Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Danaher Corporation (NYSE:DHR)

Q2 2009 Earnings Call

July 23, 2009 8:00 am ET

Executives

Matt R. McGrew – Vice President of Investor Relations

H. Lawrence Culp, Jr. – President, Chief Executive Officer & Director

Daniel L. Comas – Chief Financial Officer & Executive Vice President

Analysts

Robert Cornell – Barclays Capital

Nigel Coe – Deutsche Bank North America

Steve Tusa – JP Morgan

Deane Dray – Friedman, Billings, Ramsey & Co., LLC.

Jeff Sprague – Citigroup

John Baliotti – FTN Midwest

Steven Winoker – Sanford C. Bernstein & Co., LLC.

Terry Darling – Goldman Sachs

Richard C. Eastman – Robert W. Baird & Co.

Operator

My name is Mark Pena and I will be your conference facilitator today. At this time I would like to welcome everyone to the Danaher Corporation second 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) I would now like to turn the conference over to Mr. Matt McGrew, Vice President of Investor Relations.

Matt R. McGrew

On the call today are Larry Culp, our President and Chief Executive Officer and Dan Comas, our Executive Vice President and Chief Financial Officer. I’d like to point out that our earnings release, Form 10Q, the 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 www.Danaher.com under the heading earnings and will remain available following the call.

Also, the audio portion of this call will be archived in the investor section of our website later today under the heading investor events and will remain archived until our next quarterly call. A replay of this call will also be available until July 28th. The replay number is 888-203-1112 in the US and 719-457-0820 internationally and the confirmation code is 7112404. I’ll repeat this information at the end of the call for late arrivals.

During the presentation we will describe certain of the more specific factors that impacted year-over-year performance. Please refer to the accompanying slide presentation, our earnings release, Form 10Q and other related presentation materials, supplementing today’s call for additional factors that impacted year-over-year performance. Please note that our EPS guidance to be provided at the end of the call excludes the impact of acquisition costs related to any future transactions resulting from the adoption of SFAS 141R. Costs associated with close transactions are included in our EPS guidance.

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 to the date they are made and we do not assume any obligation to update any forward-looking statements.

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

H. Lawrence Culp, Jr.

As some of you know, Matt McGrew is our newly appointed Vice President of Investor Relations and has been in the role for a couple of months now. Matt has been with Danaher since 2004 and has been an outstanding partner within both internal audit and M&A, most recently serving as our director of M&A finance. I think Matt is a great addition to the IR team and we’re happy to have him in this role.

Let me start by providing some color around what we are seeing across the businesses and end markets so as to provide some context to the results we delivered in the second quarter and our outlook for the rest of the year. Clearly, conditions remain challenging, geographically Europe decelerated across most of our businesses in the quarter while the US and emerging economies remain soft. On a relative basis, China continues to be our best performer notwithstanding the difficult year-on-year comparisons due to sales generating in the lead up to the Beijing Olympics last summer.

Despite the environment, I’m pleased with how we are executing. Results within our professional instrumentation segment were essentially in line with our overall business results as strength in our environmental platform helped to offset continued weakness in test and measurement. Our medical technologies segment absent KaVo largely outperformed as a result of its consumables mix and our med tech segment is now approaching the combined size of our industrial technologies and tools and components businesses and as a result its performance helped mitigate the larger decline seen in those two segments due to their industrial and consumer exposure.

In this environment, we continue to focus our efforts on capturing market share, Sybron, Videojet, Radiometer, Gilbarco Veeder-Root, Matco and ChemTreat are among the Danaher businesses where we believe we have taken notable share from competition. Our margin performance was again strong in the second quarter despite a sequential deterioration in our core growth, our decremental margins were similar to our solid first quarter performance. Additionally, I’m pleased to report that cash flow, perhaps the most significant metric for Danaher was once again robust as we generated $438 million of free cash flow in the quarter. Despite the economy we expect strong cash flow for all of 2009.

As previously announced we anticipate a total of $150 to $170 million of restructuring spending for 2009. In the second quarter we spent $46 million of these funds and eliminated approximately 1,000 positions. This amount is approximately $34 million or $0.08 per share higher than our original budgeted plan for the second quarter but consistent with our guidance provided last quarter. We believe these restructuring actions will position us well to weather the storm and to outperform when the economy improves.

With that as a backdrop, let’s move to the detail of the quarter. Today we reported second quarter earnings per diluted share of $0.89 representing an 18.5% decline from last year. Despite the challenging economic environment, we were able to deliver EPS within our guidance range primarily as a result of the savings generated by the restructuring actions initiated last year and taken in the first half of this year as well as the ongoing hard work of driving material costs and operating expense reductions across the company.

Results for the quarter decreased 18.5% year-over-year to $2.7 billion with core revenues down 15%. The impact of currency translation reduced revenues by 5.5% offset by acquisitions which contributed 2% to sales growth. Year-to-date revenues decreased 16% to $5.3 billion as core revenues declined 13%. Year-on-year gross margin for the second quarter decreased approximately 30 basis points to 47.2%. This modest decline is primarily explained by our 2009 restructuring spending as our cost savings have largely offset the impact of the revenue decline.

SG&A expenses as a percentage of sales were 28.4% compared to 26.2% a year ago primarily due to reduced leverage on our SG&A cost base as a result of the lower sales volumes and additional restructuring costs in 2009. For the quarter, research and development spending as a percentage of sales was essentially flat year-over-year at 5.9%. Operating profit for the quarter was $344 million representing a 33% decrease over last year. Incremental restructuring spending over the prior year accounted for approximately one quarter of this decrease.

For the first six months, operating profit was $684 million, a 26% decline over the same period a year ago. Operating margin in the second quarter declined 260 basis points to 12.9% primarily due to lower sales volumes across most businesses and the impact of year-over-year restructuring costs partially offset by the benefit of restructuring and cost reduction activities. Year-to-date operating margins decreased 170 basis points to 12.9% primarily as a result of these same factors.

Our effective income tax rate for the second quarter was 6% as compared to 24% in the prior year period. Our effective income tax rate was favorably impacted by discreet tax benefits of $60 million or $0.18 per share related to the resolution of various international and domestic tax matters which we included in our guidance for the quarter. For the balance of this year, we anticipate our tax rate to be approximately 25% absent the impact of additional anticipated favorable discreet tax item.

Net earnings were $296 million for the quarter, a decrease of 18.5% compared to the prior year, a result of lower revenues and additional restructuring spending offset partially by the previously mentioned tax benefit. For the first half, net earnings were $533 million, a decrease of 16.5% over last year. Operating cash flows for the second quarter were $486 million, a 16.5% decrease year-over-year. For the first six months operating cash flows were $802 million, a 12% decline over last year. Free cash flow for the second quarter was $438 million and our free cash flow to net income conversion ratio was 148%.

DBS is the driver behind this significant and sustained cash flow performance. Our first half cash flow performance includes $900 million of cash payments as a result of our restructuring initiatives. Of particular note, we reduced inventories by over $90 million in the quarter. We anticipate that our conversion ratio will remain strong over the balance of the year and as a result we are optimistic about our ability to deliver free cash flow in excess of net income for what would be our 18th year in a row.

Financially, we’re in great shape with $1.3 billion of cash on hand and over $1 billion available under our CP program. As we referenced in our prior earnings call in early April, we completed the acquisition of three companies with aggregate annual revenues of about $50 million to strengthen our environmental, test and measurement and sensors and controls businesses. We remain confident in our ability to deploy capital in this environment and are encouraged by the opportunities in our acquisitions funnels today.

Now, turning to the operating segments, professional instrumentation decreased 17% for the quarter with core revenues down 15.5%. For the first half, revenues decreased 15% with core revenues down 13.5%. Operating margin for the second quarter declined 500 basis points to 15.1% primarily due to lower sales volumes and the incremental impact of year-over-year restructuring costs incurred during the quarter. Year-to-date, operating margin decreased 200 basis points to 16.4% when compared to 2008 due principally to these same factors.

Environmental platform revenues declined 3.5% in the quarter with core revenues down 1%. For the first half revenues decreased 2.5% with core revenues flat. Water quality core revenues declined at a low single digit rate in the quarter as Hach Lange core revenues declined at that mid single digit level as growth in consumables and aftermarket service revenues was more than offset by soft instrumentation sales. Despite the top line performance Hach Lange’s operating margin expanded more than 50 basis points in the quarter.

Trojan’s core revenues grew at a double digit rate in the quarter with strong growth in waste water applications as well as continued shipments for the New York City drinking water program. This project is expected to positively impact Trojan’s revenues for the balance of this year. During the quarter Trojan received a prestigious Stockholm Industry Water Award awarded by the Stockholm International Water Institute in recognition of several recent Trojan installations that illustrate the potential of UV treatment for waste water reuse applications.

At ChemTreat revenues were essentially flat year-over-year as unseasonably cool weather in April and May briefly delayed sales to boiler cooler applications. New account generation was robust in the quarter and we believe we are capturing share in many of our vertical markets. Gilbarco Veeder-Root’s core revenues were up low single digits year-over-year. At Gilbarco sales grew at a mid single digit rate, solid growth in our passport point of sale systems where we think we are taking share were partially offset by lower dispenser sales. Veeder-Root sales were down in the quarter with sales of our enhanced vapor recovery solution slowing as regulators delay enforcement actions until later this year.

Moving to test and measurement, revenues declined 30.5% in the quarter with core revenues down 30% reflecting a very challenging market environment. All businesses were down significantly with the exception of Tek communications. For the first six months revenues decreased 26.5% with core revenues down 26%. Fluke core revenues declined as sales of core test products in Europe decelerated rapidly during the quarter. Inventory reductions in the distribution channel at Fluke continued to adversely impact revenues.

At Tektronix, sales were down across all product categories and geographies as customers continued to delay investments. Electronics and computer end markets were particularly soft. Sales from our Fluke Networks and Tek communications businesses collectively declined at a mid teen rate as weak demand in our enterprise management systems were partially offset by strong sales to North American carriers. Despite the weak top line performance Tektronix achieved double digit operating margins in the quarter absent restructuring costs.

Moving to medical technologies, revenues for the quarter decreased 12% compared to last year with core revenues down 7.5%. For the first six months revenues decreased 9% with core revenues down 4.5%. Med tech operating margin for the second quarter was down 100 basis points to 9.8% due primarily to incremental restructuring costs incurred in the coffee. Operating margins for the first six months decreased 80 basis points to 10.3% as compared to the first six months of last year, a resulting incremental restructuring costs and lower sales volumes.

Within our dental business core revenues declined at a low double digit rate in the quarter. Sybron sales declined at a low single digit rate with higher sales of our disinfection product lines more than offset by soft sales of general dentistry consumables and orthodontia products. Sales of total care disinfectant wipes used for medical applications were particularly strong in the quarter with infection control experts using them to help prevent the spread of the H1N1 swine flu virus. Despite the soft top line, we believe Sybron is capturing market share across a number of product categories.

KaVo revenues declined at a high teen rate in the quarter with a general slowing across all major geographies and most product categories. The economic downturn continues to significantly impact sales of new dental equipment as many doctors postponed capital investment in their practices. A bright spot within the business has been our European demand for KaVo’s E70 treatment unit which we launched earlier this year. While we expect the third quarter to remain challenging, we are encouraged by the medium term outlook. We just completed a terrific sales meeting with a key distribution partner and are launching some important new products in the second half and we are seeing positive results from our cost reduction activities.

Leica core revenues declined in a mid single digit rate in the quarter driven by weak demand in the industrial and life science research markets. While we have seen increased quote activity, a number of customers are delaying new equipment purchases pending the release of federal stimulus funding or qualified programs. Leica Biosystems core revenues declined at a high single digit rate in the quarter as a difficult year-over-year comparison and soft instrument sales more than offset sustained growth in our advanced stain and consumables. Encouragingly new orders continue to grow at a mid single digit rate in this business.

Radiometer’s core revenues grew at a mid single digit rate in the quarter driven by continued strong consumable sales primarily in Europe and Asia resulting from past success in growing our install base. China sales also benefited from the launch of the [8VL80] compact blood gas analyzer.

Moving to our industrial technologies segment, revenues declined 25.5% for the quarter with core revenues down 19%. For the first half revenues declined 22% with core revenues down 16%. Operating margin for the second quarter was 15.7%, a 140 basis point decline compared to last year due primarily to lower sales volumes as well as incremental restructuring costs incurred during the quarter. Year-to-date operating margin decreased 130 basis points to 14.7% largely due to these same factors.

Product ID revenues were down 19.5% in the quarter with core revenues down 12.5%. For the first half, product ID sales decreased 18% with core revenues down 10.5%. At Videojet, sales of consumables and aftermarket services declined at a lower rate than equipment sales in the quarter. We believe our medium and low price point CIJ printers which we launched the end of last year are continuing to take share in a tough market.

Motion revenues were down 43.5% in the quarter with core revenues down 35%. For the first half, sales declined 37.5% with core revenues down 29.5%. Further deceleration in our elevator business which was down nearly 50% and flat panel displays which is down more than 70% impacted our performance during the quarter. Additionally, customer shutdowns particularly in Germany contributed to a meaningful slowdown in our European business.

Finally, moving to tools and components, revenues for the quarter were down 23% with a core revenue decline of 22.5%. For the first half, revenues declined 22% with core revenues down 21.5%. Operating margin for the quarter was 14.5%, an increase of 150 basis points from the prior year due to the benefit of lower commodity costs, increased productivity, cost savings attributable to prior year initiatives as well as some favorable mix which helped offset both lower sales volumes and incremental year-over-year restructuring costs incurred in the quarter. Year-to-date operating margin decreased 180 basis points to 10.6% with the difference from the three month period largely a result of legal and commodity costs recorded in the first quarter.

Mechanics hand tool core revenues declined 12% in the second quarter and 13% for the first six months primarily due to lower sales to both consumer and professional channels. We were pleased with our sell through at Sears in the quarter which was the strongest in nearly two years helped in part by good Father’s Day sales. Sales of our domestic china tool brand [Sada] also rebounded this quarter.

To wrap up my prepared remarks, as 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. When the economy and our end markets improve we believe we will emerge as an even stronger and more competitive company. Our expectation is for third quarter core revenues to be in line with those of the second quarter. For the full year, we are forecasting core revenues declines approximately in line with the first half of this year.

The additional restructuring charges that we announced in April are expected to reduce EPS by approximately $0.08 per share in the third quarter and $0.25 per share for the full year. We expect the reductions in our tax reserves will increase EPS by approximately $0.12 per share in the third quarter and $0.30 per share for the full year. As a result, we expect our earnings per share for the third quarter to be in the range of $0.80 to $0.90. For the full year we expect earnings per share to be in the range of $3.30 to $3.50. These ranges include the tax and additional restructuring items just mentioned but exclude the impact of future acquisition related costs resulting from the adoption of SFAS 141R.

Matt R. McGrew

That concludes the formal comments. We’re now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Cornell – Barclays Capital.

Robert Cornell – Barclays Capital

Maybe just first of all give us a little help Larry with how the quarter tracked April, May, June, I mean was the exit rate June significantly worse than the 15% organic growth decline?

H. Lawrence Culp, Jr.

No, I think as you look across the last three months we were pretty much in line with what we reported during the course of the quarter, no real change in that regard, certainly not a decal as we exited June. Some of the leading indicators whether it be quotations or funnels, our look at many of our distribution partners inventories, I think on balance were stabilizing and in some cases dare I say encouraging but in terms of what went out the door it was by in large linear in the quarter.

Robert Cornell – Barclays Capital

When you talked about gaining market share in a bunch of these businesses, some of the heavy lifting on restructuring, do you think you’re setting Danaher up to grow faster than the 5% to 7% going forward in a comparable economic environment? Is that something that is the back of your mind at all in some of these programs?

H. Lawrence Culp, Jr.

Well, I think everything we do Bob in that regard both organically and frankly, inorganically is aimed at delivering core growth in that range. Obviously, we would like to think over time that we could do better. I don’t think we’re going to reframe that long term core growth rate on the call today. I’m optimistic that we will be in a different economic environment at some point but right now I think we’re well served by being tough on costs, being aggressive on share, continuing to stock the acquisition pipeline which again, we’re very optimistic about and just play our game. When the headwinds subside, let alone when the tailwinds present themselves, I think we’ll be in good shape.

Robert Cornell – Barclays Capital

One final thought Larry, is it fair to say the change in guidance is a function of the drop in Europe?

H. Lawrence Culp, Jr.

I think that’s a large part of it Bob. We saw in Europe a marked decel from the first quarter. Now, we were working probably against one of our tougher comps over there but Europe got soft in almost every business during the second quarter in a way I think hopefully is not a permanent state but it was a shock to the system.

Operator

Your next question comes from Nigel Coe – Deutsche Bank North America.

Nigel Coe – Deutsche Bank North America

I guess sharp declines in test and measurements opens the door that that could rebound quite quickly. How do the book-to-bill ratios look in those businesses?

Daniel L. Comas

Unlike the first quarter, where our shipments were clearly better than our bookings, we saw more equalization of that in the second quarter. I’m not sure we’re forecasting a turn here in the second half but it was an encouraging sign.

Nigel Coe – Deutsche Bank North America

How does the new product launch cycle look for Tektronix sort of second half of the year and maybe in to 2010?

H. Lawrence Culp, Jr.

I think the new product pipeline there Nigel is one we’re pretty encouraged by. I think that team has certainly over the last two years been more focused around where we’ve been spending that money and they obviously have a long history of being outstanding in bringing new technologies to market. I would just add to your question, another area that we’ve been working hard on in Tek is to improve the global go to market capability. It’s one thing to have great products but we need to be able to sell those effectively, present that value prop to customers around the world and I think as we anticipate that rebound that you just referred to that will come, we just don’t know when, I think from a product and go to market perspective we’ll be in much better shape when we went in to the downturn here.

Nigel Coe – Deutsche Bank North America

In that regard, how much of an opportunity to you think the 3G launches are in China?

H. Lawrence Culp, Jr.

Well, I think China is hard for us to read right now but within the comp side at Tek we are comfortable with our positioning but obviously we want to see that play out a bit more than it has thus far.

Nigel Coe – Deutsche Bank North America

Then just one final one for me, the industrial margin strength was a bit of a surprise given the volume headwinds. Could you just sort of breakout price inflation? Maybe juts for the whole of Danaher just the price inflation gap through the quarter and in particular within tools and industrial tech?

Daniel L. Comas

Nigel, specifically on price we got about a point and a half of price across businesses and roughly in those segments. I think we were pleased the way price held up and that clearly benefitted margins in the quarter. I think particularly with motion and tools we are getting some commodity benefit right now and you saw that play out with the very good tool margin performance. I would add to that we’re executing well in the factories both in the tool and margin side and I think that’s helping as well and we’ve also got some commodity relief really start to play out here in the second quarter in those two businesses.

Operator

Your next question comes from Steve Tusa – JP Morgan.

Steve Tusa – JP Morgan

It’s tough to tell what the dynamics are on the margin in professional instrumentation but, where do the margins in Tektronix stand? I guess if you could just talk about that versus just the margin dynamics between that and Fluke in the quarter?

Daniel L. Comas

Tektronixs all up absent the restructuring was about 10% operating margin. Fluke remained north of 20%.

Steve Tusa – JP Morgan

Then just looking at the back half of the year, any change in your foreign exchange assumptions?

Daniel L. Comas

Basically based on where it was, right now about 1.40 which is pretty close to where it was in April.

Operator

Your next question comes from Deane Dray – Friedman, Billings, Ramsey & Co., LLC.

Deane Dray – Friedman, Billings, Ramsey & Co., LLC.

I’d like to pick up on your comment to Bob’s earlier question regarding M&A and you said that you’re optimistic so just give us the latest update in terms of pipeline, asking prices for assets and more specifically about how much acquisition capital you think you’re willing to commit at this stage?

H. Lawrence Culp, Jr.

Dean, I think again we certainly are very busy right now on the M&A front. I think we’re pleased with the progress that we’re making both around frankly the active deals as well as in our monthly funnel reviews with all the businesses. I think as we’ve said during the course of the year time is our friend here as the 52 week highs come down with the [inaudible] and the economy just wears on many private owners.

So, I think as we look at the balance sheet, clearly with the cash on hand and we mentioned the CP availability as well, I think we’re very comfortable with the prospect of deplying9 billions of dollars in this environment. Again, I think we’re going to try and be as smart as we can both strategically and financially as we deploy that capital but we have a lot of conviction that these are the types of times in which we want to be an aggressive strategic investor in our businesses. Obviously, not a lot necessarily through the first six months to show in that regard but again, I think this is going to be a good year for us as the environment only gets better.

Deane Dray – Friedman, Billings, Ramsey & Co., LLC.

Should we expect a larger deal or a number of smaller bolt ons? You’re probably not willing to give more clarity on the billions but can you narrow that down at all?

Daniel L. Comas

Deane, one way to frame that up is we have roughly $1 billion of cash on the balance sheet. If we have comparable cash flow in the second half as the first half that’d be another $725,000 and as Larry mentioned we have $1 billion of availability on our commercial paper program. So, that could kind of frame up our kind of latitude if you will over the next two or three quarters from a capital structure point of view.

H. Lawrence Culp, Jr.

Deane, we never plan it this way but obviously if you look at every dozen or 15 deals that we do, obviously the majority of those tend to be important bolt ons with one, or two, or three larger transactions that are also consistent with the strategy. So as we try to [inaudible] you with a little bit of color, looking forward I don’t think that the future will be much different than that past performance.

Deane Dray – Friedman, Billings, Ramsey & Co., LLC.

Just a follow up for Dan, at EPG you all were quite explicit to say that you were managing more to a decremental margin at this stage of the downturn and 25 was the bogey and it looks like you slipped a little bit above that. How precise can that be managed and what are your expectations going forward?

Daniel L. Comas

Well Deane on the second quarter if you exclude the incremental restructuring our decrementals are actually about 23% which were a little better than what we did in the first quarter. Clearly, if you add the incremental restructuring we were slightly north of 25%. So, we were very pleased with our decremental margin performance here in Q2 resulting from a couple of things: one, the actions we’ve taken on the restructuring side; two, the fact that we still are getting some price; and finally, we are getting some commodity relief here.

Operator

Your next question comes from Jeff Sprague – Citigroup.

Jeff Sprague – Citigroup

Just on the Tek versus Fluke it appears that the margins in Tek are coming down much more sharply than they are in Fluke. A, is that correct statement or is that just a function of where you’re at in the integration?

H. Lawrence Culp, Jr.

I think it’s a function of a couple of things Jeff, one is the Tek’s down a little bit more of Fluke, the gross margins are a little higher at Tek so that top line dynamic creates a little bit more downward pressure and the third bit would be just what you described, we obviously are much further along at Fluke than we are at Tek. One business we’ve had for a decade, the other for a couple of years now. With that said, I think as we move through the second half of this year, I think we’d anticipate showing some sequential improvement in the margins at Tek. I think they’re doing a very good job on the cost side and as Nigel alluded to earlier, when the volumes come back I think we’re really going to like the performance out of that business.

Jeff Sprague – Citigroup

The favorable price cost that you saw in the quarter, I guess particularly for tools but also in the motion and some of the other industrial businesses, do you have that magnitude of the benefit in the third quarter or does it start to diminish from here? How do we think about that?

Daniel L. Comas

Well you’ve seen some rise in commodity prices so it may not be quite as much. We’ve been told if everything works well in the second quarter, our execution, price, commodity, we also had some favorable mix, within in tool I wouldn’t expect quite as much of a year-on-year improvement. That’s probably more related to mix and maybe a little less commodity benefit.

Jeff Sprague – Citigroup

Is there any favorable LIFO dynamics going on in the margins currently?

Daniel L. Comas

Well, I think we kind of bleed through the high commodity costs even though commodities came down the end of last year it actually took getting through the last quarter to really see the benefit and it really rolled in to the second quarter.

Jeff Sprague – Citigroup

Then just finally for me, on Trojan a nice bright spot, how long does that project play out over the next several quarters? And, anything else going on in the bid and proposals side of that business?

Daniel L. Comas

Regarding New York City we will recognize most of that revenue this year and we’ll have a strong second half, both quarters, regarding Trojan.

H. Lawrence Culp, Jr.

Jeff, we haven’t really seen a dramatic tail off in the big quote activity there which is encouraging. I think that’s where the Stockholm Award is particularly important because with everything going on in places like Australia and California the whole idea of this waste water reuse is getting more attention and I think Trojan is very well positioned in that regard.

Jeff Sprague – Citigroup

Are there any stimulus that’s actually pointed towards Trojan in some direct or indirect way?

H. Lawrence Culp, Jr.

I think our view is that both Trojan and Hach Lange will get some of this targeted water quality money. It’s just this stuff is far from shovel ready as they say so it’s probably more of a dynamic for next year and maybe even more so in ’11 than anything we might dial in here for the second half. I mean in contrast whether you’re talking about the US stimulus or maybe even what the Chinese and Japanese are trying to do, we would anticipate maybe seeing a little bit more of that show up in med tech particularly in Leica on the research side a little sooner. But quite frankly Jeff, we don’t have a lot of that dialed in here to the second half.

Obviously, Fluke’s got some exposure both around weatherization and the so called smart grid but again, it’s on the margins my in large and we’re not going – what we’ve presented here is not a fourth quarter waiting for a handout.

Operator

Your next question comes from John Baliotti – FTN Midwest.

John Baliotti – FTN Midwest

Larry or Dan or I guess maybe collectively obviously the balance sheet is very strong and you guys have had a very long history of deep due diligence even on small deals so I’m just wondering, we’ve seen some headlines on some macro data that makes people think things are getting better. Some companies are saying it’s less negative or things are stabilizing. Is that manifesting itself in any of the targets?

Do they have the impression of hey they made it this far so maybe they’re not looking for the kind of valuations that they may have been considering earlier in the year? Given that your restructuring is going up, it would appear that you guys are certainly not expecting things to just come right out of this any time soon. I’m just wondering are the targets less realistic than you are?

H. Lawrence Culp, Jr.

Well, some may be listening in so I don’t want in any way to –

John Baliotti – FTN Midwest

Okay, how about academically?

H. Lawrence Culp, Jr.

Academically, of course. John, I think everyone is mindful of the environment. Obviously, what we do is driven by a long term perspective on what’s best for Danaher. I think the general stabilization that we’re seeing perhaps in a number of markets at least here in the US is helpful, it’s constructive because in certain situations it’s been tough to talk about the numbers, to forecast the model with things moving around the way they have the last six to nine months. So, I think in a number of situations where people have perhaps decided to have conversation with us or others, the current environment is actually again constructive because we can talk to a set of numbers that have perhaps less variability and risk in them then they might have three or six months ago.

John Baliotti – FTN Midwest

It’s obviously not just you guys because there are a number of companies that have a history of consistent M&A and they’re pretty quite also and they’re also very conservative and also very thorough and it just seemed consistent that no one seems to be doing very much right now and the equity market running in spurts it seems like some people are thinking that we’re just going to come right out of this and spending is going to resume the way it was going in to it.

H. Lawrence Culp, Jr.

I would encourage you not to too tightly link the absence of any announcement with the level of work that’s being done.

John Baliotti – FTN Midwest

Oh no, I would expect it to be just as much if not more but it seems like there’s obviously no panic on anyone’s part given what’s going on out there. Is that fair to say?

Daniel L. Comas

John, I’d add a couple of things maybe along the lines of what Larry referenced, the improvement in the equity markets here the last couple of months actually has helped a few discussions. There’s a little bit less of a mindset from sellers that they’re selling at the absolute kind of bottom and actually that plays in to price discussions. I would also add that the expectation among sellers of a very quick recovery, I would say has significantly dissipated versus our discussion four or five months ago.

As we talk about forecasts with potential sellers you are seeing a lot fewer kind of V shaped recoveries or if you do, as you really drill down with them, they realize that’s kind of optimistic. I think just the economic climate, the fact that it’s been now out there for three quarters does weigh on sellers particularly around how good things could look or perhaps things may not turn that quickly when they do turn and that again, helps in terms of the price discussion.

Operator

Your next question comes from Steven Winoker – Sanford C. Bernstein & Co., LLC.

Steven Winoker – Sanford C. Bernstein & Co., LLC.

A couple of questions, one on restructuring you had talked about the $150 to $170 million targeted for ’09 charges that would lead to ’09 savings of about $150 and annualized to about $250. You’ve talked a lot about that this call but could you give a little more color on sort of how we should think about that quantitatively in terms of your progress against the savings side of that?

Daniel L. Comas

What we reference was the $150 to $170 would generate about $50 million of savings in the back half year and about another $90 million next year, about $140 million in total. I think what you’re referencing, the $250 million in total of savings includes what we did in the fourth quarter of last year. So roughly the $250 of spend will get an annualized savings of $250. In terms of the pay back we’re seeing, we’re pretty comfortable and we see it kind of playing out in the decremental margins that we’re getting a kind of one year pay back on what we’ve done so far and we’ve seen that play out pretty favorably here in the first half.

As you know, we’re pretty high gross margin, high contribution margin business and our ability to sort of keep the decrementals down to sort of 25% has been the result of what we have done. So, at least what we’ve executed so far, the pay back has played out as we expected.

Steven Winoker – Sanford C. Bernstein & Co., LLC.

Why not increase the restructuring at this point in terms of the forward commitment? Is it a function of we feel like we have our hands full already, just trying to balance capital allocation? How should we think about increases in the actual charges?

H. Lawrence Culp, Jr.

Well Steve obviously as Dan’s walk just suggested, we did that not too long ago. I think virtually every one of our businesses is pretty busy in that regard. But, you’ve raised a good question and I wouldn’t want to discount the possibilities as we get a little further down the road this year as we see those types of projects present themselves, if we continue to make the progress, executing the approved programs, we may come back and do just that.

Steven Winoker – Sanford C. Bernstein & Co., LLC.

On working capital, I think I looked at inventory sort of a couple of days better than prior quarter, a couple of days worse than prior year, receivables a little bit longer by a few days, payables about in line, not dramatic changes, as you look at that in the current environment, what kind of dynamics are you seeing going forward?

Daniel L. Comas

Overall, we were very pleased, particularly if you look at the end of the first quarter and what we did in the second quarter, taking out about $90 million of inventory out of the system. That’s clearly a little bit of a negative to the net income line as we kind of put less overhead in to inventory but clearly the right thing to be doing from a cash flow perspective and managing the business appropriate with the top line picture. I mean overall I would say Steve we’re pretty pleased with what we have done in the working capital side here in the first half particular in the second quarter.

Steven Winoker – Sanford C. Bernstein & Co., LLC.

In terms of the receivable side, customer liquidity are you seeing less pressure on your customers as well?

Daniel L. Comas

Steve, on the margin it’s probably gotten a little bit better, it’s still a little bit more of a challenge in the emerging economy as you’d expect and that’s where we’re seeing challenges, it tends to be in those economies.

Steven Winoker – Sanford C. Bernstein & Co., LLC.

I guess my final question in light of all the acquisition discussion, you’ve talked about Tek versus Fluke a little bit and given the core growth down over so dramatically how are you thinking about what’s evidence of integration success here? So, as we think about it should another major acquisition come along we can or not point to Tek as an example of Danaher’s successful DBS implementation?

H. Lawrence Culp, Jr.

Well, I just think that if you look at the margin performance both on an absolutely and a decremental basis, in light of the economy, to me the performance stacks up pretty well. I also think if you look at what we’re turning in here relative to competition, we fair pretty well. Some of the things are a little harder Steve to give you visibility on that I look at relative to the teams’ embrace of DBS in the lab. On the sales and marketing side what they’re doing relative to what will move the share needle if not the overall top line going forward.

I think this is has been a very well executed integration. I give that team out in Beaverton very high marks in that regard. Has it been perfect? No but an excellent effort in many ways. Again, I think as some folks mentioned earlier, we simply need a little bit of tailwind in that market place for this business to be a very strong contributor to the overall Danaher performance.

Daniel L. Comas

Steve, just one data point, as you know when we acquired the business it was about a 12% operating profit business. This quarter top line was down over 30% and we still achieved 10% operating margins. For a 60% gross margin business you can imagine the fall off when you lose 30% of revenues.

Operator

Your next question comes from Terry Darling – Goldman Sachs.

Terry Darling – Goldman Sachs

I got on the call a little bit late so I may have missed this but I’m wondering if you can talk about expectations for second half free cash conversion? It won’t be as strong as this quarter which was much better than we thought but it’s still pretty [soft].

H. Lawrence Culp, Jr.

We thought that while we’re proud of the second quarter and at such a high bar at a minimum we thought we’d have strong conversion in the second half and certainly thought the full year would be north of 100% Terry.

Terry Darling – Goldman Sachs

Then Larry can you talk about maybe the two swing factors that might push you to the high end of the range for the back half guidance and the two or three swing factors to the low end?

H. Lawrence Culp, Jr.

I think given what happened in Europe in the second quarter that’s probably on both lists Terry to be frank. I think one of the swings to the upside could well be inventory levels in the channel. We’ve seen such a dramatic drop even in the face of sell through being down but relatively stable. Depending on how folks maybe come back from labor day and are looking at their inventory levels we could see a little bit more pop in the top line than frankly what we’ve dialed in. I think we’ve got a generally conservative top line outlook for the second half just given the environment. But, that’s where I would look to see a little bit of potential upside. In terms of the downside, I think Europe is the geography that we have our eyes on right now.

Terry Darling – Goldman Sachs

Then lastly, buyback is that on the radar screen at all or are you just that optimistic about acquisitions that you want to remain in position for that?

H. Lawrence Culp, Jr.

I think right now given what’s in the pipe we’re going to be very focused on the M&A front.

Operator

Your final question comes from Richard C. Eastman – Robert W. Baird & Co.

Richard C. Eastman – Robert W. Baird & Co.

Larry just a couple of things from a geographic perspective. One is, could you just lay out maybe the second half as it applies to China in terms of your expectations? I mean, can we see some growth there year-over-year in the second half?

H. Lawrence Culp, Jr.

I think we’ll see an improving situation in China. We’ve seen a lot of projects get pushed interestingly at a time when the government is trying to stimulate the economy. But, I think we’ve got an eye on returning to growth perhaps more so in the fourth and for the full second half.

Richard C. Eastman – Robert W. Baird & Co.

Would it be fair to say that any follow on restructuring program or additional incremental restructuring program in the second half again would be perhaps targeted more towards the European assets given where sales trends are? Are you comfortable that you’ve scoped out enough cost savings given the relative decline in volumes out of Europe?

H. Lawrence Culp, Jr.

Rick, I think that’s a very fair assumption but I wouldn’t limit it to Europe largely because as we tend to transform these cost structures in our best businesses and some of our businesses with the most improvement opportunity, regardless of where they are located, one improvement sets you up to go get the next one. So, there are things that we’re working on now even in the US that may well set us up to access that next level of costs coming out. But, you’re point about Europe I think is very relevant at least in our business and I suspect others.

Operator

That does conclude our question and answer session. We will now turn the conference over to Mr. Matt McGrew for any closing or additional remarks.

Matt R. McGrew

Just as reminder the replay number is 888-203-1112 in the US and 719-457-0820 internationally with the confirmation code of 7112404. Dan and I will be available today for any follow up calls. Thanks everyone for joining us.

Operator

That does conclude our conference call. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Danaher Corporation Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts