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Danaher Corp. (NYSE:DHR)

Q4 2009 Earnings Call

January 28, 2010 7:30 am ET

Executives

H. Lawrence Culp Jr. - Chief Executive Officer, President

Daniel L. Comas - Chief Financial Officer and Executive Vice President

Matt R. McGrew - Vice President, Investor Relations

Analysts

Nigel Coe - Deutsche Bank Securities

Deane Dray - FBR Capital Markets & Co.

Robert Cornell - Barclays Capital

Steven Winoker - Sanford C. Bernstein & Co.

Stephen Tusa - J.P. Morgan

Scott Davis - Morgan Stanley

John Baliotti - FTN Equity Capital Markets

John Inch - Merrill Lynch

Jeffrey Sprague - Citi Investment Research

Ajit Pai - Thomas Weisel Partners

Richard Eastman - Robert W. Baird & Co., Inc.

Operator

Good morning. My name is William and I will be your conference facilitator today. At this time I would like to welcome everyone to the Danaher Corporation’s fourth quarter 2009 earnings results conference call. (Operator Instructions). I would now like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations.

Matt R. McGrew

Good morning everyone and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer and Dan Comas our Executive Vice President and Chief Financial Officer. I’d like to point out that our earnings release, 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.

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

The audio portion of the 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 February 2nd. The replay number is 888-203-1112 in the US and 719-457-0820 internationally and the confirmation code is 5742258. 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, 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 that we might make today. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements.

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

H. Lawrence Culp Jr.

Good morning everyone. I’ll start this morning by providing an overview of what we’re seeing across our business and in markets to frame-up the backdrop for our quarterly results and our outlook for the first quarter.

We are quite pleased with the way our business has executed and what was clearly a very challenging operating environment throughout 2009. Despite those pressures, we were able to successfully protect and nurture our organic investments while staying quite active on the acquisition front announcing or closing 18 transactions throughout the year.

Many of our end markets have stabilized and our order book continues to improve. In the quarter, orders were down low single digits compared to 9% organic decline in shipments which includes the impact of four fewer selling days. Clearly a positive going into 2010. We believe by and large that the de-stocking that has occurred principally in our distribution channels in the US and in Europe has run its course. We continue to focus our efforts on capturing market share, ChemTreat, DEXIS, Gilbarco Veeder-Root, Videojet, and Radiometer are among the businesses where we believe we have taken notable share in 2009 driven by our increased focus on EBS sales and marketing tools as well as our investments in innovation.

After returning to modest growth in the third quarter, China domestically grew at a high single digit rate in the quarter with our Hach Lange and Leica businesses leading the way. We also saw a return to growth in Latin America, India, and other emerging economies. The US was in line with overall company results while Western Europe was relatively weaker.

During the quarter, we again saw the benefits of the restructuring payoff as our core operating margin expanded 150 basis points year-over-year. We were particularly pleased that our fourth quarter adjusted EPS was up slightly over the prior year despite the 9% organic revenue decline. Our 2008 and 2009 restructuring activities are now substantially complete. Over the last five quarters, we spent approximately $320 million, eliminated 5100 positions, and closed 43 facilities. We expect $170 million of incremental benefit from these actions in 2010.

So, with that as a backdrop, let me move to the details of the quarter. Today we reported fourth quarter GAAP earnings per diluted share of $0.80, up 13% from last year. Adjusted net earnings per diluted share was $1.12. For the full year, GAAP earnings per diluted share was $3.46, a 12.5% decline compared to 2008. Adjusted net earnings per diluted share was $3.53. Revenues for the quarter decreased 1.5% year-over-year to $3.1 billion with core revenues down 9%. The impact of currency translation increased revenues by 4.5% and acquisitions contributed 3% to sales growth. Our full year 2009 revenues were down 12% year-over-year to $11.2 billion with core revenues also declining 12%.

Year-over-year gross margin for the fourth quarter increased 20 basis points to 45.9% largely relating to our 2008 and 2009 restructuring initiatives as well as lower commodity costs which more than offset the impact of lower sales volumes and incremental year-over-year restructuring costs in the quarter.

Operating margin in the fourth quarter decreased 70 basis points year-over-year to 12.6% with the impact of incremental restructuring costs more than offsetting the benefit provided by this restructuring and other cost reduction activities. Our core operating margin increased 150 basis points on a year-over-year basis despite the core revenue decline. For the full year, our operating margin was 13.8% compared to 14.7% in 2008. 2009 operating cash flow was $1.8 billion, a 3% decline year-over-year. Free cash flow was $1.6 billion and our free cash low to net income conversion ratio was 140% representing the 18th year in a row where we delivered free cash flow in excess of net income.

The Danaher business system continues to be the primary driver of our cash flow performance.

During the quarter, we completed the acquisition of 6 companies with aggregate and annual revenues of about $250 million to strengthen our environment, test, and measurement and dental businesses and to continue the evolution of our portfolio. For the full year, we closed or signed 18 transactions totaling approximately $1.1 billion in revenue and which will deploy capital of $1.9 billion. Heading into 2010, we believe we have more than $2 billion of additional M&A spending capacity to expand and strengthen the portfolio. As part of our portfolio evolution, we also completed three small divestitures during the fourth quarter.

Now, turning to our operating results, professional instrumentation revenues decreased 1.5% for the quarter with core revenues down 10%. For 2009, revenues decreased 11% with core revenues down 12.5%. Operating margin for the fourth quarter increased 80 basis points to 18.6% primarily due to the benefit of restructuring and cost reduction activities.

Our environmental platform revenues increased 5.5% in the quarter with core revenues down 3%. For 2009, revenues were flat year-over-year with core revenues down 1.5%. Water quality core revenues decreased at a low single digit rate in the quarter. At Hach Lange core revenues declined at the same low single digit rate with strong growth in our service business more than offset by lower instrument sales. Our China business was up, more than 20% in the quarter resulting from increased enforcement of environmental regulations.

Overall, we are beginning to see an increase in project activities which is a strategic focus of ours as we look to expand our install base and capture the recurring revenue stream from consumable sales. Restructuring actions taken throughout 2009 helped to expand fourth quarter operating margins more than 100 basis points over the prior year.

Trojan’s core revenues grew at a low single digit rate in the quarter with strong growth in drinking water applications primarily related to New York City drinking water project. Sales to industrial and commercial markets rebounded in the quarter after experiencing declines throughout most of the year. For the full year, Trojan core revenues grew at a mid teens rate, and they ended the year with a robust backlog.

At ChemTreat, fourth quarter revenues were up mid single digits year-over-year driven by sales of our boiler cooler water applications primarily to commercial and industrial markets. We believe that we continue to capture share across many of our end markets and are pleased with recent wins in the chemical and petroleum verticals resulting from our DBS initiatives.

During the quarter, we acquired CRISON Instruments, a manufacturer of electro-chemistry instruments and consumables headquartered in Barcelona. CRISON’s high quality, easy to use product, portfolio strength has been top-lined as E-chem lab and process business. Also in the quarter, ChemTreat acquired Trident Technologies, a provider of water treatment services to commercial, institutional, and industrial customers in the Western US and Mexico.

Gilbarco Veeder-Root’s fourth quarter core revenues declined in the mid single digit rate year-over-year. At Gilbarco, sales increased in a low single digit rate. Continued growth in our passport point of sales systems and payment solutions more than offset lower dispenser sales. Veeder-Root sales were down in the quarter partially due to a difficult year-over-year comparison around waiver recovery in California.

Moving to test and measurement, revenues declined 10% in the quarter with core revenue down 18%. For the full year, core revenues were down 24%. Fluke core revenues declined at a low teens rate in the quarter with growth across the emerging markets and China more than offset by declines in other geographies. Importantly, bookings followed the outpaced shipments in the quarter, driven in part by the recent launch of several new products including the 233 digital remote display multi-meter and our Ti32 thermal imager.

Also during the quarter, Fluke announced a $1.4 million award from the National Institute to the standards and technology to develop a new instrument to calibrate and measure the magnitude and phase of voltage and current for smart grid applications. This grant is funded by the American Recovery and Reinvestment to support research and to advance measurement science in areas of critical national importance. This award recognizes Fluke’s outstanding brand quality and is a testament to its robust R&D capabilities.

At Tektronix we saw a strong sequential order growth in the quarter resulting from new product introductions and an improving R&D spending environment. In China, orders were up double digit year-over-year. Shipments, however, remain weak across all major product categories and geographies. We do though remain optimistic that the broad-based improvement in order activity is indicative of a strengthening in our end markets.

Core revenues from our Fluke networks and Tek Communications businesses collectively declined at a low single digit rate in the quarter with high teens growth of network management solutions at Tek Communications more than offset by weak demand across most product categories.

During the quarter, Tek Communications launched the G10, it’s next generation monitoring platform used to collect, correlate, and analyze signaling data for next generation IT telecom networks. Early feedback from customers has been quite positive.

Also during the quarter, we acquired Sypris Test and Measurement and Davis Tech. These businesses are leading providers of calibration services, testing, and component screening products serving military, aerospace, avionics, and telecommunications customers. These two acquisitions, Sypris and Davis accelerate a key strategic initiative at Tektronix to expand its service offerings.

In the quarter, we acquired ClearSight a California based provider of network analysis tools for real-time application monitoring, protocol analysis, and troubleshooting. ClearSight came to us from Toyo, a longtime partner of ours in Japan. The business enhances Fluke Network’s protocol analysis product line and strengthens its access to the Japanese network monitoring market.

Moving to medical technologies, revenues for the quarter increased 9% compared to the prior year period with core revenues down 2%. For 2009, revenues decreased 4% with core revenues down 5%. Med tech operating margin for the fourth quarter was down 220 basis points from the prior year to 8.5% due primarily to the impact of incremental year-over-year restructuring costs and transaction cost associated with pending and completed acquisitions. However, our core operating margin increased 120 basis points on a year-over-year basis as the result of the benefit of restructuring and cost reduction initiatives implemented in 2008 and 2009.

Within our dental business, core revenues declined at the mid single digit rate in the quarter. Sybron core sales declined at a low single digit rate with strong sales of our orthodontia solutions and disinfection product lines more than offset by soft sales of general dentistry consumables. Sales of our Damon branded orthodontic system were up more than 20% in the quarter driven by an excellent response to our new Damon Q product and the introduction of Damon Clear.

During the quarter, we expended the distribution channels for Sybron which thus far has been very positively received by the market.

Cable revenues declined at a mid single digit rate in the quarter with improved performance on the sequential basis across most geographies and product categories. A number of recent product launches including the DEXIS Platinum sensor, the KaVo comfort drive hand-piece, the Gendex 8500 2D panoramic imager and the KaVo E70 treatment unit contributed to this improved performance. Additionally, we believe channel inventory reductions are largely complete, recent restructuring initiatives benefited KaVo’s bottomline with fourth quarter operating margins increasing more than 200 basis points year-over-year.

During the quarter, we also closed the previously announced acquisition of PaloDEx, a Finland based manufacturer of dental imaging products which is expected to strengthen our digital imaging product portfolio in all key categories.

Leica core revenues were essentially flat in the quarter with strength across Asia and Latin America offset by weaker demand in the US and Europe. I’m pleased to report though that for a second year in a row, Leica exceeded $1 billion of sales. Leica Microsystems continues its success in Japan where we have awarded orders totally more than $15 million including the large forensic order we referenced last quarter as part of that country’s stimulus program. In the US stimulus funding has begun to flow although microscopy awards to date have been modest.

Subsequent to quarter’s end, we acquired Genetix, a UK based provider of imaging and intelligent image analysis solutions used by scientists and clinicians to facilitate the development of pharmaceuticals biotherapeutics, mainstream research and clinical diagnostics. The acquisition of Genetix strengthens Leica’s position in the high growth virtual microscopy market and expands our research and clinical businesses.

Leica Biosystems core revenues increased at a mid single digit rate in the quarter. In October, we launched the BOND-III advanced staining system which combined with our BOND Max product contributed to a significant increase in instrument placements during the quarter. We have been very pleased with early customer demand for the BOND-III and we recently won a multi-unit order from one of most influential diagnostics labs in the UK. Overall, our advanced staining and instruments consumables business grew more than 30% in the quarter.

Radiometer’s core revenue grew at low single digit rate for the quarter driven by continued strong consumable sales primarily in Europe and Asia. In 2009, we sold approximately 200 AQT instruments which is nearly five times the numbers sold in 2008 and the customer feedback has been very encouraging. AQT's launch in the US and Japan is still pending and we wait regulatory approvals.

Moving to our industrial technology segments, revenues declined 9.5% for the quarter with core revenues down 15%. For 2009, revenues decreased 18.5% with core revenues down 16%. Operating margin for the fourth quarter was 11.5%, a 220 basis point decrease compared to the same period last year due primarily to incremental year-over-year restructuring costs incurred in the quarter.

Despite the revenue decline, core operating margin increased marginally on a year-over-year basis as a result of the benefit of restructuring and cost reduction initiatives implemented in 2008 and 2009.

Product identification revenues were up 7% in the quarter with core revenues declining 1.5%. For the year, product ID sales decreased 10.5% with core revenues down 8%. Videojet’s core revenues grew at a low single digit rate in the fourth quarter primarily a result of higher consumable sales.

We saw sequential improvement across most geographies with the recovery in China outpacing that in the US and in Europe. While still a challenging market, we are very pleased with the performance of our refreshed CIJ product line during the quarter and we believe we continue to take share.

Motion was down 24% in the quarter with core revenues down 30%. For the year, sales decreased 33.5% with core revenues down 30%. On the bright side, we saw sequential improvement in several technology and industrial end markets during the quarter primarily in the US and Asia. European end markets remain difficult. During the quarter, we received a $6 million multi-year order from a large power infrastructure supplier to provide an array of automation assemblies for a nuclear refurbishment project.

And finally, moving into tools and components, revenue for the quarter decreased 9.5% with core revenues down 9%. For the year, revenues were down 18.5% with core revenues down 18%. Operating margin for the quarter was 10.5% and increased 70 basis points from the prior year due to the benefit of lower commodity costs, increased productivity, and cost savings attributable to 2008 and 2009 restructuring which helped to offset both lower sales volumes and incremental year-over-year restructuring costs incurred in the quarter.

Mechanics hand tool core revenues declined 9% in the fourth quarter and 11% for the year primarily due to lower sales to both the consumer and professional channels. We were pleased with our sell-through in the quarter. Sales of our domestic China tool brand Sata grew at a double digit rate during the quarter, and in addition, our US Government business was up substantially in the quarter and for the full year, and we expect this growth to continue in 2010 with a solid backlog already in place.

So, to wrap-up, we continue to execute well in a difficult but improving economic environment. Our investments in innovation, sales and marketing are driving market share gains. Our restructuring and cost reduction progress is evident in our margins. Our free cash flow remains strong and we’re putting it to good use in acquisitions and in strengthening our competitive positions and accelerating our sales and earnings growth potential. We believe we are well positioned heading into 2010 with DBS driving our focus on our performance.

We are reaffirming this morning our full-year 2010 GAAP earnings per share guidance of $3.80 to $4.10. We expect GAAP diluted earnings per share for the first quarter to be in the range of $0.77 to $0.82 on flattish revenues. Both the full year and first quarter EPS guidance represents an approximately 8% to 15% increase over the comparable prior year periods.

Matt R. McGrew

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Nigel Coe - Deutsche Bank Securities.

Nigel Coe - Deutsche Bank Securities

So, you’re seeing some very nice trends in dental for the quarter, how much do you think is inventory and how much do you think is the genuine end market improvement, any relation to the year end budget coming through?

H. Lawrence Culp Jr.

Nigel I think it’s a bit of all the above to be straight. The inventory adjustments have been more pronounced for us at KaVo than at Sybron; we saw less of that in the fourth quarter, that’s now behind us. We certainly see a better uptake not only in terms of our sales in but our sales out, again, probably more so at KaVo than at Sybron as we ended the year; end of year on the equipment side often a positive or an uptake in buying; we didn’t really know how to best forecast that but we were pleasantly surprised with our results. It’s actually the most important data point for me having been at two sales meetings here in the last two weeks let along seeing a couple of weeks worth of orders, we’ve also gotten off to a good start; so, it’s not as if there’s a lot of business that got pulled forward or that was simply a year end phenomena there; I think we’re seeing a return to a more typical mindset on the parts of docs. I think we’re very much in a sweet part of the new product launch cycle as well that would apply to both KaVo and to Sybron. So, I think right now from a topline perspective, we’re not going to suggest to blow out the topline here at dental, but I think particularly at KaVo we should have a better year in 2010.

Nigel Coe - Deutsche Bank Securities

And then on KaVo, you talked about the revenue trends, can you address the margins; obviously you had a tough 2009, can you tell where they are right now and then maybe switching gears to industrial and tools margin, typically it was a sizable step down from Q3 to Q4, can you talk about that as well?

H. Lawrence Culp Jr.

Nigel, on the KaVo question, we did have a good Q4 at KaVo; it is seasonally the strongest quarter in terms of margins, but on a year-over-year basis, we were up about 200 basis points; we went from kind of extra restructuring mid single digits last year to high single digits, 7%, 8% in the quarter. We do benefit from some higher buying but we also got a lot of restructuring done towards the end of the year at KaVo as well, and it gives us some confidence going year end 2010.

Nigel Coe - Deutsche Bank Securities

And the margins for industrial and tools?

H. Lawrence Culp Jr.

Tools, some of that is the incremental consumer business which is at slightly lower volumes in the fourth quarter; on the industrial segment, some sequential improvement at motion which is a lower margin than our product ID business.

Nigel Coe - Deutsche Bank Securities

Okay, principally a mix rather than inflation.

H. Lawrence Culp Jr.

Yes, not atypically either.

Nigel Coe - Deutsche Bank Securities

And then, obviously we saw the announcement yesterday on AB Sciex, when is your best guess on getting that close and give us your best guess on the AQT launch in US and Japan?

Daniel L. Comas

Nigel, we now have all regulatory approvals. We are finishing up a couple small final transition issues and we expect to close very shortly.

H. Lawrence Culp Jr.

Nigel, as you can appreciate, the authorities like us to limit what we say about timing both here in the US and in Japan. Suffice to say we’re hopeful that we’re through both those efforts at some point in 2010.

Operator

Your next question comes from Deane Dray - FBR Capital Markets & Co.

Deane Dray - FBR Capital Markets & Co.

Larry, I’d be very interested in hearing your comments regarding potential restocking; you said de-stocking has run its course but based on your assessment of channel inventories, you think they stay low here for a while or are there any indications that restocking will waive this?

H. Lawrence Culp Jr.

Deane, I think it’s a little hard to call right now, but again I’m encouraged by what we’re seeing both in terms of sell out and sell in early in the year; other companies have reported as well a strong finish, an encouraging start does not a year make; but I think that will be helpful to certainly a company like ours particularly where we’re going to market through distributions. I would also add that when we turn the year like this, distributors are not necessarily going to be out aggressively loading up; we are at low levels in a number of places and in some cases probably too low; I think we like to work with a short supply chain with a number of those distributor partners so that they don’t have to blow in a lot of inventories, they can rely on our quick turn and our manufacturing capability to provide some of that, but undoubtedly some of that will seep in if we see this rising tide last for a bit longer at the start of the year.

Deane Dray - FBR Capital Markets & Co.

On that point on the start of the year, we heard that Med Tech has gotten off to a good start in January, can you just calibrate for us since the meeting at December and what experience you’ve seen so far in January across the businesses just in terms of what changes at the margin you’d call out?

H. Lawrence Culp Jr.

I think that we’ve finished a little bit better than we would have anticipated; certainly if you look at Tek and Motion businesses, it certainly felt the brunt of the downturn; they’re certainly in a good place, built backlog; we did that in Med Tech as well, more so at Leica and in dental; then we did a Radiometer; so I think that that backlog build was encouraging during the fourth quarter and I think by and large we seemingly have not missed a beat here thus far in January; again, I don’t want to get too far ahead of myself but we were thrilled to walk in with the backlog and I think even more so to see just the general pulse across the businesses. What I’m describing is really not limited to one pocket or another, its broad-based at this point; but again, it’s early.

Deane Dray - FBR Capital Markets & Co.

About backlog, we don’t normally hear Danaher talk about backlog, at the end of third quarter, you called out $100 million in backlog, how did you finish this quarter without that backlog burn through and how that might have added to the core revenue growth this quarter?

Daniel L. Comas

As Larry talked about in the prepared remarks, while the shipments were down 9%, our orders went down a couple points year-over-year, so we built another comparable about $100 million of backlog in the quarter and that’s one of the reasons as you know when we’re together in December we talked about the first quarter probably being down organically, we now are talking about it being relatively flat.

Operator

Your next question comes from Robert Cornell - Barclays Capital

Robert Cornell - Barclays Capital

Can you give us a little more color on your first quarter outlook in terms of what businesses are doing well, what are on the soft side?

H. Lawrence Culp Jr.

I think as we talk about, again as Dan highlighted, probably a flattish outlook compared to a slightly down outlook that we had back in December. I think Med Tech is going to lead the way; it will probably be Med Tech and T&M fighting out with water slightly behind in terms of the start here. I think we’re going to have some challenges at Gilbarco and Tools; probably in industrial is where we’ll lag a bit, but again, certainly encouraged by the sequential trends; for no other reason, the exposure obviously is a little later cycle and that will down in all likelihood double digits in 2010. So, all in all, I think the businesses that led us in the fourth quarter, particularly from an orders perspective, a backlog build perspective were the ones that were going to be strong for this year and certainly getting stronger at the outset.

Robert Cornell - Barclays Capital

What’s the balance in the first quarter of the restructuring benefit versus some of the temporary cost recoveries and possibly the cost price catch-up in terms of matching of price and materials?

H. Lawrence Culp Jr.

As we confirmed again today, we expect about $170 million of restructuring benefit in the full year; we’ll probably get at least a quarter of that or maybe a little bit more than that in the first quarter; it should be on a relative basis the biggest beneficiary of the restructuring benefit as we got some of the other stuff during ’09. In terms of the one-time stuff on the cost side, we talked about it being about $60 million headwin and that should be roughly $15 million a quarter; so obviously the restructuring benefit a lot more than the headwin from some of the one-time cost actions. We did see in the fourth quarter a little less price benefit and a little bit more commodity inflation, but it is hard to quantify; I think it will be a slight headwind, but it is not going to be big number for us.

Robert Cornell - Barclays Capital

An update on AB Sciex, both timing and accretion?

Daniel L. Comas

Bob, we have got all regulatory approvals and we expect to close this very shortly. We’re not going to provide any update beyond what we’ve already done until we get to close, and then as I said it is imminent.

Operator

We’ll take our next question comes from Steven Winoker - Sanford C. Bernstein & Co.

Steven Winoker - Sanford C. Bernstein & Co.

The first question is around that core gross number again; down 9% versus where you talked about being up 4% for the full year back in December. As you look at that and you talk about the first quarter, now more flat versus your prior thoughts of it being down and the progression; it is still going to require very dramatic increase for the rest of the year. Do you see that having changed your mind as you have talked about some of the businesses?

Daniel L. Comas

I think Steve what we said in New York is we thought we would be up 1% to 5%, but we wouldn’t be positive until the second quarter. I think with the finish; again, yes we were down 9%,but keep in mind orders, and we don’t want to talk a lot about orders, but I think with the tide changing, it is important; we were probably down 2% in orders and that’s with fewer days, four fewer days, which obviously works against us in the quarter. So, I think with the order book, the backlog billed, and the start of the year, and the new news today is we think we will be flattish; I think we’ve got an outside shot at a positive number in the first quarter that simply makes it easier for us to in that 1% to 5% range or potentially higher.

Steven Winoker - Sanford C. Bernstein & Co.

I might have missed this, but Tek specifically in Q4 was down how much?

Daniel L. Comas

Tek communications was up in the fourth quarter; Tek instruments was down comparable…

Steven Winoker - Sanford C. Bernstein & Co.

It was down 25% to 30% I think in the third quarter.

Daniel L. Comas

What you saw was that Tektronix was down comparable in the fourth quarter, but orders were up sequentially double digits and year-over-year was down in the mid teens and we had a significant book to bill; it was about 115% in the quarter.

Steven Winoker - Sanford C. Bernstein & Co.

Were you able to hold margins?

Daniel L. Comas

We saw, outside restructuring, Tek Instruments improved sequentially from 10% to the mid teens in the fourth quarter. You do get a little bit more seasonal lift, but a clear sign that the restructuring paid off pretty nicely there.

Steven Winoker - Sanford C. Bernstein & Co.

Something I just want to understand; you took R&D down from 5.3% to 4.9%, about 40 basis points. Your product vitality and other things; how should I think about R&D reductions?

H. Lawrence Culp Jr.

Steve, I think you should look at it as a very modest sequential decline in terms of the dollars spent. We had a couple of programs wrapped, some of that expense went to the launch, you saw a lot of those launches highlighted in New York; I really don’t think it is particularly meaningful.

Steven Winoker - Sanford C. Bernstein & Co.

So, there was no shift in particular businesses.

H. Lawrence Culp Jr.

There is no strategy shifts, there is really nothing to report behind that; that slight sequential downtick.

Steven Winoker - Sanford C. Bernstein & Co.

On the SG&A increase, that 130 basis points, does that include the restructuring or not; the increase for SG&A?

Daniel L. Comas

That includes the restructuring. It also included, as Larry talked about the significant go to market launches with something prior to what we introduced in the mid year and the third quarter.

Steven Winoker - Sanford C. Bernstein & Co.

On return on capital; that looks like it was down year-over-year again also; how should we think about that, your goals for return on capital going forward this year?

Daniel L. Comas

The decline in ’09 was clearly a function of the lower sales and lower earnings. You should see an improvement consistent with our earnings growth during the year, but factoring in that when new acquisitions come in they come in as a lower return.

Operator

We’ll take our next question from Stephen Tusa - J.P. Morgan.

Stephen Tusa - J.P. Morgan

I may have missed this, but the first quarter dynamics from an earnings perspective; is that because you’re going to take some charges when you close these deals; it just looks a little bit light from a seasonal perspective.

H. Lawrence Culp Jr.

I think Steve it is fundamentally in line with the increase for the year that we talked about back in New York. I realize that may cash some people this morning, but I don’t really think there is news there. We’re going to continue to invest as we have here in the fourth quarter in our innovation and growth activities, begin to get more of that $170 million of incremental restructuring benefit with some other costs going back into the business, but that’s just I think a clarification of what we’ll do here in the next 90 days based on what we said we would do for the full year in December.

Stephen Tusa - J.P. Morgan

So nothing unusual, charges or anything to hold into the first quarter or like that?

Daniel L. Comas

No.

H. Lawrence Culp Jr.

I think if you look Steve at our profitability in the first quarter versus the full year over time I think on a seasonal basis it is very consistent looking back over time.

Stephen Tusa - J.P. Morgan

I was just looking at the EPS stuff; bit of a busy morning here. Professional instrumentation very strong, but Med Tech was wide on the margins; was there anything specific in the quarter that led to that; was it a mix impact, a little bit lower than we would have expected even axing out the restructuring.

Daniel L. Comas

They did; on a reported basis they had more restructuring dollars in any segment, but if you adjusted out the restructuring they ran about 14% which was up over a 100 basis point year-over-year, and the biggest driver of the year-over-year improvement came out of dental equipment.

Operator

Our next question comes from Scott Davis - Morgan Stanley.

Scott Davis - Morgan Stanley

The R&D decrease in overall spend or at least a percent of sales; should we think about that 4.9% being more or less the run rate from here or will you have to ramp up for another product cycle somewhere down the road?

H. Lawrence Culp Jr.

I think we’ll take that up in 2010 even with a little bit of a better top line environment and we don’t necessarily target that per se; we’re really trying to fund the strategy, if you will Scott, more than trying to hit a number, but as you’ve seen we’ve been taking that up with the increased emphasis there. I suspect that we will be meaningfully north of 4.9% what we were in the quarter on a full year basis. I think on a full year to full year basis we will be up modestly as a percent of sales.

Daniel L. Comas

Scott, if you look at the full year we were at 5.7% which was flat versus ’08 and it will be 5.7% or as Larry suggested a little bit higher than that in 2010.

Scott Davis - Morgan Stanley

It’s hard for us to picture how the spend can be that volatile; it just seems like most of R&D spend would be people, and not sure how that changes quarter to quarter; is there something I am missing there?

H. Lawrence Culp Jr.

Scott, sometimes in a project not all of the human costs, if you will, are on your payroll, third parties, contractors, and the like, programs tailing off, some of that becomes variable expense, some of that money in the P&L will go out of R&D into sales and marketing for the launch; that’s really all you’re seeing again sequentially in terms of the dollar let alone the ratio.

Scott Davis - Morgan Stanley

That makes sense. Just a bigger picture question, but when you do make an acquisition, let’s say the size of Tektronix, I know that was your bigger one, and maybe Sciex, let’s say; how do you integrate the R&D, do you keep them decentralized and focused on specific projects or is there a way to get some scale out of that spend?

H. Lawrence Culp Jr.

Scott, I think the way we’ve always operated it with respect to innovation and technology as well as other areas is to make sure first and foremost that that activity is very focused around that business, those customers, those applications, those problems; and then only if you will quite tactically if there are touch points, be it in optics out of Leica, microprocessing say out of tech where there is that sort of core technology capability that can be ported elsewhere, you’ll see us do that. In fact, I need to see a couple of announcements through the year, they may not be material, but I think they’ll be evidence that we are connecting some of the potential share technologies across businesses in often not so obvious ways.

Scott Davis - Morgan Stanley

I think I understand; it’s more application specific R&D, and where you can cross pollinate, you do so; is that what you’re saying?

H. Lawrence Culp Jr.

Whether we’re at Hach solving water quality challenges or at tech in test and measurement, we want those folks first and foremost focused on their customers and those applications. We don’t run a corporate R&D center, but what we do is to make sure that where there is challenge in one business and a potential solution in another, then with a light touch we bring those folks together to see if there is something there; again a light touch, not a big corporate apparatus.

Operator

We will take our next question from John Baliotti - FTN Equity Capital Markets.

John Baliotti - FTN Equity Capital Markets

I was just curious; you said you closed 43 facilities and the market seems to be having this generalization that customers are going to start inventories back, and your base of locations is obviously smaller. So, you individually, I wouldn’t expect to be certainly not out of the gate ramping up your inventories, your CapEx to where you were entering this downturn, right?

H. Lawrence Culp Jr.

I think that’s fair.

John Baliotti - FTN Equity Capital Markets

Right, and you guys are pretty realistic and pretty concerned; I would imagine that you’re expecting your customers to act much differently than they are right now?

H. Lawrence Culp Jr.

It’s hard to generalize, but I think again, with the finish and with the start, lots of people I talked to are becoming more confident about what could happen in 2010.

John Baliotti - FTN Equity Capital Markets

If you look at durables and so on, so far the trends have been that orders are turning into shipments right away, that the backlogs really aren’t being filled; I guess what I am saying is that it seems like you guys are pretty realistic about the expectations given your own patterns and probably your better customers acting pretty efficiently, pretty prudent; is that…

Daniel L. Comas

I would rather think that we are taking a prudent approach to thinking about the sequential ramp; the scenarios that could occur in 2010, not getting too far ahead of ourselves, but at the same time making sure we’re not so conservative that we don’t have the labor plan or the material plan in place to catch the wave, whatever size it may come in.

John Baliotti - FTN Equity Capital Markets

I can appreciate that; I am just thinking, looking at all that you’ve done to the portfolio over the last five to ten years, as you’re going through this, what are you thinking the profile of the firm looks like, of your company looks like; let’s say through this next cycle, is it higher core growth, is it more offsetting cyclicality, is it steadier longer-term growth; as you’re going through options, how do you think about what the eventual look would be?

H. Lawrence Culp Jr.

I think what we’ve tried to do with the moves, say since the last five years or even the moves we made in 2009, John, is to make sure that first and foremost that if we were never to do another acquisition that we have a high growth, high margin, innovative science and technology oriented portfolio that can perform over the long term, and I think that very much is in place. Certainly, as we look forward, we have an opportunity to do quite well from a core growth perspective given what we have done both from a product and a go to market side. With respect to acquisitions, if you look over the last year, the last five years, I do believe that we have improved the quality and capability of this company. So, we’ll look to add like-type business, again with an emphasis towards higher growth, higher margin, more global, more technical businesses where our DBS skill sets are applicable and gain value.

Operator

We’ll take our next question from John Inch - Merrill Lynch.

John Inch - Merrill Lynch

I want to go back to the first quarter dynamic; historically your first quarter is about 20% of your year and if you take the mid point, $0.80 and the mid point of your guide of $3.95, it would be $0.20, but the first quarter had flat organic revenues; you were thinking you were going to do up and even in your analysts appendix roll forward, there was $0.10 to $0.40 of contribution from the positive organic trend that is coming beyond the first quarter, and then I think Dan you even called out the fact that the cost headwinds were going to be linear, equally spread; I am just trying to understand, why would the first quarter not be low relative to the sequential ramp which you’re actually expecting but which is not really embedded in the dynamic of the first quarter being 20% of the mid point.

Daniel L. Comas

One thing I did say is on a relative basis Q1 will be the biggest beneficiary of the 2009 restructuring.

John Inch - Merrill Lynch

Yes, you did; how much is that?

Daniel L. Comas

That’s probably a penny or so, a penny or two. Our full year guidance is at 2.5% to 3% core and we’ve got zero here; that cost is a couple of cents from a follow-through perspective, but that should be roughly offset with the restructuring, and it is early in the year; so that’s kind of our best look at this point. If we thought organic was going to be down the first quarter, our Q1 guidance would have been a little bit lower. So, we think it captures it at best as we can at this point, but I understand the question and the point.

John Inch - Merrill Lynch

But you’re still expecting to get, call it $0.25 at the mid point from core growth spread over the next three quarters, right?

Daniel L. Comas

We had an exceptionally strong margin performance across the business in Q4; sort of our confidence that we can replicate that the next quarter is pretty high, but going out four quarters, there are more unknowns and probably we factored that in a little bit as well.

John Inch - Merrill Lynch

That’s fine, I am just trying to gauge and make sure that there is nothing else unusual, that you’re just being conservative. The following question really is; what’s going on in Europe, if I remember last year, Europe all of a sudden deteriorated for you and I think a lot of it, somewhat on a relative basis, deteriorated for you and I think it has to do a little bit with your mix; what are you seeing in Europe versus in terms of the sequential; how does that look with your outlook for the year?

H. Lawrence Culp Jr.

John, I would say that what we’re seeing in Europe broadly defined is just a more slower, maybe a more sluggish sequential improvement; I wouldn’t say it is universal in every single one of our businesses, but it is not coming back. If I look at China, if I look at India, it has come back during the second half very strongly; the US has been getting better month to month, but not nearly and as pronounced a way in Europe. Europe is just in that third slot, it’s just getting better, but on a relative basis much more slowly.

John Inch - Merrill Lynch

Is there any reason to think it could pick up for any reason based on your business mix or other trends or do you think it is just going to lag throughout the year?

H. Lawrence Culp Jr.

I think there is a potential for Europe to lag, more of a Macro call than a Danaher call, but I would think it would be hard for Europe to sit out what appears to be strengthening outlook for the global economy at least here in the early half, the first half of 2010.

John Inch - Merrill Lynch

I am sorry Larry, you talking about Danaher or about Macro Europe?

H. Lawrence Culp Jr.

I am talking about Macro Europe and obviously it has got a big footprint there, John. I think if you were to look at the emerging markets, the US, and Europe as your three big buckets of growth potential or improvement, I think Europe will be in that third slot when all said and done for 2010, but that doesn’t mean it isn’t getting better; it’s just getting better at a slower relative rate.

John Inch - Merrill Lynch

I understand, and that’s consistent with what you’re seeing on your order book; that’s what you’re saying?

H. Lawrence Culp Jr.

Indeed.

Operator

We will take our next question from Jeffrey Sprague - Citi Investment Research.

Jeffrey Sprague - Citi Investment Research

I actually have a couple of questions left despite people asking five or six at a time on the call here. Larry, two strategic type of questions; I know this MDS thing is probably a tad sensitive, but were you surprised given that the concentration was only going to take the players from four down to three that there was an FTC objection, and I am really asking that even from a bigger picture type of things; when some of these sub-niches that you’re carving out in Med Tech, is there concentration issues that maybe are going to make the navigation of the M&A a little bit more difficult?

H. Lawrence Culp Jr.

I think what I can share Jeff is we had a productive conversation with the authorities. As Dan indicated, that has come to a positive conclusion, and I suspect that going forward we may well have other light conversations, but I think we’ll continue to be an active acquirer this year in and around the businesses that we highlighted in December, and I don’t really see any reason to think that the landscape has changed in a way that will prevent us from continuing to put our acquisition capital to good use in the neighborhood.

Jeffrey Sprague - Citi Investment Research

On the flip side, on the divestiture side, those sound small, but what’s the circumstance there? Are you guys actually getting some reverse enquiry from people who know what’s non-core to Danaher and expressing some interest or are you actively looking to prune a few things?

H. Lawrence Culp Jr.

I would say Jeff, it’s more the latter; there are certainly things on the margins that we thought might be in better hands elsewhere, and with the economy stabilizing, this is probably a better time for us to do that here at year’s end, and obviously there were some folks who were keen to be the counterparty if you will. It is probably important strategically more so than it is financially, but I would suspect we will continue to look for those opportunities where we can over time.

Jeffrey Sprague - Citi Investment Research

What was the annualized revenue divestiture that you completed?

Daniel L. Comas

About $50 million.

Operator

We will take our next question from Ajit Pai - Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

The first question I think is to do with your consumable business; you talked about strength on the Videojet side, but across your portfolio, your consumables seem to have held up quite well during the downturn, but could you discuss the pricing; could you discuss whether there was pushback on pricing or what the sustainability was, particularly in the product ID side, but also in the other businesses?

H. Lawrence Culp Jr.

I think with respect to pricing, as Dan indicated, we were positive again in the fourth quarter, but we’ve seen sequential softening through the second half. I think by and large the consumables, and frankly our entire after market exposure which is about 30% of our business now has held up pretty well. Is it sustainable, frankly I think we have seen in the downturn, let alone in good times that we can get price in the after market across the business, not only at Videojet but at Hach and with the medical businesses; I would suspect that going forward, we’ll be smart about price and should get it. I guess that makes it sustainable.

Ajit Pai - Thomas Weisel Partners

The second question would just be regarding your M&A on a go-forward basis, you talked about continuing to be active there; over the past decade you’ve diversified internationally quite substantially, but where you are right now, do you think that is still a focus to further diversify your business internationally or do you think that right now the activity is likely to be equal and that’s not really your focus anymore?

H. Lawrence Culp Jr.

In terms of the international exposure?

Ajit Pai - Thomas Weisel Partners

Yes, the international exposure.

H. Lawrence Culp Jr.

I think that you’ll continue to see us both organically and inorganically focus our energies globally with a particular emphasis as many companies are on the emerging markets. When I look at our new product cycles, I look at some of our localization efforts in China and India; I’m very encouraged by the progress in that regard; you heard us talk about a Brazilian acquisition this year, we’re working on and hopefully soon we’ll complete the Indian acquisition of Gilbarco Veeder-Root; so, we’re going at those markets aggressively inorganically as well as organically and clearly there will be a bigger part of our business I suspect, a bigger portion of overall revenue every year going forward.

Operator

We’ll take our final question from Richard Eastman - Robert W. Baird & Co., Inc.

Richard Eastman - Robert W. Baird & Co., Inc.

Larry, when I look out to calendar 2010, when I look at the midpoint of the EPS guidance back up to the operating margin line, it looks like may be you need about 120 basis points of improvement there year-over-year; with all the puts and takes, which platform is absorbing restructuring cost, if you just look at the four platforms, can you just characterize which of the four you would expect the greatest margin improvement to occur given the trailing restructuring efforts are largely complete?

H. Lawrence Culp Jr.

We think that it will be pretty broad-based. I think if you looked at the ’09 margins and you back out the incremental restructuring, we ended the year probably about 15%. I think to get to the midpoint, we have about 2.5%, 3% organic growth, I think we need more like 70 or 80 basis points of core margin improvement. I should be most pronounced in medical technologies and biggest driver of that hopefully we’re encouraged by what we saw here in Q4 will be KaVo, but also should see some nice lift at Leica as well. The second largest contributor should be industrial tech and professional instrumentation and tools will be probably the lowest; we have a low bar here for Q1 in tools, but thereafter, we’ve got a pretty touch comp; suspect for the full year, tools and components could be the smallest year-over-year contributor, but it’s also as you know the small segment.

Richard Eastman - Robert W. Baird & Co., Inc.

Dan, as you referenced earlier, the Med Tech piece in the fourth quarter excluding the restructuring was around 14%?

Daniel L. Comas

Yes.

Richard Eastman - Robert W. Baird & Co., Inc.

Is that a margin that we can hold?

Daniel L. Comas

There are lot of one-time costs coming in, but absent that, we would expect well over 100 basis points year-over-year margin improvement in Med Tech; now the 14% is we do get the seasonal volume lift in Med Tech but it might not be a bad target overall again outside Sciex.

Richard Eastman - Robert W. Baird & Co., Inc.

Lastly on price, are we treating that as neutral for the time or are we going to attempt to get some gain on it?

Daniel L. Comas

We still have got a point of price here in Q4 and we think price will be positive in 2010.

Operator

There are no further questions at this moment.

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 5742258. Dan and I will be around all day for follow up calls. Thanks for joining us everybody.

Operator

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

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Source: Danaher Corp., Q4 2009 Earnings Call Transcript
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