating margin in the first quarter was 15%? Does that exclude any restructuring costs?

Dan Comas

That's actually – that's before the non-cash intangible amortization, but yes, that was the operating margin of the business.

Richard Eastman – Robert W. Baird

Okay. And could you just size the network management piece of Tektronix just in dollars, roughly?

Dan Comas

Give me a second I give you too.

Richard Eastman – Robert W. Baird

Roughly. Maybe in the meantime in terms of – nice work on the capital structure here, early in the year and the question would be as you look forward and you look into the acquisition pipeline that you have, do you feel more comfortable at this point with your ability to assess the target companies EBITDA that you're looking at. I mean we talk about stabilization of the economy and the business models. Are you feeling increasingly confident that you know what you're going to be paying for here going forward?

Dan Comas

I think the short answer there, Rick, is yes. Again, we're not trying to call a hard bottom here but with the fourth quarter and the first quarter behind us, we've seen a lot of the noise that's going to impact any potential business we would like to bring on and we can see how it has played out. Come to a point of view obviously as to what has become. So it's a bit of a pressure test, a stress test if you will to use the popular term that every business has taken here. So I think that is a constructive part of the analysis as we look to deploy that capital

Richard Eastman – Robert W. Baird

Does it lead you down the path of larger potential acquisitions given that the risk maybe is minimized, is more minimized?

Larry Culp

I think that's – I think you could have a good debate around whether that's true or not for a Company like ours. I mean small companies like the three we've just brought in, you could argue that that sort of spending mitigates risk in one way. Obviously, a large Company that we understand well, that fits well for us, where DBS is going to be applicable and add value. That's certainly a possibility and we're going to look at those just as we will the dozen or so smaller bolt-ons we typically do in the course of the year.

Dan Comas

Rick, on your question in '09 we expect Tek on to be a little greater than 25%.

Richard Eastman – Robert W. Baird

Of Tek?

Dan Comas

All of Tek, which has obviously grown as they kind of outperformed the general test and measurement space.

Richard Eastman – Robert W. Baird

Okay. And then did you also say that Accu-Sort was up year-over-year?

Dan Comas

They were up slightly, given the timing of some projects, given obviously some cutback in spending here. We think they will be down in the second quarter.

Richard Eastman – Robert W. Baird

Well, okay.

Larry Culp

But they were up slightly in the first.

Richard Eastman – Robert W. Baird

In the first. Alright. Well, finally. Hey, thanks.

Dan Comas

Thanks, Rick.

Operator

And due to time constraints our final question comes from Nicole Parent of Credit Suisse.

Larry Culp

Our final call and maybe your final question.

Nicole Parent – Credit Suisse

It is. Thanks, Larry. Two final questions. Could you give us a sense, I mean, you talked about U.S. and Western Europe being soft. Could you give us a sense just in the context of the incremental restructuring how much is happening in the U.S., how much is happening in Europe and where you think we are in Europe relative to the U.S. deceleration?

Larry Culp

I think that with what we – to take the second one first, Nicole, I think when you look at what we saw in the quarter, Europe and the U.S. were down pretty much in lock step with each other. I think that the way '08 played out, my own view is that the U.S. will come back sooner than Europe will or at least the moderation in the declines will occur here first in all likelihood. With respect to the additional cost actions, as we look at the U.S., non-U.S. split there, it's actually pretty well balanced again, where we have some of our cost imperatives in Europe, I think accelerating the list will allow us to take some roof tops out that are not wildly economic for us but there are things that we can still do in the U.S. which we're going to tee up as part of this acceleration.

Nicole Parent – Credit Suisse

Okay. And then just one last one. I think over the last 12 months to 18 months or 24 months you guys have really benefited from some strong new product introductions. You stepped up the R&D. How do we think about R&D as a percentage of sales for the remainder of the year and as you look into 2010? And how do you kind of think about investment in new products in this type of an environment?

Larry Culp

Well, I think as we reduce cost, the way we talk about it internally, we want to make sure we're dynamically allocating resources to protect the real growth drivers and to fund fully to the extent possible the good out year contributors. So you saw us hold R&D as a percent of sales in line, suggest a decline in the first quarter. By and large that was an FX effect. A little bit of the Tek restructuring and resetting there going on and a couple of the bigger programs like Calypso at BJ, AQT at Radiometer slowing their rate of spend. But I'm heading out Monday night to our innovation conference where we're going to bring that group together. I think that's a group that's very important to us. Those investments are ones by and large protected even in this environment. And I think if you look at the first quarter, where we've outperformed, I think you can attribute it to a number of the innovations that have come to market. Whether we talk about some of the new Medtech products, like the twisted file at Sybron, we talked a bit about Calypso and product ID, Gilbarco doing very well in the payment space and obviously in California around enhanced vapor recovery. So that's an important part of this business and our strategy. No less today than it was a year or five years ago and it will be the case through this year and next and going forward. No changes there.

Nicole Parent – Credit Suisse

Good to hear. Thank you.

Larry Culp

Thank you, Nicole. Best of luck.

Operator

And at this time, I would like to turn the conference back over to Andy Wilson for any additional or concluding remarks.

Andy Wilson

Thanks, Cecilia. Just as a reminder, the replay number is 888-203-1112 in the U.S and 719-457-0820 internationally. Confirmation code 279-7420. Thanks everyone for joining us.

Operator

That does conclude today's conference, ladies and gentlemen. Again, we appreciate your participation today, and you may disconnect at any time.

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Source: Danaher Corporation Q1 2009 Earnings Call Transcript
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