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Danaher Corporation (NYSE:DHR)

Q4 2007 Earnings Call

January 24, 2008, 8:00 am ET

Executives

Andy Wilson - Vice President, Investor Relations

Larry Culp - President and Chief Executive Officer

Dan Comas - Executive Vice President and Chief Financial Officer

Analysts

John Inch – Merrill Lynch

Deane Dray – Goldman Sachs

Jeff Sprague – Citigroup Investments

Nicole Parent – Credit Suisse

Bob Cornell – Lehman Brothers

Steve Tusa – JP Morgan

Ann Duignan – Bear Stearns

Scott Davis – Morgan Stanley

Ajit Pai – Thomas Weisel Partners

Richard Eastman – Robert Baird

Operator

At this time I would like to welcome everyone to the Danaher Corporation Fourth Quarter and Full Year 2007 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Andy Wilson, Vice President of Investor Relations.

Andy Wilson

Good morning everyone thanks for joining us. On the call today are Larry Culp our President and Chief Executive Officer and Dan Comas our Executive Vice President and Chief Financial Officer. I’d like to point out that our earnings release is available on our website under the heading earnings. As our year end Form 10-K has not yet been filed we’ve included as part of the earnings release the fourth quarter income statement, year end balance sheet and cash flow statement. In addition we’ve included data in the press release reflecting our business segmentation as well as segmental supplemental income statement data to facilitate your analysis.

Our earnings for the period include the results of operations of Tektronix since its acquisition in November 2007. As we previously discussed, included in Tektronix results are certain non-cash acquisition related charges for purchase and process research and development and a fair value adjustment to record inventory and deferred revenue which reduced net earnings by $66 million or $0.20 per diluted share in the quarter. In addition non-cash acquisition related charges in the 2008 first quarter and full year will be approximately $0.05 per share and $0.13 per share respectively. These charges are excluded from our earnings per share guidance to be provided at the end of the prepared remarks.

Information with regard to the components of these charges will be included in our year end Form 10-K to be filed with the SEC. Access to a webcast presentation supplementing today’s call can be found under the heading of Web Events. This call will be replayed through January 28th and the audio portion will be archived on our website later today and will remain archived until our next quarterly call. Our website address is www.Danaher.com. [Executive Instructions]

I’d also like to note that in order to help you understand the company’s direction 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 filing. 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 or intend to update any forward looking statements except as required by law.

With respect to any non-GAAP financial measures provided during the call today the accompanying information required by SEC Regulation G relating to those measures can be found in the Investor section of our website under the sub-heading Earnings.

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

Larry Culp

Good morning everyone. We are very pleased to report to you that 2007 was another record year for Danaher. On the financial front revenues grew to over $11 billion, adjusted earnings per share grew 19% and our free cash flow exceeded $1.5 billion highlighted by our record quarterly free cash flow performance of more than $500 million. Two thousand seven saw us consummate the largest acquisition in our history, Tektronix and we strengthened the portfolio with 11 other acquisitions. In July we successfully completed the divestiture of our Power Quality business to better focus our efforts on our outstanding growth platforms. All in all 2007 was a good year for Danaher.

Turning to the fourth quarter we are very pleased with the continuation of our sales and earnings growth. Our fourth quarter earnings per share was $0.97 included in the earnings per share results were the negative impact of approximately $0.20 per diluted share of non-cash acquisition related charges for Tektronix as well as the benefit of approximately $0.05 per diluted share related to reductions of income tax reserves as a result of the favorable resolution of certain prior year tax matters. Absent these two matters adjusted earnings per diluted share was $1.12 or a 19% increase over last year’s comparable adjusted earnings per diluted share from continuing operations of $0.94.

For the full year earnings per share form continuing operations was $3.72. In addition to the fourth quarter items identified a moment ago full year 2007 earnings per share benefited from a $0.02 per diluted share gain related to the collection of indemnity proceeds and a $0.02 per diluted share gain resulting primarily from the impact of income tax rate reduction in certain international jurisdictions. Excluding these gains as well as for fourth quarter items just mentioned adjusted earnings per share from continuing operations for the full year 2007 was $3.83 an increase of 19% compared to 2006 full year adjusted earnings per share from continuing operations.

Revenues from continuing operations for the quarter increased 19.5% to a record $3.1 billion as revenues from existing businesses referred to as core revenues grew 4.5%. Acquisitions contributed 10.5% and currency had a positive impact of 4.5% in the quarter. For the year ended December 31, 2007, revenues from continuing operations increased 16.5% to a record $11 billion. Core revenues were up 4.5%, acquisitions contributed 8.5% and currency had a positive impact of 3.5%.

Year over year gross margins for the fourth quarter improved 130 basis points to 46.2%. Several factors contributed to this improvement including leverage from higher revenues, higher gross margins and our recently acquired businesses and the impact of ongoing cost saving initiatives. Gross margins for the full year improved 140 basis points to 45.7% primarily due to the same factors.

SG&A expenses for the fourth quarter were 24.5% of sales compared with 23.9% a year ago. For the full year SG&A expenses as a percentage of sales increased 60 basis points to 24.6% due to higher SG&A structures in our recently acquired businesses as well as increased sales force investments in emerging markets including India, the Middle East and China.

Research and Development spending as a percentage of sales for the three and 12 month ended December 31, 2007, was 6.9% and 5.5% respectively as compared to 4.2% and 4.6% a year ago. This increase is primarily due the mix of newer businesses with higher R&D structures as well as a $16 million non-cash acquisition related charge for Tektronix which increased R&D spending as a percent of sales approximately 190 basis points in the quarter and 55 basis points for the full year.

Operating profit for the quarter was $465 million including $68 million of non-cash acquisition related charges for Tektronix. Absent these charges adjusted operating profit for the quarter was $533 million a 21% increase compared to adjusted operating profit for the fourth quarter of 2006. For the full year operating profit was $1.7 billion a 16% increase compared to last year and a 21% increase excluding the non-cash acquisition related charges for Tektronix.

Operating margins for the quarter were 14.8% a 200 basis point decrease over 2006. Operating margins from existing businesses contributed 70 basis points of improvement with particular strength in Medical Technologies. The impact of recently acquired businesses particularly Tektronix in the associated acquisition related charges had a diluted impact on the quarters operating margin. For the year operating margins were 15.8% in line with 2006. Operating margins adjusted exclude the impact of recently acquired businesses and the non-cash acquisition related charges for Tektronix improved 85 basis points.

Net interest expense for the fourth quarter was $30 million compared with $25 million for the fourth quarter of last year. This increase was primarily a result of the net increase of borrowings related to the acquisition of Tektronix. Our affected income tax rate for the fourth quarter was 26.3% compared to 23.4% in the fourth quarter of ’06. A reduction of income tax reserves in the fourth quarter was offset by the tax treatment of certain non-cash acquisition related charges for Tektronix.

Net income from continuing operations were $320 million for the quarter and $1.2 billion for the full year. Included in the fourth quarter and full year net income was approximately $66 million of non-cash acquisition related charges for Tektronix. Excluding these charges as well as the previously mentioned gains in both periods related to collection of indemnity proceeds the impact of income tax reductions in certain international jurisdictions and the sale of securities in 2006, adjusted earnings from continuing operations increased 22% in the fourth quarter and 21% for the full year as compared to adjusted earnings from continuing operations for the same period in 2006. Including a gain on sale of the Power Quality business in July of ’07 full year net income was $1.4 billion.

Record operating cash was from continuing operations were $1.7 billion for 2007 an 11% increase over 2006. Free cash flow defined as operating cash flow from continuing operations less capital expenditures was a record $509 million for the three months ended December 31, 2007. This is the first quarter where our free cash flow is exceeded the $500 million mark. For the year free cash flow was $1.5 billion a 10% increase over 2006. Our free cash flow to net income conversion ratio for the year was 127% making 2007 the 16th consecutive year in which our free cash flow has exceeded our net income. The Danaher business system continues to be the driver behind the significant and sustained cash flow performance.

Capital expenditures for the year increased approximately 19% to $162 million. Our balance sheet remains strong with a debt to total capital ratio of 29% and over $230 million in cash and cash equivalents at years end.

Turning to our operating segments Profession Instrumentation revenue increased 37% for the quarter to $1.1 billion with revenues from existing businesses contributing 5.5%. Full year revenues increased 22% to $3.5 billion as revenues from existing businesses contributed 6.5%. Operating margins for the 2007 fourth quarter were 16% as compared to 22.3% in the prior year. Absent the negative impact of recently acquired businesses including non-cash acquisition related charges for Tektronix adjusted operating margins improved by approximately 60 basis points in the quarter driven by additional leverage from our sales growth in our Fluke and Water Quality businesses and margin improvement activities in our Gilbarco Veeder-Root business.

For 2007 full year operating margins were 20.1% a decrease of 140 basis points compared to 2006 while adjusted margins which exclude the items mentioned above improved 135 basis points.

Environmental platform revenues for the quarter were 22.5% with core revenues up by 5.5%. For the full year environmental revenues increased 16.5% with revenues from existing businesses up 6%.

Water Quality core revenues grew to high single digit rate in the fourth quarter led by continued momentum from Hach Ultra Process and lab products. Particularly in China where we continue to expand our sales force initiatives. Sales across North America were also strong and Hach Lange posted its best quarter of the year with double digit growth.

In Trojan we achieved double digit revenue growth for the year with strength across most geographies and with particular success in both drinking and waste water application. During the fourth quarter we shipped a multi-million dollar order to Brisbane, Australia, addressing the regions initiative to convert wastewater to suitable drinking water as a result of the ongoing drought in the area. In addition Trojan enters 2008 with year end backlog at an historic high.

Our acquisition of ChemTreat is progressing well, the business achieving high single digit revenue growth in the quarter compared to its results in the fourth quarter of ’06 as a stand along company.

Gilbarco Veeder-Root’s core revenues grew low single digits for the quarter and the year as we did not see year end orders materialize in Mexico. Despite restructuring activities in the fourth quarter GVR improved its operating margins in the quarter by more than 100 basis points as compared to the same period in 2006 a result of ongoing DBS improvement in factory and higher margins from recently introduced new products.

Moving to test and measurement our new name for our electronic test platform, revenues were up 64.5% in the quarter with core revenue contributing 5.5%. Full year revenues increased 31.5% as core revenue contributed 8%. Fluke core revenues grew at a high single digit rate for the quarter with solid international growth particularly in China, Latin America and Australia where sales were up double digits. During the quarter Fluke innovation efforts led to the introduction of the new Ti10 and Ti25 break through products in thermography to bring easier functionality and reliability at a price point that we expect to drive significant growth in the industrial maintenance market.

Fluke’s innovation efforts continue to gain public recognition during the quarter as the company won best in test from Test Measurement World Magazine for its new bench top digital multi-meter designed in our China development center. Fluke Network sales were flat for the quarter as a result of several large prior year orders that didn’t reoccur in 2007. F-Net sales finished the year up mid single digits with particular strength across Asia/Pacific and in Europe. In addition operating margins improved over 100 basis points during the year.

As I mentioned at the outset of the call we finalized the acquisition of Tektronix in the quarter. The integration is proceeding very well, DBS implementation is on track and we are confident we will attain our cost reduction targets. Collaborative efforts between Fluke and Tektronix have already helped identify a number of significant opportunities in both product development and in market penetration. We are excited at this point about the progress the team has accomplished to date and look forward to sharing further successes with you throughout 2008.

Moving now to Medical Technologies, revenues for the quarter increased 24% to $866 million compared to 2006 as quarter revenues contributed 9.5%. Broad based improvements across all businesses contributed to this growth. For the full year 2007 sales increased 35% to approximately $3 billion with core revenues contributing 8%. Med Tech operating margins for the fourth quarter were 15.3% compared to 14.6% a year ago. Absent the negative impact of approximately 120 basis points related to newly acquired businesses adjusted margins for the fourth quarter 2007 improved approximately 190 basis points over the fourth quarter 2006 primarily driven by leverage from higher revenue. For the full year operating margins improved 130 basis points to 13.1% when compared to the prior year.

Turning to our Dental businesses fourth quarter core revenues grew at a high single digit rate. Sales of consumables, imaging equipment as well as our minimally invasive product offerings contributed to this performance. Full year 2007 Dental revenues also grew at a mid single digit rate. We continue to see excellent results in the Dental consumables business which enjoyed high single digit growth in 2007 and significant margin expansion. Growth was broad based across all major geographies and product categories.

A great example of this performance was the success of the Kerr Demi Light, for many of you who attended the mid year analyst meeting in September you may recall the demonstration of the portable LED curing light a high powered compact light used to cure and restore materials such as composites, bonding agents and cements. We launched the product back in August and since that time Kerr has recorded sales approaching $10 million helping it achieve double digit growth in this product category.

Within Dental Equipment we experienced geographic strength in North America where we believe we are taking share partially offset by softness in Asia reflecting a weak Japanese market. Imaging revenues were up double digits driven by both Gendex and Dexis two dimensional panoramic products as well as the continued robust sales of ISI’s iCAT 3D imaging systems both in the US and in Europe where the product was launched mid year 2007. If we were to include ISI in our core growth calculation for the quarter Dental Equipment would have increased at a mid single digit rate.

During the quarter KaVo launched Comfort Drive which is the first hand piece in the market that combines the ergonomics of turbines with the power of electrics. We believe this hand piece will set a new standard in the market and represents an excellent example of using our voice of customer and innovations DBS tools to create what we believe to be a multi-million opportunity.

At Radiometer core revenues grew at a low double digit rate for the quarter and a high single digit rate for the year driven by instruments placements throughout Europe. In QT our pointed care offering used to detect cardiac markers which we displayed at our year end analyst meeting launched in the UK and Australia earlier this month. In the US clinical trials are continuing and we obviously look forward to sharing early market feedback with you in the near future.

Leica Microsystems core revenues grew to low double digit rate in the quarter and a mid teens rate for the year driven by robust microsity demand in particular Confocal microscopes. Geographically growth was broad based and benefited from Leica’s strong portfolio of new products which have been brought to market in the last two years. In 2007 Leica generated more than 50% of its revenue from these new products.

Our Leica Biosystems business continues to enjoy very healthy growth driven in part by more than 30% growth in our Vision Systems business. This growth resulted from strong sales of innovated bond, amino hista chemistry advanced standing systems as well as increase sales in specimen preparation handling equipment a result of the successful integration of the Vision and Leica sales forces.

Moving to our Industrial Technology segment revenues increased 7% for the quarter to $812 million with revenues from core businesses up 2.5%. Full year revenues increased 5% to $3.2 billion with revenues from core businesses were up 1.5%. Operating margins for the fourth quarter were 16.3% essentially flat compared to the same period a year ago. Margins were negatively impacted by new acquisitions, spending for product development and emerging market sales force initiatives as well as restructuring activities. These cost activities should help drive continued margin expansion in 2008. For the year operating margins increased approximately 120 basis points to 16.9%.

Product Identification revenues increase 9% during the quarter with core revenues increasing 3.5%. Product ID full year revenues were up 3.5% with core revenues decreasing 1%. The full business in 2006 that did not recur in 2007 adversely impacted full year core revenue growth by more than 800 basis points.

Growth in our core marking business was up mid single digits driven by strong performance in our Laser business which grew more than 20%. The primary growth driver has the CO2 laser platform which provides permanent marking on a variety of services through high speed steered beam technology. This platform which replaced 17 Legacy lasers now accounts for more than 40% of Videojet’s laser business.

Switching to Motion, revenues were up 5.5% in the quarter the core revenues 0.5%. For the full year Motion increased 2.5% with revenues from core businesses declining 1%. Motions performance continues to be adversely impacted by softness in its tech and markets particularly in semi-con and electronic assembly. Motion did experience a rebound of bookings in its flat panel display business in the fourth quarter which bodes well for this market segment in 2008.

Our OEM elevator business grew revenue double digits in 2007 a result of robust motor sales to Otis and a new product launch with [inaudible]. Elevator product demand continues to be healthy entering 2008 due to the global conversion to more energy efficient systems and commercial construction demand in the developing world.

Motion is pursuing a number of growth opportunities in clean energy and recently announced winning a greater than $10 million with Hagland a division of BAE Systems for the design, development and delivery of an electric propulsion system for military vehicles. Motion’s custom design capabilities for high powered motors and drives is proving to be very attractive for hybrid applications in both Aerospace and Defense markets as well as in heavy duty and specialty vehicles. We expect to announce additional development contract wins in the near future.

Finally moving to Tools and Components revenue for the quarter was $365 million down 2%. For the full year revenues for Tools and Components decreased 1% to $1.3 billion. Operating margins for the quarter were 11.8% a decrease of 290 basis points from the prior year due primarily to lower volumes in our mechanics hand tool business with Sears and in our Jacobs Vehicle Systems business. In addition, costs associated with the fire in our Shandong, China tool facility as well as additional restructuring spending in the quarter negatively impacted operating margins. For the full year operating margins decreased approximately 130 basis points to 13.1% primarily due to these same reasons.

Hand tool revenues declined 1.5% in the quarter for the year sales increased 1%. Double digit growth at Lowe’s helped partially offset decline in sales to Sears/Kmart during the quarter.

Looking back on 2007 we see a year where we successfully reach a number of milestones. Exceeding $11 billion in revenue, generating more than $1.5 billion in free cash flow and significantly expanding our now $2.5 billion position in Test and Measurement. Looking ahead in 2008 despite ongoing weakness that began in the middle of 2007 in some of our OEM and customer facing businesses we will continue to see strength across most of the portfolio.

We are however well aware that current global economic concerns and accordingly took the meaningful cost reduction actions in the fourth quarter. In addition, we have developed comprehensive contingency plans within each of our businesses. We are poised to capitalize on growth opportunities and address uncertainties as they present themselves this year and remain confident in our ability again deliver and outperform in 2008.

Given this outlook we are reaffirming our December adjusted earnings per share guidance for the first quarter to be in the range of $0.84 to $0.89 with full year 2008 adjusted earnings per share expected to be in the range of $4.30 to $4.40 which excludes the non-cash acquisition related charges for Tektronix.

Question & Answer Session

Operator

[Operator Instructions] We’ll go first to John Inch with Merrill Lynch.

John Inch – Merrill Lynch

Since obviously there’s been a lot of consternation around the economy just even in the past few weeks. Since the analyst meeting have you noticed a discernable change in any of your businesses either the US or Europe or anywhere else?

Larry Culp

Since we saw you in December, obviously the headlines have been consistently and persistently negative but on balance what we are seeing I think with very few exceptions is pretty steady and a lot of our business leaders are trying to figure out what the newspapers and the talking heads on television are seeing out there. Not that we’re putting our heads in the sand but you look at the way we finished with a lot of the businesses, we have but two and one half weeks of bookings so that’s a little hard to read too much into January.

Obviously we ended up being a little softer than we had anticipated at Sears at year end, I think that’s been well publicized. We’ve seen I think in Asia consistent strong growth, in US I think we’ve seen a little bit of I would say modest slowing in a place or two but really nothing I think would correlate at this point with the headlines that are out there. We feel good where we are.

John Inch – Merrill Lynch

If you go back the recession of ’01 when Danaher ultimately had to take a charge and downsize to a degree. You are a much different company, that said there’s always, I would think as part of your scenario planning you would have to be thinking about those possibilities and even the possibilities of the information you are getting from the field perhaps is lagging or its being filtered in some manner. Can you talk about what levers you prospectively are able to pull if in fact you start to see some of the demand for your products, regardless of where it is, some of it start to turn South more quickly?

Larry Culp

You bet and I think it really does start with the portfolio, right? So many of the wonderful businesses that we have today like our Medical Technology business is half of what we call Test and Measurement, our Environmental business are a much bigger part of the portfolio today. It’s a very different Danaher, I think it’s a stronger portfolio than we had last time we saw a slow down in terms of the economy. When we were together in December what we try to do in the roll forward talking about our guidance is really give you a flavor for what we have laid in, in terms of flexibility with respect to the investments that we put into the businesses.

We also talked about the ongoing cost reductions that we get as a result of persistent application with DBS plus obviously all of the determined activity that we have going on. As we watch the trip wires if you will and all the businesses and we are watching everything we can right now, our own numbers and numbers with our distributor partners, our customers in the like, we will be I think quick to make sure that we pull back on investments that we can do without, that we can defer for a period of time while making sure we can continue to protect the investments that drive both the short and the long term growth prospects that we have.

We talked a little bit in prepared remarks obviously about some restructuring; it was a bigger program at the end of the year than it was a year ago. We ended up with well over 200 heads coming out the organization, I think that is the sort of thing that should be evidence to you John that we are going to be proactive we are not going to wait necessarily until its too late to do the things that we need to do to protect our profitability, our earnings as best we can in a more uncertain environment here in ’08.

John Inch – Merrill Lynch

Lastly this China fire does that roll through the other quarters this year? Should we be taking down assumptions a little bit in the T&C business or have you pretty much contained in being able both to redeploy the utilization?

Dan Comas

The team over there has really done a nice job of getting that factory up and running so I don’t see it impacting our business over there as Larry noted the concern in the Tools business is more around the US consumer.

Operator

We’ll go next to Deane Dray with Goldman Sachs.

Deane Dray – Goldman Sachs

Just a follow up on the actions that you took in the fourth quarter, were those preemptive moves that came in towards the end of the quarter or was that something you had planned all along in terms of headcount?

Larry Culp

I wouldn’t say that those were actions that were in the plan. I think if we were adjusting in the second half and certainly in the fourth quarter to some of the concerns certainly as we think about the Tools business with its exposure to the US consumer and some of the OEM facing businesses in Industrial Technologies we were making adjustments to cost structure taking actions proactively. Really in preparation for ’08 more than anything else, it obviously hurt us in the fourth quarter, we spent more than $10 million in the quarter going through those head count reductions and the attendant facility moves. We thought that was the right thing to do for those businesses, we thought it was the right thing to do frankly in preparation for ’08.

Deane Dray – Goldman Sachs

I’ll also point out that those charges were also flowed through your operating results, is that correct?

Larry Culp

By all means, what we call restructuring I think more than anything to make sure people understand that we are on our toes ready for what may come here and we are already in to not only continuously planning across the board but taking actions in those businesses where it’s appropriate. Many other businesses I would say were prepared but we want to make sure we don’t move in a way that hurts our growth prospects in ’08.

Dan Comas

Maybe just for a quantify the activity between the restructuring and the fire and most of it being the restructuring activities we took it impacted the fourth quarter margin corporate wide by almost 50 basis points.

Deane Dray – Goldman Sachs

With regard to these contingency plans and I’m sure you are hesitant to put specific numbers on it could you give us a sense of in priorities of business of where and how you can selectively pull back discretionary spending if it works out that it needs to be done?

Larry Culp

Rest assured I’m not hesitant at all to quantify that internally but for the purpose of this call I think again it’s really a business by business activity given really the way we operate. We’ve got strategies and budgets that are tailored to each business and its situation but again whether we are talking about investments in head count, investments in opex, our factory structures, our overhead structures and the like we can defer certain investments, we can go after certain costs that exist today in ways that hopefully protect all the good growth investments we want to protect for the future but also get at perhaps some of the costs that we carry today that frankly we don’t need. Particularly if things do indeed decelerate from this point.

Operator

We’ll take our next question from Jeff Sprague with Citigroup Investments.

Jeff Sprague – Citigroup Investments

I’ll move to another topic but not to beat theme but just one other thought on what you are observing. Many of us would remember that before the prior slow down Danaher was one of the very first to kind of raise their hand and say some things were going on before other companies did. The mix is obviously changed a lot, when you look at that little bit of slowing on the edges that you said you saw in some businesses were those businesses that were flashing the signal last cycle?

Larry Culp

I think when we talk about where saw this office we had Tools, we had Motion last time around as part of the portfolio. Motion was hit hardest because of its exposure to Tech and the bursting of that bubble. Tools was more consistent given what was happening with the US consumer that go around versus this time around. I think we are watching Gilbarco very closely given that ultimately they serve a number of retailers and obviously the retailers have the exposure maybe alter it, adjust their capitals given what consumers are doing.

We are also watching Product ID very carefully but obviously if we didn’t have either of those two businesses with us last time around. Those are businesses fortunately we were able to acquire in the down turn from folks that at the time were less prepared to preserve their portfolio, preserve their strategic options when things got soft.

Dan Comas

If you’ll remember the last time the business where we had the most trouble, the biggest drop and where we took the hardest hit was the Power Quality business that we divested this past summer.

Jeff Sprague – Citigroup Investments

Could you give us a little color on how Tektronix performed in the quarter, I’m sure it’s a little muddy now but what was their organic growth like on a stand alone basis?

Larry Culp

I wouldn’t say it was muddy per se, since the acquisition revenues were down slightly I think consistent with the soft order book that they had publicized during the summer and the fall. I think all in all we feel very good about that investment, that acquisition, we are excited about the way that team has embraced Danaher, EBS, Fluke and Fluke Networks and I think we are going to be very happy having Tek on board here. I’m very pleased we were able to bring them in last year.

Jeff Sprague – Citigroup Investments

On Med Tech it did accelerate nicely, you called out a couple things, Europe and few others but it’s always kind of tough to size those as you are bouncing through them. What do you think was really kind of the main stand out performer that kind of drove the up tick in the growth rate?

Larry Culp

I think Leica had a terrific 2007, I don’t know how to describe it otherwise virtually across the board as you look by product and by geography. Radiometer as I mentioned was also very strong. Sybron came in and contributed in the second half relative to kind of the core calculations nicely and we obviously don’t yet include fully the division in the ISI contributions but they were also very helpful here. We are very pleased with the Med Tech performance and certainly if we are looking at a bumpy ride come ’08 we are thrilled we’ve got $2.5 billion in Med Tech of businesses performing as they are currently.

Operator

We’ll go next to Nicole Parent with Credit Suisse.

Nicole Parent – Credit Suisse

At the risk of piling on in the macro I just have one quick follow up on Europe. When you think about where you are seeing weakness and I think in the press release you alluded to softness on the OEM side, is that just largely the tech weakness you had seen on the semi-conductor side and then with respect to Europe how do you see that playing out?

Larry Culp

With respect to Motion and the OEM comment, the softness that we’ve seen clearly has been in Tech. I think that I was with the Kollmorgan team just a week ago and that situation is pretty steady right now. It’s very interesting, there’s some puts and takes obviously its not lighting the world on fire with respect to core growth we’ve got a number of good verticals like commercial construction work in force right now the OES program and the like. It’s steady, it’s not deteriorating and I think that’s a really interesting data point when we obviously are watching virtually daily but it’s an encouraging sign.

Nicole Parent – Credit Suisse

More specifically on Europe?

Larry Culp

I would say Europe is steady; I would describe it that way with respect to Motion and frankly the rest of the portfolio but obviously a geography that we are watching very carefully as well.

Nicole Parent – Credit Suisse

One last one on M&A, can you give us a snapshot with private equity out of the market now have you seen prices come in would you expect more activity as we roll into 2008 and kind of how you are thinking about it?

Larry Culp

I think that if you go back to 2002 when we bought Videojet, we bought Gilbarco we made a big add to Water a tough environment was good for a strategic acquirer. Lots of folks were on the sidelines at that point and if things do get sloppier out there I think prices will adjust in certain markets. Obviously the competitive set will be markedly different. We would welcome that convention to a slowdown and obviously you saw when we went out and arranged the financing with Tektronix the slug of equity was really geared toward making sure we were in a position given the uncertainty in the capital markets to be in a position to be an active strategic acquirer in a down turn.

So as we sit here in early January the balance sheet is strong, we saw a $1.5 billion of free cash, I think we are in a good position to basically run our playbook here from an M&A perspective.

Operator

We’ll go next to Bob Cornell with Lehman Brothers

Bob Cornell – Lehman Brothers

Would you just flush out the thoughts you mentioned on the combination of Tek and Fluke just how they are starting to work together, you mentioned some of the opportunities, give us a little more color there please?

Larry Culp

I’ve got to be a little careful because I know there are some folks on the call who are looking for that page of the playbook. I think what we did first of all as we always do is plug the senior team in to DBS, they’ve gotten through the initial orientation, and they’ve begun to do their own ties and events to get a flavor for what this is all about. They were already on the lean journey so this is not a foreign concept to them, they’ve taken it and just run hard. We’ve obviously been plugging in our procurement activities as well really from a corporate perspective but Fluke’s had the point on that to make sure we get the vast majority of the $40 million in the early round of cost reductions as Tek is now part of a $13 billion company not a billion dollar company.

From the strategic perspective clearly there are opportunities with Fluke and with Tek as they serve the same engineers bench through similar channels in a number of markets around the world. We are working not only on some product ideas but also some channel programs to put the combined strength to its full use. I would say there are also similar opportunities; I was out in Colorado Springs last week with our Fluke Network team as we think about the communications side of Tektronix with that neck. Both from a product and a go to market perspective there are going to be things I think each business is going to help the other. The pillars just get stronger and stronger as we build the T&M business out.

Bob Cornell – Lehman Brothers

You mentioned the Tek soft order book, have you had a chance to do further due diligence on that, have an increased perspective, can you give a little color around that?

Larry Culp

I think the additional exposure that we’ve had thus far is very consistent with what they’ve said publicly and what we had discerned in our diligence. We knew that the lumpier carrier programs from an order perspective were going to be soft here. I think that was part of our opportunity. It’s not as pronounced from a shipment perspective. The other item that they flagged as you may recall is the weakness in Japan which has continued.

Bob Cornell – Lehman Brothers

Just a comment on the Radiometer new product, is that in the market? I didn’t quite get what the perspective was there?

Larry Culp

We are now shipping that product.

Bob Cornell – Lehman Brothers

What’s the impact, how’s it going?

Larry Culp

It’s been two weeks, the customers love this product, it’s now approved we’re shipping but it literally is the first full month of production. We are pumped up about that program as we ever have been.

Bob Cornell – Lehman Brothers

I didn’t hear you say in guidance what the organic growth target was for the year? I think you guided that mid single digits is that still the target?

Larry Culp

I think that’s exact; there are no changes in that regard from what we said. In December we thought we’d be in that mid single digit range this year, obviously operating as aggressively as we can where we have growth opportunities and appropriately cautiously where have some of this headline risk out there.

Operator

We’ll take our next question from Steve Tusa with JP Morgan.

Steve Tusa – JP Morgan

Can you just run through what you expect from the different pieces of Med Tech which you would be more worried about in a tough US environment? I know that this business is thought of as less than cyclical but I’m just curious, there’s got to be some swelling in a couple of them, I’m just curious how you are thinking about that?

Larry Culp

I think that’s right, let’s be clear this is the business in all likelihood will be our best performer if the economy does decelerate further if the softness broadens. I would say that Leica and Radiometer given that they serve research and clinical applications are probably going to be well insulated simply because I think budget programs that they participate in tend to have a little bit of that longer cycle dynamic to them. Once they start they are hard to shut down, they are both going to be coming off very good years so we need to keep that in mind but that’s really the way I would think about those two legs of the Med Tech platform.

I think in Dental we obviously have been benefiting on a global basis from the increased investment in technology by all levels of dental practitioners, consumables, more function of procedures and case load. We need to be watchful here relative to whether the US consumer dynamic has any impact on the dental business. Those that I’ve talked to and respect, who’ve been in the business far longer than I have I think support the assumption in your question that there won’t be a lot of impact but there could be some. We just want to watch that given the new business wars. We obviously do have a large presence here in the US.

I think all in all we like where these businesses are strategically, we think they all had a very good fourth quarter and enter ’08 with a lot of optimism, a lot of confidence. We had a couple kick off sales meetings so far and the sales teams are very enthusiastic about the new products and programs here in ’08.

Dan Comas

Given these businesses that are still relatively new to the portfolio that we think we’ve got a lot more room on the margin side, we’ve got over 100 basis points of core margin improvement in ’07 and would be looking for similar type results here in ’08. I think if you’ll not only steady growth but above average op improvement for the coming years.

Steve Tusa – JP Morgan

You have a different portfolio you have some of this cost opportunity is it reasonable to assume given the last recession you guys held earnings flat if you strip out the big extraordinary charge that you guys with this portfolio might actually be able to grow earnings through a reasonably bad recession?

Larry Culp

I think that when you look at the portfolio, you look at this team; you look at DBS, come what may we are confident we are going to outperform. What that looks like you can calibrate it or model it in a number of different ways but we’re going to make the right decisions, take the tough decisions and outperform in a tough time if that evolves here as we try to do in all seasons.

Operator

We’ll take our next question from Ann Duignan with Bear Stearns

Ann Duignan – Bear Stearns

Sorry to beat the macro thing to death here but how do you think about organic growth by quarter or by progression through the year? Do you think stronger maybe in the first half because of easier comparables and then perhaps slowing because of lack of visibility in the back half? Do you think that interest rate cuts that are happening now may cause acceleration in the back half? Maybe talk about it by quarter, just the progression of your organic growth and how you are thinking about that?

Larry Culp

I think right now it’s obviously very early in the year, we are watching all of our indicators, talking to as many customers as we can to make sure we understand how they are thinking about budgets and capital plans for the year. What I’d say is that, as we shared with Bob a moment ago, I think we stand by the mid single digit range for the year that we talked about. I think all in all we come into the year obviously with first quarter inventories at Sears a little bit higher than I think we would have liked, they would have liked, given the softness during the holiday season. PID on the margin a little softer as well, we get an offset as you talked about with Jake Brake AVS.

We need to see how the year plays out, I’m not sure that the economics department at Danaher, we don’t have one, is ready to make the call on what the Fed actions or even the stimulus program that Congress is talking about is going to kick in here in the second half. Obviously you’ve got the monetary and physical policy levers being pulled aggressively right now, that has to have a positive impact when that hits. I’m not sure our crystal ball is any better than anyone else’s. We want to focus on what we can control and go after all of the revenue opportunities we can while being just smart and prudent on the cost side.

Ann Duignan – Bear Stearns

On Product ID I have to believe given how much of that business is consumables tied to kind of industrial activity that that business may be one of the first or the early cycle businesses that might see a slow down in the near term. Is that what you were insinuating on the Product ID side?

Larry Culp

Yes and yes, I think that’s a spot on look at where we might see some softening next. If you just look at the Danaher portfolio, I think it’s less on the consumables side per se but we watch that, but also the new printers, the new laser printer, the new TTO machine going into production line. That presumably if it’s a new product introduction it’s something people could defer. We try to look at those orders; we break it down by consumables versus equipment to try to read in to what customers are going to do here in ’08. I think right now we are watching that one very carefully.

Dan Comas

The other dynamic we have with Product ID and its more within the Acu-sort business as you know they have some large project business, last couple of years with the Post Office but also with people like UPS and whether some of those projects get pushed out in this climate is a risk as well. I think the offset there is they tend to be much lower margins than the core printing and consumable piece of Videojet.

Operator

We’ll go next to Scott Davis with Morgan Stanley.

Scott Davis – Morgan Stanley

I was wondering if we could take a little step backwards and talk about the Tektronix and maybe remind us how you go to market, how much distribution versus direct, how much channel visibility you have, product cycles? Just a little bit of a teach in if you could on that particular business.

Larry Culp

Well keep in mind that you really break Tek down roughly call it two thirds/one third, two thirds being their core instrumentation business of oscilloscopes and other bench top products used often in research and development. That’s a business that is 60% to 65% direct, the rest being through distribution and its in some but not all of its distribution channels where we often listed literally side by side with you’ll see a fair bit of the channel synergy in that part of the business.

On the communications side that is principally a direct business, when we say communication we are typically talking about network operators carriers and the like. It’s a business where we have an ongoing conversation with many of the larger customers and obviously due demand planning and the like with our distributive partners on an ongoing basis as well. That’s been a strength of the Tek organization that we are keen to leverage going forward.

Scott Davis – Morgan Stanley

When you think about revenue drivers is it Tek capex, is it new product cycle, is it Tek capex driven by the flows of the equity markets and how much capital these companies have? It’s just an industry that I don’t cover so I’m kind of curious.

Larry Culp

I think you have a number of macro drivers there but Tek is very focused in R&D as opposed to manufacturing and all these companies obviously are wholly dependent on the next generation product being a winner. Their demand may fluctuate, they may have to adjust their spending in the factory as a result but in terms of what’s happening in the lab on the bench relative to R&D our work suggested that that’s a more stable environment and the digital revolution that we see in so many places is really fueling development spending in that regard and then turn spending for Tek products.

On the communications side obviously we see the proliferation of services by the network operators and Tek helps these folks develop and deploy those new services. That’s something that we see as an eviquitive growth driver around the world for Tek. It’s that combination I think got us excited that this was a good, smart step into an adjacent market for our T&M business.

Scott Davis – Morgan Stanley

That really serves to buffer the natural tech cyclicality that’s out there is that what you are implying?

Larry Culp

I wouldn’t say that it is completely buffered, I think we acknowledged to the extent that we serve some of those tech markets if there’s volatility or cyclicality there we we’ll be exposed to some of that but its far more modest in R&D so many of the other favorable attributes of the acquisition made this one that we thought very strongly about obviously consummated.

Operator

We’ll go next to Ajit Pai with Thomas Weisel Partners.

Ajit Pai – Thomas Weisel Partners

A couple of quick questions, I think the first one is just looking at your cash flow, the operating cash flows and free cash flows and as you just mentioned I think your free cash flow exceed your net earnings by quite a margin. In terms of growth rate you are looking at 11% in your operating cash flow and about 10% in your free cash flow for the full year. How much of that is the fact that it’s from continuing operations and instead of net earnings including further acquisition, how much of that is to do with the change in the way that you generate cash flow the delta between your net earnings and your cash flows growth?

Dan Comas

I’m not sure exactly I get the question, let me try and you can correct me. We had a very strong performance in cash flow for the year; we did not get a lot of benefit from a new acquisition coming in. As you know Sybron occurred early in 2006 and Tektronix occurred kind of late in the year so it really was from continuing operations from the core business that we delivered this very strong cash flow.

Ajit Pai – Thomas Weisel Partners

When you are looking at the 21% growth in your net income and you are looking at the 10% and 11% growth in the operating cash flow and free cash flow most of the difference can be attributed to what you just mentioned.

Dan Comas

Yes and the dynamic of from ’05 to ’06 when the cash flow was up I believe in the high 20’s was because of the timing of the Sybron acquisition when we brought it in and we had a lot of cash flow that last quarter because of the difference in their year end, we talked about that last year. If you look at ’05 to ’07 which I think is more representative look when you take out the impact of the timing of an acquisition free cash flow is compounded out of that 19% over that two year period.

Ajit Pai – Thomas Weisel Partners

Looking at the quality [inaudible] right now and also the impact on some of the tightening in credit is happening, are you seeing any change both in your lenders not just domestically but across the world any kind of tightening in terms of their ability to lend to you of any sort if the bank here anything at all? Secondly for your customers is there any change in tendency of your customers to actually delay payments to you?

Dan Comas

We have not seen any issues, as you know we are an A plus credit tier one commercial paper issuer and we have not had any issues either in the US or in Europe. Regarding the second point, nothing that I’m aware of, I’m sure there some instances somewhere where this tighter credit market is impacting a customer but nothing to note.

Ajit Pai – Thomas Weisel Partners

Looking at your Product ID business I think you mentioned pretty decent growth out of the laser products for marking and then you talked about the economic sensitivity of this business I think in response to a question a few minutes ago. How do you think about this business over the next two to three years, what are the major drivers that will reaccelerate growth in this business? Do we expect anything in the near term and do you plan to go from the fixed side and the desktop side in this business, get more into the mobile side of this business?

Larry Culp

We don’t have a desktop business in Product ID we’re really principally in marking and coding in production environment. There’s really no opportunity I think in our view after an acquisition to take that position out of a production environment into a mobile environment. I think the growth drivers are going to continue to be good. We didn’t report the year we would like because of the tough top line comps from ’06 because of the Postal programs.

Frankly I was thrilled with the year that we had in Product ID particularly at Videojet where they had excellent core growth, good margin expansion, we are making some smart investments that will yield things we will talk about in ’08 and ’09. I don’t think we have anything but good opportunities like the trajectory we’ve been on with Product ID. It’s just a business that clearly had a tough reporting comp in ’07 but when you look under the covers they did very well.

Operator

We’ll take our final question from Richard Eastman with Robert Baird.

Richard Eastman – Robert Baird

On the Test and Measurement side of the business the core growth rate at 5.5% was certainly below trend line for the last couple of years and I know Fluke Net had a couple tough projects compares year over year, are you sensing that you are picking up any macro weakness in the Test and Measurement side of the business, excluding Tektronix, just Fluke or Fluke Net?

Larry Culp

I think the short answer is no. We finished very strong and we have but a couple weeks of orders so if something is going to happen this year we certainly aren’t seeing it in terms of our leading indicators, our order book. We tend in the fourth quarter to see some of that noise at Fluke Net depending on whether there is a big year end program here or there. I didn’t read anything and I encourage you not to read anything into the Fluke Net performance for the fourth quarter. We need to obviously watch what customers do as the year plays out. I think right now we feel very good about where T&M is excluding Tek for ’08.

Richard Eastman – Robert Baird

On the Med Tech platform given that we pulled this platform together over the last few years and it’s been maybe skewed a bit towards European based acquisitions, given the cost structures there and the fact that we have been operating in a very good revenue marketplace for the last couple of years do you feel comfortable that the trailing pace of cost reductions would continue to drive operating margin there if revenue growth falls off? Obviously the difficulty in taking costs out of some European operations, do you think you are far enough ahead on that curve that if we see revenue grow slow that we can comfortably deliver on the margin improvement that we’re targeting?

Larry Culp

We would certainly intend to do that. Keep in mind we talk about these European headquarter businesses their cost structures really span the globe gives us an opportunity not only to deal with head count, really anywhere not just Europe but also the new product pipeline at Leica for example has been an important part of the margin play. Having these companies come in and just buy commodities globally is part of the larger organization maybe a sharper purchasing organization to boot. Those are all cost leverage pulling that have been helping drive the margin expansion in addition to the volume and obviously are also leveraged that we think still have future impact on the business, almost regardless of the revenue environment.

Operator

That concludes the question and answer session, at this time Mr. Wilson I’ll turn the conference back over to you for any additional or closing remarks.

Andy Wilson

[Executive Instructions] Thanks for joining us.

Operator

That does conclude today’s conference, thank you for your participation.

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Source: Danaher Corporation Q4 2007 Earnings Call Transcript
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