Danaher Corporation Q3 2009 Earnings Call Transcript

Oct.22.09 | About: Danaher Corporation (DHR)

Danaher Corporation (NYSE:DHR)

Q3 2009 Earnings Call

October 22, 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

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

Nigel Coe – Deutsche Bank North America

Robert Cornell – Barclays Capital

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

Jeff Sprague – Citigroup

Steve Tusa – JP Morgan

Ajit Pai– Thomas Weisel Partners

Jason Feldman – UBS

Richard Eastman – Robert W. Baird & Co.

Scott Davis – Morgan Stanley

Operator

At this time I would like to welcome everyone to the Danaher Corporation’s third 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) Please be advised that we will be recording this conference. I would now like to turn the call 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 the 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 on 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 October 27th. The replay number is 888-203-1112 in the US and 719-457-0820 internationally and the confirmation code is 8728742. 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 10Q and other related presentation materials supplementing today’s call for additional factors that impacted year-over-year performance. I’d 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 we might make today. These forward-looking statements speak only as of 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.

We’ll start this morning by providing an overview of what we are seeing across our businesses and end market to lay a frame work for our quarterly results and our outlook for the balance of the year. We are pleased with how we are executing in a stabilizing yet still challenging economy. Results within our professional instrumentation segment were essentially in line with our overall business results. Environmental continues to be relatively resilient while test and measurement saw sequential improvement though overall remains weak.

Our medical technologies segment with the exception of KaVo largely outperformed as a result of its high consumables mix. The industrial technologies segment absent our niche aerospace and defense businesses improved sequentially particularly in North America while tools and components businesses continued to experience soft demand. Even in this environment we continue to focus our efforts on capturing market share Videojet, ChemTreat, Gilbarco Veeder-Root, DEXIS, Radiometer and Matco are among the businesses where we believe we have taken notable share from competition.

Geographically, China was our best performer with mid single digit revenue growth in the quarter. Europe and the emerging economies continued to be very soft while the US saw modest sequential improvement in many end markets. Our margin performance was again strong in the third quarter with our core operating margins improving sequentially by 140 basis points from 14.2% in the second quarter to 15.6% in the third. In addition, each segment saw sequential improvements in core margins.

Additionally, our cash flow was once again robust as we generated $472 million of free cash flow in the quarter. Despite the incremental restructuring costs and lower volumes experienced across our businesses, year-to-date free cash flow was down only modestly. During the quarter we announced a top up to our previously communicated 2009 restructuring initiatives which are now expected to approximately $250 million and are expected to provide annual cost savings of approximately $220 million.

With that as a backdrop let’s move to the details of the quarter. We reported today third quarter GAAP earnings per diluted share of $1.05 representing a 5.5% decrease from last year. Adjusted net earnings per diluted share was $0.89 which was $0.02 above the high end of the $0.77 to $0.87 adjusted EPS guidance range we provided in July. Revenues for the quarter decreased 14.5% year-over-year to $2.75 billion with core revenues down 14%. The impact of currency translations reduced revenues by 2% offset by acquisitions which contributed 1.5% to sales growth.

Across our businesses orders solidly outpaced shipments as we built approximately $100 million of backlog during the quarter. Year-over-year gross margins for the third quarter increased 90 basis points to 48% largely due to year-over-year cost savings relating to our restructuring initiatives and ongoing cost reduction efforts as well as lower commodity costs which more than offset the impact of lower sales volumes and additional restructuring costs in 2009.

Operating margin in the third quarter increased 60 basis points on a year-over-year basis to 16.9%. With lower sales volumes across most businesses and the impact of incremental year-over-year restructuring costs more than offset by a onetime gain resulting from the litigation settlement with Align Technology and the benefit of restructuring and cost reduction activities.

Our effective income tax rate for the third quarter was 19.1% as compared to 24.5% in the prior year period. Our effective income tax rate was favorably impacted by discreet tax benefits of $37 million or $0.11 per share related to the favorable resolution of various international and domestic tax matters which was previously included in our guidance for the quarter. For the balance of the year we anticipate our tax rate to be approximately 25%.

Operating cash flows for the third quarter were $503 million, a 16% increase year-over-year. For the first nine months operating cash flows were $1.3 billion, a 3% decline year-over-year. Free cash flow for the third quarter was $472 million and our free cash flow to net income conversion ratio was 134%. Our year-to-date cash flow performance includes $136 million of cash payments as a result of our restructuring initiatives.

Of particular note, we reduced inventories by over $113 million or 10% year-to-date which is roughly in line with our core sales decline of 13%. 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.

During the quarter we completed the acquisition of six companies with aggregate annual revenues of about $130 million to strengthen our environment, test and measurement, product identification and dental businesses. We also announced our intention to acquire AB Sciex, Molecular Devices and [Paladex]], all of which we anticipate closing in the fourth quarter. We are optimistic about our ability to continue to deploy capital in this environment and are encouraged by our active opportunities.

Now, turning to our operating segments perpetual instrumentational revenues decreased 12.5% for the quarter with core revenues down 13.5%. For the first nine months of 2009 revenues decreased 14% with core revenues down 13.5%. Operating margin for the third quarter declined 450 basis points to 15.6% primarily due to lower sales volumes and the incremental impact of year-over-year restructuring costs incurred during the quarter.

Our environmental platform revenues declined 2.5% in the quarter with core revenues down 2%. For the first nine months revenues decreased 2.5% with core revenues down 1% year-over-year. Water quality core revenues increased at a low single digit rate during the quarter. At Hach Lange core revenues declined at a low single digit rate but with lab and processing sales improving sequentially from the prior quarter due to an increase in project activity. Despite the top lines declines and prior year restructuring costs, Hach Lange’s operating margin expanded more than 100 basis points over last year.

Trojan’s core revenues grew at a double digit revenue rate during the quarter with strong growth in waste water applications as well as continued shipments for the New York City drinking water project. ChemTreat’s revenues were up low single digits year-over-year driven by sales of our boiler cooler water applications. New account generation continues to be robust and we believe we are capturing share in many of our end markets.

During the quarter we acquired [Inaudible] Scientifica a Brazilian based distributor of laboratory instruments, microbiology products and basic lab equipment. [Hexis] is the primary distributor of Hach Lange products in this strategically important emerging economy. Also in the quarter we acquired Para-Chem Technology, a US based provider of geothermal solutions for steam, brine and cooling water systems. The geothermal segment is an attractive adjacency for ChemTreat and provides access to end markets poised for accelerated growth in the coming years as demand for clean and renewable energy increases.

Gilbarco Veeder-Root’s core revenues declined at a high single digit rate year-over-year. At Gilbarco sales declined at a low single digit rate as continued growth in our passport point-of-sale systems was more than offset by lower dispenser sales principally in Europe. Veeder-Root sales were down in the quarter with sales of our enhanced vapor recovery solution slowing in advance of the yearend implementation deadline in California.

Moving to test and measurement, revenues declined 23.5% in the quarter with core revenues down 25.5%. Fluke, Tektronix and Fluke Networks all improved sequentially from the previous quarter with signs of stabilization in the US and China while Europe continues to experience weak demand. For the first nine months of 2009 core revenues decreased 25.5%. Fluke core revenues declined at a mid teen rate in the quarter with sales decline of core test products in Europe more than offsetting growth in China. Across Asia we shipped more than 100 thermography units which are being used for H1N1 flu detection at airports and schools.

In the US we believe that the inventory reductions in the distribution channel are largely behind us. During the quarter Fluke launched a series of new important products including the 233 digital remote display multi meter with wireless capabilities and the TI31 thermal imaginer thermography at the mid price point range. At Tektronix, sales were down across all product categories and geographies as customers continued to delay investments. Like Fluke, we believe we have worked through the US distributor destocking issues and in the third quarter our orders improved at a high single digit rate over the second quarter.

Sales from our Fluke Networks and Tek Communications businesses collectively declined at a double digit rate partially due to a difficult year-over-year comparison at Tech Communications which benefited from a large Australian network management shipment last year. During the quarter we acquired AirMagnet a leading enterprise Wi-Fi analysis and security provider based in California. This business compliments Fluke Networks by providing chronic leadership in wireless test solutions.

Moving to med tech revenues for the quarter decreased 8% compared to 2008 with core revenues down 8.5%. For the first nine months of 2009 revenues decreased 9% with core revenues down 6%. Med tech operating margin for the third quarter was up 960 basis points from the prior year to 21.9% due primarily to the one time litigation settlement gain. Despite the revenue decline, core operating margin was essentially flat versus the prior year.

Within our dental business, core revenues declined at a mid teens rate in the quarter. Sybron core sales were relatively flat in the quarter with higher sales of our orthodontia solutions and disinfection product lines offset by soft sales of general dentistry consumables. Sybron enjoyed mid single digit growth in orthodontics driven by a strong response to our new [inaudible] product which provides dentists greater treatment flexibility, easier wire change overs and a smaller bracket profile for improved patient aesthetics.

During the quarter Ormco announced an exclusive collaboration arrangement with Align technology to jointly develop and market an orthodontic solution combining Align’s Invisalign system and Ormco’s Insignia custom orthodontic bracket and arch wire system. We remain very excited about this strategic opportunity. Cable revenues declined at a double digit rate in the quarter with weak demand across the major geographies and product categories as dentists continued to delay capital spending. In addition, channel inventory reductions continue in center geographies.

In the quarter DEXIS launched its new platinum sensor which has the ability to take vertical and horizontal bitewing x-rays with a single sensor thus eliminating the cost and inconvenience of using multiple sensors. While the environment remains challenging we are encouraged by the cost actions we have taken and with the recent number of new products. We believe that we will see sequential improvement in both top and bottom line performance in the fourth quarter.

During the quarter we announced the acquisition of [Access] Dental a leader in dental rotary instrumentation. [Access] provides Sybron with a strong sales force, an established brand and valuable channel relationships in the sizeable rotary segment. Subsequent to quarter end we also announced our intention to acquire [Paladex] Holdings, a finished base manufacturer of dental imaging products. With the pending addition of Instumentarium Dental and SOREDEX we will add two strong brands to our imaging group which is expected to strengthen our product portfolio in all key categories of digital imaging. This acquisition is subject to regulatory approval and customary closing conditions.

Leica’s core revenues declined at a mid single digit rate in the quarter with strength across Asia more than offset by weak demand in the US and European industrial and life science research markets. During the quarter Leica received a $10 million microscopy order in Japan, the largest single order in the company’s history. This was a great win for the team in a region where we have significant local competition. The order will begin shipping in the fourth quarter and will continue in to next year.

In addition, Leica launched the SCN 400, a new digital pathology slide scanner during the quarter and additional feedback in the US and in Europe has been quite positive. Recent reports from our sales team indicate that orders related to US stimulus funding have increased sequentially however shipments have only begun to materialize. Leica Biosystems’ core revenues were essentially flat in the quarter with strong growth of our advanced staining consumables offset by soft instrument sales.

In Europe distributor inventory levels were adversely impacted pending launch of the new BOND-III system which is due out this month. The BOND-III advanced staining system provides faster staining capability, greater flexibility and increased efficiency to the histologist.

Radiometer’s core revenues were at a mid single digit rate for the quarter driven by continued strong consumable sales primarily in Europe and Asia resulting from past success in growing our install base. In Asia sales benefitted from double digit growth in Japan as well as the recent launch of the ABL80 compact blood gas analyzer in China.

In the quarter we announced the pending acquisition of AB Sciex and Molecular Devices. As a reminder, AB Sciex is a leading designer and manufacturer of mass spectrometers used by researchers and clinicians to identify and quantify specific molecules in complex samples. Molecular Devices provides high performance bio analytical instruments and consumables that accelerate and improve research productivity and effectiveness in life science research and drug discovery.

The acquired businesses will expand med tech annual revenues by more than $650 million to nearly $4 billion. The acquisition remains subject to regulatory approvals and customary closing conditions but we believe we are on track for closing in the fourth quarter.

Moving to industrial technologies, revenues declined 20% for the quarter with core revenues down 18%. For the first nine months of 2009 revenues decreased 21.5% with core revenues down 16.5%. Operating margin for the quarter was 17%, a 120 basis point decrease compared to the same period last year due primarily to lower sales volumes across the segment as well as incremental restructuring costs incurred in the quarter.

Product ID revenues were down 11% in the quarter with core revenues decline 8.5%. For the first nine months product ID sales decreased 15.5% with core revenues down 9.5%. In Videojet we have begun to see stabilization across most geographies with printer placements improving sequentially from the prior quarter. We launched the 1610 small character continuous inkjet printer ideal for high speed application in the quarter, the third version of our 1000 series product platform. While it’s still early market feedback is again, for this new product, being quite positive.

During the quarter we acquired FOBA Technology, a German based manufacturer of laser based marking and engraving systems. Though the strength in Videojet’s channel in Europe and North America in core parts marking applications it increase its exposure to fast growing niche verticals such as medical and smart cards. Also in the quarter we acquired Wolke inks and printers based in [Harris Brook] Germany. Wolke markets a leading thermal inkjet printer with significant channel presence with major pharmaceutical customer and OEM. The business expands Videojet’s presence in the attractive pharmaceutical vertical market with specific functionality targeting track and trace applications.

Motion revenues were down 34% in the quarter with core revenues down 30.5%. Year-to-date sales decreased 36.5% with core revenues down 30%. We saw sequential improvement in several end markets during the quarter including electronic assembly, semiconductors and elevators particularly in the US though overall levels are still soft. European end markets did not show the same sequential improvement as customer factory shutdowns across Germany continue to impact performance.

During the quarter Kollmorgan launched the AKM Servo family of drives designed to expand machine performance and increase integration speeds with easy to use plug and play compatibility with Kollmorgan motors. Customer feedback has been very favorable here as well.

Finally, moving to tools and components, revenues for the quarter decreased 20.5% with core revenues down 20%. Year-to-date revenues decreased 21.5% with core revenues down 21%. Operating margin for the quarter was 15.6% an increase of 160 basis points from the prior year due to the benefit of lower commodity costs, increased productivity and cost savings attributable to prior year restructuring initiatives which helped offset both lower sales volumes and incremental year-over-year restructuring costs incurred in the quarter.

Mechanics hand tool core revenues declined 16% in the third quarter and 11.5% year-to-date primarily due to lower sales to both consumer and professional channels. Performance in the third quarter was also negatively impacted by a difficult year-over-year comparison with the Advanced Auto stocking order which occurred in the prior year period. Sales of our domestic China tool brand [Sada] grew at a low single digit rate during the quarter.

To wrap up, we continue to execute well in a difficult economic environment. Our investments in innovation, sales and marketing are clearly driving market share gains. Our restructuring and cost reduction process is evident in our margins. Our free cash flow remains strong and we’re putting it to use in acquisitions and in strengthening our competitive positions and accelerating our sales and earnings growth potential. We strongly believe that we will emerge from this downturn as an even stronger and more competitive company in 2010 and beyond.

Our expectation is for the fourth quarter core revenues to be down about 10%, a sequential improvement from the third quarter notwithstanding four fewer selling days in the fourth quarter. Given our strong performance in the third quarter we are increasing our full year adjusted earnings per share outlook from $3.28 to $3.48 per share to $3.40 to $3.50 per share. Fourth quarter adjusted earnings per share outlook is now $0.99 to $1.09.

The additional restructuring charges that we approved in April and August are expected to reduce GAAP EPS by approximately $0.30 per share in the fourth quarter and $0.45 per share for the full year. As a result, we expect our GAAP earnings per share in the fourth quarter 2009 to be in the range of $0.65 to $0.75. For the full year 2009 we expect GAAP earnings per share to be in the range of $3.31 to $3.41. These ranges include the additional restructuring items just mentioned but exclude the impact of acquisition related costs for deals we have not yet announced resulting from the adoption of the new business combination accountings standard that went in to effect in 2009.

Matt R. McGrew

That concludes our formal comments, we’re not ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Deane Dray – Friedman, Billings, Ramsey & Co., LLC.

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

A couple of questions, first would be just give us a sense of how the month of September tracked versus your earlier comments in the quarter that July and August had done well or just above expectations? Then if you could, you don’t often comment about backlog and I’m interested to hear more about that $100 million in backlog. Would that be contributing to core revenues or just what’s the mix within that backlog?

H. Lawrence Culp, Jr.

Dean, I think as we look at September, it more or less played out as we had anticipated and certainly had hoped. We really went I think wire-to-wire through the quarter with good in flow. We certainly saw I think some of the destocking early in the quarter but that was a firm dynamic throughout. I think we kept waiting for Europe to show itself in September a little stronger in line with what we were certainly seeing in the US and certainly in China and India and that really didn’t materialize but I don’t think we were expecting that. I think all-in-all we were pretty pleased with the way the quarter started and certainly with the way it ended.

With respect to the backlog clearly we don’t talk about that a lot but certainly there’s a lot of interest out there with what’s happening sequentially with the current book of business so we threw that out there just to provide a little bit more color. Certainly, building backlog as we did during the quarter would suggest that our order books were up year-over-year more strongly than the core revenue number that we printed and we’re certainly encouraged by that particularly given that we built some backlog in some businesses that have really felt the full brunt of the downturn like test and measurement. All-in-all I think it’s one data point among several that suggests we do have a stabilizing economy in hand and the business is by in large pretty well in it.

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

Larry, just to clarify, within the composition of that backlog will that all flow through core revenues or is there a mix in there?

Daniel L. Comas

That will all come in the next couple of quarters.

H. Lawrence Culp, Jr.

When we ship it will be core.

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

Then just lastly, the commentary about gaining market share and you gave a full array of businesses and maybe it’s tough to generalize but how much of that is coming from new product launches or is it pricing competition or maybe even some of your weakened competitors? How would you characterize that?

H. Lawrence Culp, Jr.

I think it’s tough to paint the full parade chart out. I would not attribute much to pricing or us being advantage vis-à-vis weaker competitors as a result of the economy. I think it really comes down to two things and it’s hard to quantify but clearly we’re in a very good place with our new product launch cycle. You’ve heard us talk about the new products at Videojet as one example, this new DEXIS sensor, it’s something that we’re very excited about. Gilbarco has done a great job both with the point-of-sale program which we call Passport and what they’ve done with advance vapor recovery.

You heard in our prepared remarks a number of new products coming to market here in the fourth quarter, the slide scanner at Leica and other exciting technology we’re going to bring to market so that’s one big piece. The other is a lot of what we’ve done I think to improve our go to market. Making sure that we’re protecting our spend in that area as we have obviously cut dramatically throughout the organization elsewhere. You see that ChemTreat, we’re just putting feet on the street, good selling execution there is helping us. I think you see that with the improvements that we’re seeing at Videojet. Certainly what we’ve been able to do in some of our international markets I would attribute to just better sales and marketing execution as those growth tools within DBS I think get greater traction across Danaher.

Operator

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

Nigel Coe – Deutsche Bank North America

Just the down $0.10 called for 4Q, you called out the four fewer selling days, it was four not three right?

H. Lawrence Culp, Jr.

Yes, four.

Nigel Coe – Deutsche Bank North America

What impact is that having? It seems if I just do some back of the envelop calculations it’s maybe a seven point impact from the sales days but could you just maybe try and put some numbers around that please?

Daniel L. Comas

It’s a little hard to calculate. I think you could mathematically say that it’s four or five points. I don’t think it’s that much. It has more of an impact on the consumable business which is kind of more of a daily order run rate business less on kind of the capital purchases. My guess is it is a two to three point impact if you want to quantify but I don’t think it’s the full mathematical impact.

Nigel Coe – Deutsche Bank North America

Then you just called out the fact that the consumables business will be hit harder than the equipment businesses is. Obviously consumables is higher margin, does that mean we should expect maybe a bit more pressure on the gross margin in 4Q?

Daniel L. Comas

No, I think we’re very pleased with our sequential improvement in margins and I think we’ll see another improvement in core margins here in Q4. I haven’t looked enough at the gross margin mix for Q4 but I don’t think it will be that much of an impact.

Nigel Coe – Deutsche Bank North America

Do you want to give maybe a bit of detail on the segment by segment core revenue outlook for 4Q?

H. Lawrence Culp, Jr.

I think from a revenue perspective Nigel we just look at it from a segment perspective. I think we’ve got the potential for instrumentation to be a little bit better. I think that med tech should be significantly better in part because we’re going to get through a lot of the stocking that we’ve seen around KaVo. I think industrial will probably be in line, maybe a little better and I think tools will be better if for no other reason because of the absence of the Advance Auto comp that we talked about in the prepare remarks.

Operator

Your next question comes from Robert Cornell – Barclays Capital.

Robert Cornell – Barclays Capital

Previously you had been saying that you had about $160 million of cost savings I think rolling over in to 2010. We’ve done more in the way of restructuring, maybe you can just go in to a little bit of detail about maybe what you’ve been doing on all of this restructuring. I think yo8u had programs that started in last year’s fourth quarter where [inaudible] ratchet them up over the course of this year and you had increment in the current quarter. What is the outlook for 2010 in terms of a short term benefit? And, maybe a little more color on what’s been going on with all these restructuring programs?

H. Lawrence Culp, Jr.

Let me just provide a couple of key points. I’d start with just reminding everybody that we’re always in restructuring mode. We’re always looking to take cost [inaudible] out of the business. That’s a key tenant in the Danaher business system. We celebrated that activity beginning late last year, you saw us call that out as we did in the fourth quarter. With the program that has been further accelerated during the course of the year, we’re going to end up spending the better part of $250 million this year on top of the $80 plus we did last year so we’re talking about an investment all up of approximately $320 million.

What we’ve done is obviously exited a number of positions out of the organization as well as reduced our overall footprint both in manufacturing and in selling and other administrative activities. If you look from a facility count we’re going to end up being down 42 rooftops when this program is over. We will have exited about 10% of our associate population, about 5,100 jobs. But again, I think we feel optimistic that the execution has gone well this year, that’s why we topped it up a few months ago yet again and see that really occupying our activity really through the rest of the year.

We’ll try to protect obviously selling and R&D as best we can and root out the waste and unnecessary capacity everywhere else. I don’t think Bob you should expect to see us top this up yet again this year. I think it’s our hope that as the economy stabilizes we’re not talking about these sorts of call outs next year but that we will perhaps get back to a quite restructuring, pay as you go sort of activity that you see us implement in more normal times.

Robert Cornell – Barclays Capital

You mentioned stocking and destocking a couple of times in discussing various businesses. Where would you characterize the whole destocking phenomena when you look across the whole portfolio of Danaher businesses and are you in fact benefitting a little bit from some restocking in some businesses? How would you characterize that evolution in stocking and destocking?

H. Lawrence Culp, Jr.

I think on balance we are certainly being helped by the end of the destocking but I don’t think we’ve yet seen a material positive effect from restocking. I mean certainly in environmental we don’t do a lot of distribution, much of what we do is direct at Hach Lange, there’s some where obviously distribution is more important as in Gilbarco Veeder-Root. I don’t think we’ve seen a positive benefit there. Certainly the absence of some of these dramatic declines in test and measurement as we indicated are going to help Fluke and Tek even before we see a pick up.

I think med tech is certainly where we have seen the most dramatic perhaps inventory reductions in the channel particularly around KaVo and to a less degree at Sybron. But, even Sybron felt a little bit of that around the consumables business here in the third quarter. I guess the sell out numbers at retail were certainly better in the US than our sell in numbers. [Inaudible] by in large a direct business, that doesn’t apply thought internationally we’ve certainly seen some of the smaller distributors take down consumables.

Motion we’ve certainly seen it but again no positive effect yet from any restock and tools has certainly felt it both in industrial distribution and at retail. But again, I think net-net we welcome the stability. We await the restock but are really watching sell through at this point to see when the real uptick will present itself.

Robert Cornell – Barclays Capital

The final question for me, how would you characterize the benefit to Danaher from holding price relative to some of the commodity price declines you’ve seen in the last nine months relative to any hedges you have in place? I mean, are we still getting a bit of a tailwind there or how is that working?

Daniel L. Comas

We are and you can see it most notably Bob in the tool margins where our core margins were up 300 basis points year-on-year. The tailwind was less in Q3 than it was in Q2 and it will be less in the coming quarters. I would note that the core margin increase in tools probably about half of that is commodity benefit but half of that is execution so we’re not going to see the big multi hundred point improvement in margins in tools because it’s going to become much less of a tailwind commodities. But, I think because of execution we’re still going to do fine from a margin perspective there.

Robert Cornell – Barclays Capital

How come you guys haven’t gotten more pressure to give up price in some of those markets?

Daniel L. Comas

I would say we have a little bit. Our overall price has gone from 1.5 to more like a point or .2. That is a sign that we’re still getting roughly the same amount of price in consumables but more the industrial equipment products we’re getting a little bit less price.

Operator

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

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

Could you give us an update view of your thoughts around capacity for new acquisitions coming up over the next couple of quarters given the $1.6 of cash that you’ve now got and the CP lines?

Daniel L. Comas

Of the $1.6 that we ended the quarter with about $1.3 billion to $1.4 billion in spoken for between MDS and the [Paladex] deal, both of which are signed and announced but not closed. But I mean, If you just look at our next five quarters of cash flow, our $1 billion of capacity under commercial paper, it’s probably well north of $2 billion in the next three or four quarters without even having to think about really having to raise any term debt or impact to our credit rating.

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

As you talk about MDS, given the complex deal structure is that closing still on track timing wise?

Daniel L. Comas

Yes, we just got shareholder approval at MDS. There was some regulatory approvals we’re waiting for the we think are coming shortly and we’re still confident there will be a fourth quarter closing.

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

Is the environment, the bid ask spreads that are out there continue to improve to your favor?

Daniel L. Comas

I would say the fact that we’ve signed eight deals in the last eight weeks is a positive sign and I think a number of discussions we are having right now are encouraging.

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

If you look at the impact of acquisitions in your free cash flow for the quarter can you give us some color about that?

Daniel L. Comas

I’d have to look at it. We actually have a little bit of a negative now because under the new accounting rules your expenses run through your cash flow but I can look up that off line Steve. I don’t think it’s a big impact because we didn’t have a lot of acquisitions the last three or four quarters and the deals we just closed we closed late in September so I don’t think they had much of an impact to Q3 cash flow.

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

As we look at the sequential changes in the sub reported business segments from the second quarter to the third quarter and the first, that dental business again endodontic and consumables is what’s dragging that down versus orthodontics and infection because that’s the one that is down mid teens now versus low double digits from last quarter?

Daniel L. Comas

We probably weren’t as clear as we could have been in the stick. The Sybron business was essentially flat in the quarter and ortho was up a little bit, general dentistry was down, the equipment business was down 20% and that blended to a down low teens.

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

And the equipment business you’re explaining mostly through inventory destocking still?

H. Lawrence Culp, Jr.

Well, I think the first issue there Steve clearly is a lower level of spend particularly for big ticket items both in the US and Europe. I think that coupled with the destocking that we’re seeing this year are I think the two primary reasons why we’re down the way that we are. But again, I think we have a lot of improvement opportunities in front of us at KaVo. I’m encouraged by what I’ve seen. I was in with the team in Europe two weeks ago, I’m with the team in the US in fact, tomorrow. I think we’re beginning to get the traction I’d like to see us having in that business.

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

A final comment on Tek margins would be helpful.

Daniel L. Comas

The Tek margins absent restructuring were comparable to Q2, just low double digit. We believe they’re going to move sequentially to mid teens here in the fourth quarter again, absent restructuring.

Operator

Your next question comes from Jeff Sprague – Citigroup.

Jeff Sprague – Citigroup

Could we just follow up a little bit more on restructuring Larry or Dan and just help us thinking about the benefit variance as we move from ’09 to 2010?

Daniel L. Comas

Jeff, the way we’re looking at is of the $250 million spend this year, there’s an annualized benefit of $220. Roughly a quarter of that we’re going to get in the second half or let’s call it $60 million in the second half. We’re pleased with what we got in the third quarter and we think we’re tracking well in that regard. And, we’ll get about $150 to $160 million benefit rolling forward in to 2010.

Jeff Sprague – Citigroup

That’s the incremental on top of the $60?

Daniel L. Comas

Yes. So, $220 total, $60 this year, $160 left over for next year.

Jeff Sprague – Citigroup

And I see there’s a comment in the Q that some of this $250 maybe actually doesn’t get spent or executed on until the first half of next year. Does that weight those benefits then for next year more in to the second half or does that kind of come through in a linear fashion over the course of the year?

H. Lawrence Culp, Jr.

I think that’s right. I think as we’ve tried to highlight we think we’ve bitten off a lot here to get done. Some of it may spill in to early next year in terms of the spend and if we execute on that path clearly some of the benefit will be more back loaded and potentially a little less. But, I think we are pleased with the execution we’ve seen through nine months. There’s a lot of work to do here in the fourth quarter and we’re hopeful we’ll get through that but it will be tight which is why we flagged it again in the Q.

Jeff Sprague – Citigroup

Is there any spillover benefit in to 2010 from the $80 million of ’08 actions?

Daniel L. Comas

Very little. I mean, we thought we’d get $100 million this year and we’re tracking awfully close to that.

Jeff Sprague – Citigroup

Larry when you were just piecing together kind of the GAAP walk on guidance, can you just true us up maybe Dan on just kind of the tax items? You said tax 25% in Q4 so there’s no more unusual in tax?

Daniel L. Comas

That’s correct. In the fourth quarter, and we have posted this on our website, kind of a quarter-by-quarter look with the onetime items, we’ll have about $0.30 of restructuring in the fourth quarter and probably about $0.04 of M&A expense and that’s primarily the deal expenses on the [Paladex] and the AB Sciex deal. So, at the midpoint of $1.04 of adjusted EPS you have $0.70 GAAP EPS adding back to get to adjusted $0.30 of restructuring and $0.04 of M&A expense.

Jeff Sprague – Citigroup

Just on deals, just the complexion of things like as you said Dan, eight deals in eight weeks. Obviously AB Sciex is sizeable but is there anything to glean here from what we’ve seen? Should we expect to see a lot of little deals, is that’s what’s breaking free or are there actual sizeable things in the pipeline?

H. Lawrence Culp, Jr.

Jeff, I think what you’re seeing is another frankly typical Danaher acquisition year where you’re going to have a couple of big deals and we put the [inaudible] of pairing in that zone, some smaller situations and a number of bolt ons to put together an average year of 12 to 15 deals. I think that distribution is shaping up as it has in years past but the six deals that we have flagged here that some of you may have not known about that we closed out in the quarter tended to be our bread and butter but there certainly are some larger situations still very much percolating in the M&A process that we’re optimistic about.

Daniel L. Comas

I’m not sure you can glean too much prospectively but of the six deals closed and the two deals pending the collective purchase price is about 1.5 times revenue which is lower than the last couple of years. Now, part of that reflects lower margins given the downturn but that often bodes well from a return perspective is going in at a little lower revenue multiple.

Jeff Sprague – Citigroup

Just kind of maybe one other thing that’s got two parts, I think all companies here are kind of struggling with trying to get their arms around what costs actually come back. Everybody has leaned on 401k and merit raise and all kinds of things as we’ve progressed through ’09. I’m sure you’re looking at some commodity cost pressure in to 2010 and is there anything else that just kind of leads in that we should be thinking about as we’re thinking about this kind of restructuring walk that we talked about a little bit earlier in my set of questions?

Daniel L. Comas

Jeff, in addition to that some potential commodity headwinds next year and again, that would primarily be around motion and tools for us. We, like a lot of companies, have done things around wages this year whether its’ furloughs, wage freezes, decreases, by in large lower bonuses. We are in the process of looking through a lot of that as we go through budgets. Some of it will depend upon how the overall environment is and we’ll talk more about this in December but there will be some headwinds for those types of items.

H. Lawrence Culp, Jr.

We’ll have some restructuring investment type activity around AB Sciex given the nature of that carve out from the two parents which probably falls in that bucket.

Operator

Your next question comes from Steve Tusa – JP Morgan.

Steve Tusa – JP Morgan

I might have missed this, what was the restructuring benefit in the quarter? You said $60 million in the second half or was it in the quarter?

Daniel L. Comas

Well, it’s probably my guess $20 to $25 million from what we’ve done year-to-date plus what we did in Q4. We thought we would get $100 million this year and we’re roughly tracking $25 million a quarter so you it might be $20 from what we’ve done this year and $25 from what we’ve done last year and you see that in the sequential lift in core margins Q2 to Q3.

Steve Tusa – JP Morgan

On the commodity front, you talked about tools being half commodity does that include modest price benefit of tools or is that all just the cost side of the equation? Maybe you can just tell us for the company what the cost side of the equation benefited you?

Daniel L. Comas

Steve, I don’t have that outside of tools because it’s not that significant outside of tools. But, I would say sequentially commodities was more of a headwind than it was in Q2.

Steve Tusa – JP Morgan

So quarter-over-quarter?

Daniel L. Comas

Yes, quarter-over-quarter we got significant margin improvement and that was despite sort of higher commodity costs.

Steve Tusa – JP Morgan

In the Q you had an added disclosure around tax legislation that’s being debated and the last sentence said that changes here would adversely impact you guys, is there anything specific that we should be watching that would hurt you guys more than any of the other changes?

Daniel L. Comas

Nothing specific other than what some of the general discussions about raising the effective tax rate for US multinationals.

Steve Tusa – JP Morgan

One last question, just on the deal, the M&A expenses, which deals were those for, the $0.04 was for which deals?

Daniel L. Comas

It’s for deals that we have signed like AB Sciex and [Paladex] that we know we’re going to have here in the fourth quarter. There’s also a small amount of kind of onetime non-cash charges related to inventory step up and deferred revenues from deals we closed in the third quarter.

Steve Tusa – JP Morgan

So these are like smaller deals?

Daniel L. Comas

Yes.

Steve Tusa – JP Morgan

So going forward given these deals, you guys do a ton of small deals every year, are we going to have basically an adjusted EPS number every quarter now given that you’re going to do a few deals every quarter and you’ll be kind of like showing $0.02 to $0.03 a quarter or will this kind of be absorbed going forward as the economy improves?

Daniel L. Comas

I suspect Steve given the new accounting rules which again, particularly the expense, having to have transaction expenses run through the P&L which I don’t think is indicative of the performance of the business we’ll be calling it out.

Steve Tusa – JP Morgan

Isn’t that though part of your ongoing business? Wouldn’t you considering doing deals given the frequency of that just basically a part of what you guys do as a company?

Daniel L. Comas

Yes and that’s very much reflected in our cash flow statement. I don’t view it as – my view and I think others have the view that is part of the cost of buying a company, the transaction costs.

Operator

Your next question comes from Ajit Pai– Thomas Weisel Partners.

Ajit Pai– Thomas Weisel Partners

One main question and one follow up, the main question would be just looking at your businesses in terms of geography. Can you give us some color on how much China is a percentage of your business right now and emerging markets as a whole. Then also, looking at the three major geographies North America, Europe and Asia, where the trends are the most positive and where they are the most negative across your businesses?

H. Lawrence Culp, Jr.

Well, certainly Asia is the most positive when we focus on China and on India which in aggregate probably will be about $1.1 billion to $1.2 billion. We were pleased, they were actually both up in the third quarter. We hadn’t seen that pairing in a while, they were both up about a mid single digit range. But, as we said in our prepared remarks, the rest of the fast growth or so called emerging markets were soft. We saw that in Latin America and we saw that in Eastern Europe. But, China and India were the standouts for us.

The US I would say was probably number two not that we were growing but again, I think the stabilization was encouraging, the backlog build was encouraging. Of the three I would slot Europe last just given that its stabilization did not firm up as much as it did in the US but obviously a pretty big gap between what we saw in North America and in Europe compared to those two high growth countries in Asia.

Ajit Pai– Thomas Weisel Partners

The second question would be just looking at the business development environment and looking at acquisitions, in the pipeline of acquisitions you have right now is it mainly sort of add on and bolt on and maybe significant acquisitions in existing verticals that you’re in on the strategic platforms or is there some material sort of potential to get an additional platform?

H. Lawrence Culp, Jr.

I think as we were talking a moment ago the funnels are always chock full of every type of opportunity from big potentially transformational situations all the way down to small channel or product bolt ons. I think as we look forward here certainly for the rest of this year, I continue to believe that it is highly unlikely that you’re going to see us create a brand new platform. Obviously with [inaudible] coming in the med tech business is going to be close to $4 billion in size, what we think of as our life science diagnostic group is going to be up 40% which is not a small number obviously. So, we’re excited about that. Obviously, lots of activity around product ID, test and measurement and environmental as well but again, I just don’t think we’ll see a new platform in the near term.

Operator

Your next question comes from Jason Feldman – UBS.

Jason Feldman – UBS

You’ve already covered quite a bit but just a few quick ones here, specifically at motion a couple of distributors in that industry have been commenting on increasing pricing pressure. Has that business been more problematic than most from a pricing perspective lately?

H. Lawrence Culp, Jr.

Not to date but I wouldn’t refute what you are hearing from distribution in that business.

Jason Feldman – UBS

There specifically as well is kind of destocking more or less as far as it can go from your perspective or is there still some room to see some additional destocking going forward?

H. Lawrence Culp, Jr.

Those are very different questions. I wouldn’t rule out the possibility that we could see it go down further but I doubt it. Again, I think there as we lead in some other businesses I think folks are pretty close or at the level that they’re comfortable with. We might argue that maybe they’re a little light. But, at this point I think the destocking absent another external shock to the system is probably by and large run its course though again, we’re going to see a little of that for us at least still play out around certain demo lines and to a degree in tools. But otherwise, particularly in motion I think we’re pretty close.

Operator

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

Richard Eastman – Robert W. Baird & Co.

Larry, in the past you’ve talked about certain pieces of your business being kind of internal maybe leading indicators. I think the motion business fell in there, product ID, if you were to take a snapshot of that at the end of September, just characterize where we are. It sounds like we’re maybe a little past stabilization in the US and maybe not quite there in Europe? How would you characterize those businesses that you look at as being leading indicators?

H. Lawrence Culp, Jr.

Well clearly Rick we look at a lot of data points both in our own order books and the sell out and build schedules with our own customers. It’s hard to circle a data on the calendar but I think we’re clearly at a point where the US is quite firm whether you look at the book to bill at T&M, sell through at Fluke, just again this inventory issue assumingly having run its course, what we’re seeing say with the consumables at Hach Lange and Videojet as well, just a lot of different data points would suggest the worst is over and we’ll build off of this phase.

I think you’re spot on, Europe is just not there yet and [inaudible] as clear of a way as we see it here in the US. But, I don’t want to suggest that Europe is in a bad place I think it just feels, if you will, it feels like it’s behind a bit what we’re seeing in the US right now. Again, I think the real contrast is everything kicking in, in our types of businesses at least right now in China and in India.

Richard Eastman – Robert W. Baird & Co.

Then just the last question, Larry on the dental equipment side and again maybe I’m weighting this incorrectly but certainly dental equipment being down 20% plus I think would seem worse than the industry. We have an easier fourth quarter comparison, I think last year dental equipment was down low double digits, how do you expect that business to perform? And, am I correct or incorrect saying at least in that piece of the business it feels like you’re underperforming the industry a bit?

H. Lawrence Culp, Jr.

Rick, I think we made no bones about the fact that KaVo is short of its full potential. I’ve said that externally, I’ve said that internally. But, I also want to reiterate my confidence for us to achieve that full potential in the business. I think sequentially as we indicated in our prepared remarks we would anticipate much better performance at the top certainly on the bottom as well. We have dedicated a fair bit of restructuring monies that we’ve spent this year to adjusting the cost structure particularly in Europe and elsewhere around the world.

But again, I think this is also a good growth market over the long term. We’re in a bit of an air pocket if you will right now. I think others see that as dentist postpone upgrading operatories, upgrading their practices but I think that will past, I really do and as the market recovers and we improve we should be undue beneficiaries of that. That’s the objective, that’s what we and the team have agreed to but again, work to do and we’re not there today but we’ll be working hard to be there in the not too distant future.

Operator

Your last question comes from Scott Davis – Morgan Stanley.

Scott Davis – Morgan Stanley

I just have one quick question and again, I just want to come back to Tektronix. Can you give us a sense of the book to bill where you’re at now, kind of where you’ve been tracking through the years to get a sense of when the comps get easier next year?

Daniel L. Comas

Well the book to bill through the second quarter was running below one. Instruments and tech communications were both over one in combined but 1.1 so obviously an encouraging sign there. That will be a slight benefit in Q4 as the book to bill grows it should help going in to 2010.

Scott Davis – Morgan Stanley

What’s the typical lag when you see an order and when you make a delivery?

Daniel L. Comas

It’s all over the map. When they were a public company they would talk about two to three quarters when the book to bill would flip, one way or another would be two to three quarters before you see that really play out in shipments.

Operator

Mr. McGrew I would like to turn the conference back over to you for any additional or closing remarks.

Matt R. McGrew

Just as a reminder the replay number is 888-203-1112 in the US and 719-457-0820 internationally with confirmation code of 8728742. Dan and I will be around all day for follow up calls. Thanks everybody.

Operator

That concludes today’s conference. Thank you for your participation.

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