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Danaher Corporation (NYSE:DHR)

Q1 2008 Earnings Call

April 17, 2008 8:00 am ET

Executives

Andy Wilson - Vice President, Investor Relations

Larry Culp - President and Chief Executive Officer

Dan Comas – Chief Financial Officer

Analysts

Steve Tusa - JP Morgan

Deane Dray - Goldman Sachs

Bob Cornell - Lehman Brothers

Scott Davis - Morgan Stanley

Jeff Sprague - Citigroup

Nicole Parent - Credit Suisse

John Inch - Merrill Lynch

Richard Eastman - Robert Baird

John Baliotti - FTN Midwest Securities

Operator

I’d like to welcome everyone to the Danaher Corporation 2008 first quarter earnings results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Andy Wilson, Vice President of Investor Relations. Mr. Wilson, you may begin your conference.

Andy Wilson

Thanks Melissa. 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 and 10-Q are available in the investor section of our website, Danaher.com, under the heading earnings. Access to a slide presentation supplementing today’s call can also be found on the Danaher website under the same heading.

Both the audio of this call and the slide presentation will be archived on our website later today and will be available until the next quarterly call. In addition, a replay of this call will be available until April 21. The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally. The confirmation code is 2384639. I will 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 the year-over-year performance. Please refer to the accompanying webcast slide presentation and the MD&A section of our first quarter Form 10-Q for details regarding additional factors that impacted year-over-year performance.

Also, all references in this presentation to earnings, revenues and other company-specific financial metrics relate only to the continuing operations of Danaher’s business unless otherwise noted.

Our earnings for the period include the results of operations of Tektronix which was acquired in the fourth quarter of 2007. Included in Tektronix’s results are certain non-cash acquisition-related charges for the fair value adjustments to record inventory and deferred revenue, which reduced pre-tax earnings by $26 million and net earnings by $19 million and diluted earnings per share by $0.06 in the quarter. Throughout the call all references to non-cash acquisition-related charges for Tektronix relate to these items.

In addition, the amount of these non-cash acquisition related charges for Tektronix for the full year 2008 are expected to reduce our earnings by approximately $0.13 per share. These charges are excluded from our adjusted earnings per share guidance we provided at the end of the prepared remarks.

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 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 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 related to those measures can be found in the investor section of our website under the subheading earnings.

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

Larry Culp

Thanks, Andy. Good morning, everyone. We are pleased to report that our first quarter earnings per diluted share was $0.83, representing another record first quarter for Danaher and an 8% increase over last year. Adjusted earnings per diluted share was $0.89, a 15.5% increase over last year’s first quarter.

Revenues for the quarter increased 20% to a record $3 billion led by acquisitions, primarily Tektronix, which were up 13%; positive currency effects of 5%, with core revenue up 2%.

Strength in our Hach-Lange, Fluke, Leica, and Radiometer was offset by continued soft demand in several of our OEM and consumer-driven businesses primarily here in the U.S. We’ll comment in more detail in the segment review, but I’ll highlight here that we are encouraged by the current order growth trends we are seeing in many of our businesses.

Order rates overall increased at a mid single-digit rate in the first quarter and we believe this bodes well for an improved core revenue performance in the second quarter. Year-over-year gross margin for the first quarter improved 160 basis points to 46.8%, primarily due to an improved mix of revenues from existing businesses as well as recently acquired businesses with higher gross margins.

SG&A expenses were 27% of sales compared to 25.6% a year ago, due primarily to higher SG&A levels in our recent acquisitions.

Research and development spending as a percentage of sales for the quarter was 6.1%, as compared to 4.9% a year ago. This increase was primarily due to the impact of newer businesses with higher R&D levels, primarily Tektronix.

Operating profit for the quarter was $413 million, which includes $26 million of non-cash acquisition-related charges for Tektronix. Adjusted operating profit was $493 million, a 19% increase over last year. Operating margin was 13.6%, a 110 basis point decline from 2007. The non-cash acquisition-related charges in connection with Tektronix as well as the impact of recently acquired businesses had a dilutive impact on the quarter’s operating margin. This dilution was partially offset by 15 basis points of operating margin improvement in existing businesses with particular strength in Professional Instrumentation.

Our effective income tax rate for the first quarter was 26.5% compared to 26.9% in the first quarter of ‘07. Net earnings were $277 million for the quarter. Adjusted net earnings were $296 million, an increase of 17.5% compared to net earnings in the first quarter of last year.

Operating cash flows were $333 million, a 3% increase over the first quarter of 2007, despite the negative impact of approximately $20 million of cash restructuring expenditures at Tektronix.

Working capital increases negatively impacted cash flow in the quarter, due primarily to higher inventory levels to support existing and anticipated order levels, as well as the slower collection of accounts receivable in Europe due in part to the timing of the Easter holiday. We expect our working capital performance to improve over the balance of this year.

Free cash flow was $294 million for the three months ended March 28, 2008. Our free cash flow to net income conversion ratio was 106%. We anticipate that our conversion ratio will increase over the balance of the year as it did in 2007. As such, we are optimistic about our ability to deliver free cash flow in excess of net income for what would be our seventeenth year in a row.

During the first quarter, we reduced our outstanding debt by over $200 million. Our debt to total capital ratio at the end of the quarter was 26.8% with over $230 million in cash and cash equivalents at quarter’s end.

Turning to our operating segments, Professional Instrumentation revenues increased 56% for the quarter with core revenues up 5.5%. The operating margin for the first quarter was 16.5% compared to 19.5% last year. Adjusted operating margin improved by approximately 130 basis points, driven by leverage from higher sales volumes in both our Water Quality and Test & Measurement businesses.

Environmental revenues grew 25%, with core revenues up 7%. Water Quality core revenues grew at a low double-digit rate in the first quarter, led by continued sales strength at Hach-Lange’s process and laboratory products throughout the U.S. and in Europe. Sales in Asia also grew at a rate over 20%, reflecting our continued focus on emerging market penetration.

Trojan delivered double-digit core growth revenue for the quarter, reflecting significant demand in Europe and in North America. Bid activity remains robust. During the quarter, we delivered a multimillion-dollar wastewater project in Spain as well as two environmental contaminant treatment projects in Australia and in the U.S., all three of which contributed to the quarter’s outstanding growth.

ChemTreat continues to perform well, achieving high single-digit revenue growth in the quarter compared to its results last year as a standalone company. Gilbarco Veeder-Root’s core revenues grew at a low single-digit rate for the quarter driven by strengthened environmental products in Asia and in North America as well as healthy point-of-sale demand in North America and payment system sales in Europe.

During the quarter, ExxonMobil installed its thousandth Passport point-of sale system, contributing to this growth. This growth was largely offset by soft demand for dispensers, particularly in the U.S. and Western Europe.

Moving to Test and Measurement, revenues grew approximately 100% in the quarter with core revenue up 3%. Fluke core revenues grew at a high single-digit rate for the quarter. Double-digit growth in industrial products was led by healthy demand for our newly launched digital multimeters and a very strong performance from the Ti-10 and the Ti-25, our new lower cost thermography products which were aimed at broadening the handheld and portable thermography market. During the quarter, Fluke’s 8808 digital multimeter was awarded Test and Measurement World magazine’s Best in Test product award.

Fluke Networks sales were down during the quarter, as strength in copper and fiber products were offset by several large telecom projects that did not reoccur this year.

Turning to Tektronix, we are very pleased with the results to-date. TEK experienced mid single-digit core growth during the quarter as compared to last year when it was a standalone company. As a result of the soft orders last year we do not anticipate this level of growth over the remainder of the year. Similar to some of our past acquisitions, this environment has helped to facilitate our integration activities which in short are going quite well. We expect to over deliver in 2008, which is our original target and believe the business will be well positioned for next year and beyond.

We have also just completed a strategic plan identifying a number of exciting opportunities many of which involved collaborative efforts with Fluke. But probably most encouraging to me at this point has been the Tektronix team’s embrace of DBS. Tektronix just received a Technology and Engineering Emmy Award from the National Academy of Television Arts & Sciences for its real-time transport stream monitoring product which provides capability for monitoring, measuring and ensuring quality around high-definition video transmission. Interestingly, this is the seventh Emmy awarded to Tektronix demonstrating their dedication to providing innovative technology to the film and television industry.

Moving over to Medical Technologies, revenues for the quarter increased 11% compared to 2007. Its core revenues were up 3% led by a strong growth at Radiometer and Leica. Med Tech operating margins for the first quarter was 11.5% compared to 12.5% a year ago, primarily due to higher new product introduction costs at Radiometer for the AQT launch, the impact of soft revenues within the dental businesses and the effect of the strengthening euro, given that much of our cost base is in Europe.

Core revenues in both our dental consumables and equipment businesses were flat in the quarter compared to 2007. In our consumables business, sales of our Damon self-ligating braces, grew at a double-digit rate but was offset by slightly weaker end markets and the impact of a very strong fourth quarter. We also saw a slowing of more expensive procedures which negatively impacted certain of Kerr’s high end restorative products. However, we believe the market continues to grow and we expect our dental consumables business to return to more traditional growth rates for the balance of this year.

At KaVo we experienced robust demand for our 3D imaging and digital product lines as well as our Pelton & Crane treatment units, which grew at a high single-digit rate in the quarter. Overall, we grew at a mid single-digit rate in the U.S. and in Europe, offset by a decline in Asia as we altered certain distribution channels during the quarter. We believe this change in distribution strategy, while negatively impacting the first quarter, will better position us for long-term growth in Asia.

As we look to the balance of 2008, we believe the U.S. tax stimulus package will positively impact the second half of the year as accelerated depreciation incentives are expected to drive big ticket equipment purchases.

During the quarter, we acquired Shirokusa Dental Supply Works, a leading dental distributor based in Osaka, Japan and the exclusive distributor of our KaVo products in Japan.

Radiometer’s core revenues grew at a mid single-digit rate for the quarter driven by strong consumable sales, a result of robust analyzer replacements in 2007. Sales growth was experienced across all major geographies. AQT, our new point-of-care offering used to detect cardiac markers is being well received in the market and we are ramping our sales and marketing investments to realize its full potential.

Leica core revenues grew at a high single-digit rate in the quarter, notwithstanding a mid-teens growth rate a year ago driven by robust compound microscopy demand as well as double digit growth at Leica Biosystems. We experienced growth across all major geographies with particular strengths in Asia and in Europe.

During the quarter, we acquired Bal-Tech, a developer and producer of specimen preparation instruments and consumables used both in pathology and research applications. Bal-Tech complements Leica’s current product portfolio and provides access to several new technologies and end user markets.

Moving to Industrial Technologies, revenues increased 3% for the quarter with core revenue down 1.5%. Operating margins for the quarter were 14.8%, an 80 basis point decrease compared to the same period last year due in part to lower sales volumes, restructuring and other cost reduction initiatives.

These restructuring and cost reduction investments will continue in the second quarter and will help drive future segment profitability. The overall impact of these investments to first half operating margin will be approximately 80 basis points.

Product Identification core revenues were down slightly in the quarter. Our core marking and coating business grew at a low single-digit rate, led by double-digit rate growth in thermal transfer overprint sales. Order rates improved sequentially in the quarter, a result of additional sales resources deployed here in the U.S.

Accu-Sort’s core revenues were down in the quarter, primarily due to customer-driven project delays. We are cautiously optimistic that these projects will be completed in the coming quarters. As we mentioned before, much of this project business comes with lower margins.

During the quarter, we acquired Claricom, a developer of software used in network and design messages used in coding equipment. Both Videojet and Linx have successfully sold Claricom products with their printers for a number of years. The acquisition of Claricom increases our capabilities to provide flexible real-time management of our marking and coding systems to our customers.

Switching to motion, revenues were up 2% in the quarter with core revenues down 4%. Growth in our aerospace and defense, flat panel and elevator businesses was offset by slowing demand in the U.S. and in Europe for standard motor and drive products. However, we are encouraged by order growth during the quarter, which increased at a double-digit rate year over year.

Kollmorgen executed a new five-year preferred supply agreement with Otis to supply traction machines for its Gen2 machine room elevators as well as to develop and supply a new range of traction machines to be launched in 2009.

Finally, moving to Tools and Components, revenue for the quarter was down 1.5%. Operating margin for the quarter was 11.7%, an increase of 60 basis points from the prior year due to volume increases at Jake Brake as well as the benefit of fourth quarter 2007 restructuring actions.

Mechanic hand tool revenues declined 6% in the first quarter as double-digit growth in China was offset by domestic weakness in both professional and consumer lines. On a positive note, sell-through at Lowe’s in our category was up double-digits for the quarter, but customer demand at Sears remained soft. One quick note here, the repairs made as a result of the fire at our Shandong, China facility last quarter have been completed and that facility is up and running at capacity again.

So to wrap up, let me say here that while we are pleased with our mid-teens earnings growth amidst the slowing in certain markets and the macroeconomic uncertainties in general, we are prepared as we look forward here to tackle both the challenges and the opportunities in 2008.

We anticipate that our strong performers will sustain their results and this, coupled with recent order trends elsewhere, will drive growth. We will continue to invest in growth opportunities were appropriate while taking real cost actions were needed. While it’s early, we are very encouraged with performance at Tektronix and we remain solidly on track there. As always, we remain focused on driving earnings and cash flow growth regardless of the economic environment.

Our adjusted earnings per share guidance for the second quarter is estimated to be in a range of $1.02 to $1.07 and we are reconfirming our full year 2008 adjusted earnings per share to be in the range of $4.30 to $4.40.

Andy Wilson

Thanks, Larry. That concludes our prepared remarks. Melissa, we are now ready for questions.

Question-and-Answer Session

Operator

We will go first to Steve Tusa - JP Morgan.

Steve Tusa - JP Morgan

A question on the comment around order rates. Could you expand on that a little bit, maybe put some numbers or just whether you’re taking about in March specifically? Can you just maybe provide some color on that comment?

Larry Culp

Sure Steve. I think if we look at the quarter, what we’re really suggesting here is that we saw mid single-digit order growth in the quarter. We had, as you look at the four segments, in fact the order growth rate exceeded the shipment growth rate in all four segments. So that dynamic was broad based, I would say it was particularly pronounced in March as we saw a sequential acceleration in a number of places. So, on balance I think we look at that relative to the second quarter and perhaps the prospects for the rest of the year, it’s one of the encouraging data points we take from the first quarter.

Steve Tusa - JP Morgan

How much of your business is book and ship? I mean what’s the lead time on that kind of stuff?

Larry Culp

Well it’s going to vary. Obviously as we’ve built a backlog during the first quarter we were seeing some of our short cycle time customers simply lay in orders for second quarter delivery, in some cases third quarter delivery; extended lead times or requested lead times on their part much more so than for us, there were also a couple of places where we didn’t get product out that we could have and obviously have already here in early April.

Steve Tusa - JP Morgan

Right. So, the bottom line is with the order rates the way they are you would expect an acceleration in core growth in the second quarter?

Larry Culp

I think that’s exactly right, Steve. That’s my expectation. We can talk a little bit more about the first quarter, but as we look ahead, I would expect three of our four segments to show accelerated core growth on a sequential basis. I think there could be a slowing in Professional Instrumentation because of the dynamics at Gilbarco Veeder-Root right now where we sell to retailers and obviously they’re getting pinched both with the consumer and with fuel margins.

But I think when you look at Med Tech right now, dental was the drag there. I think dental gets better; certainly the Sybron dynamics get better there. I think the Asian distribution issues on the KaVo side work themselves out and we have a number of exciting new product introductions both at KaVo and at Sybron coming in the quarter.

At Industrial Tech, we’ve gotten pushed a bit at Accu-Sort around some retail and some parcel post programs. They’re currently dialed in the second quarter, but I think we’ll be cautious there, but again I think on balance we should see acceleration there.

And obviously in Motion, we get at a minimum the benefit of the easier comps.

I think in Tools and Components, we’ve been dealing with a tough environment here for almost a year. So again while we’re not expecting any miracles from the U.S. consumer, I think the easier comps themselves help what we’ll turn in for the second quarter on the organic growth side.

Steve Tusa - JP Morgan

Right, and one last quick one. Any restructuring you guys did in the fourth quarter to get out ahead of some economic weakness perhaps, anything in the first quarter?

Larry Culp

Steve, you bet. What we did, I mean, this is unusual for us because as you know I think we tend to do a lot of our restructuring in the second half and in the fourth quarter, but I think given the environment that we are in we accelerated a number of actions. You look in the first quarter we probably put $10 million into restructuring activities principally in Motion, a little bit in Product ID, a little bit in Tools so that comes out of the profitability here in the first quarter.

I think you ought to expect us to do the same thing here in the second quarter. We’ve got a number of programs laid in so we’re talking about a handful of facilities, several hundred folks that we’re going to say goodbye to, but I think those are the prudent actions that we’re going to take even though it will suppress our operating margins a bit here in the short term, those are the right things to make sure we’ve got a cost structure calibrated with reality in a more uncertain environment.

Operator

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

Deane Dray - Goldman Sachs

Thank you, good morning, everyone. The first question is in Medical could you quantify what that change in the distribution channel in Asia, how that affected the quarter and how long-lasting might that effect be?

Dan Comas

Deane, it primarily impacted dental equipment. Outside of Asia in U.S., Europe, Latin America, our dental equipment business was up mid single-digit. In Asia we were down close to 50% as we changed out distribution in China. During the quarter we acquired our distributor in Japan. We’ve changed our large distributor in China who we were quite unhappy with, with a number of more regional players, and while we don’t expect a lot of year-on-year growth in Asia in Q2 we don’t expect any sort of significant decline that we saw in Q1. So if the rest of Dental Equipment continues to perform the way it did in the first quarter, we would expect a nice sequential improvement in core growth here in Dental Equipment.

Deane Dray - Goldman Sachs

So, there’s less of a carryover into the second quarter on Asia Pacific?

Dan Comas

We’ve changed out the distribution in the case of Japan. We now have control of the distribution, and we would expect that we’d see an improved performance here in the second quarter.

Deane Dray - Goldman Sachs

Then over on Tektronix, Larry, it was interesting you used the term that’s usually our line about over delivering, but it’s nice to hear that the integration is going well, but could you give us the next layer of detail? I’d be very interested, as it applies to DBS? How much of DBS is going into the pure manufacturing equation at Tektronix, which was already operating it at healthy margins? Also, what about R&D? It’s a big chunk of their expense. Is there a DBS opportunity in how they spend on R&D?

Larry Culp

Deane, a couple of things. Let me try to tackle all of that. I think with where we are today, I would say we are very pleased with the short-term performance in the business, and I would say we are very confident about the long-term potential there. Clearly when you look at the first quarter very solid top-line performance, core growth, mid single-digits, better profit performance than we had anticipated. I would say it’s very early. The DBS efforts have taken some root there. This is an organization that was quite comfortable with Lean. I think we’re sharpening the point on a number of actions in that regard. Clearly, we get a benefit from the consolidated purchasing activities, which have moved forward at a breakneck pace, so very pleased in that regard.

I think, as we look at the full year, we will as we indicated in the prepared remarks, do a little bit better on the profit side. We did not expect this a year ago to be a big growth year for them. Clearly, you heard them talk about some issues that they were having in Japan and the network diagnostics. That’ll be something we wrestle with during the course of the year and obviously it’s a big transition as well, which will perhaps create a little bit of noise here and there.

But again, I think we’re ahead of the $40 million target on the cost reductions and feel very good about the way things are playing out this year.

To your questions which I think are really more long-term and I can give you an update because we were just out there three weeks ago doing the strategy plan reviews. I think the strategic logic is very much intact. This is an outstanding company, great fit for us, clearly, a smart place for us to put money to work. I think we saw opportunities galore here, really many places for us to deploy DBS, Deane.

You talked about R&D. I wouldn’t say that we are necessarily going to change the way they do R&D because I think they do an outstanding job. They’re probably one of our benchmarks already. But I think their focus on technology can be more tightly coupled with a focus on the customer, with a focus on applications. That’s something that we’re going to bring, which is very much a part of DBS as well, which I think will help them out.

I also think our operating model of pushing decisions to the point of impact is going to perhaps liberate the operations in Europe and throughout Asia that have probably been tightly tethered to Beaverton in a number of instances. The team’s all on board on this, it’s the way we operate, I have shown this to the tech team, they get it, they’re excited about it and I think this will just make us a quicker, more market-focused organization.

The strat plan unveiled a number of additional details about the Fluke and Fluke Network synergies in terms of products and go-to-market, more to come there as have something to show for that. So, all in all, I think DBS will have a lot of impact, but it’s an outstanding company to start with and we’re excited about what will happen this year and in the future.

Deane Dray - Goldman Sachs

Terrific. Just to your point about the synergies, has that changed? I mean is that additive to your assumption at $40 million? Are there revenue synergies between Tektronix and FNET that look a little more attractive than they did previously?

Larry Culp

Yes, but we’re not going to really count the revenue synergies to overdrive the targets this year. That will all be on the cost side.

Operator

We’ll take our next question from Bob Cornell - Lehman Brothers.

Robert Cornell - Lehman Brothers

Back on the current organic growth and outlook in Motion, for example, I was a little surprised when you say aerospace, defense, flat panel was good but the standard product was soft and then mentioned the orders were double-digit. I mean, why were the standard products soft in the first quarter? It is surprising.

Larry Culp

I don’t disagree, Bob. I think we saw a number of customers come in, lay the orders in -- that’s where we saw a lot of the strength. But by the same token, we were really seeing requested deliveries extend more than we would traditionally see and whether that’s folks bringing their inventories down, being cautious; every customer has a different story.

I think the approach the team is taking is we’re going to be pleased with that backlog build, not be overconfident about what it might suggest for the year and make sure that we continue to go get the business we can, but in turn lay in the cost actions to make sure that we drive profitability this year even if things happen to take a turn for the worse.

Robert Cornell - Lehman Brothers

You haven’t mentioned how the overall economic backdrop in this quarter rolled out relative to expectations. In the fourth quarter, you did mention that you had begun to anticipate the possibility of some weakness and taken some actions and so forth. I mean, how did this quarter roll out in sort of a macro view relative to expectations, where were the pluses and minuses?

Larry Culp

I would say that on balance, Bob, it’s hard to point much in the macro that was wildly different. I mean clearly, if you look at the way the first quarter played out, we saw strong performance in a number of our key growth platforms but overall, I think a softer start to the year.

I would really point to Dental there, as we suggested. At Sybron the way the business is operated, we’ve tended to have very strong quarters at the end of the sales compensation year. We saw that in ‘06, we saw that in ’07 and then, the following quarter can be a little soft. I think we saw that effect. Now, it’s hard to parse that from the slower demand. I think a lot of folks are talking about and seeing in the U.S. around some of the higher end, some of the elective procedures. We’re heartened by the fact that Damon is still up double-digit, but we saw that slow down.

I think, as Dan reiterated a moment ago, the equipment business is where I think some people would have thought, well that might be what gets hit first, was actually very good in the U.S., it was very good in Europe, it was the changes in distribution in Asia, which took a little longer to nail down, probably had a little bit more impact than we might have anticipated, but that’s really on our books, can’t lay that on the macro scene.

You put all that together I think we still feel good about where dental will be, both consumables and equipment in ‘08. I think we saw continued softness in the U.S., in the businesses that we’ve been talking about, tools was a little bit weaker at retail despite the strong ups at Lowe’s. We talked about motion a moment ago. The Accu-Sort push outs, I think, are related to the macro environment but again, those are a couple of customers. Perhaps execution with respect to the project, perhaps a little bit of budgetary cautiousness, it’s hard to pin that down.

But we knew the U.S. was likely to be softer as opposed to stronger in the first quarter and I think that’s what played out in some of these numbers. But again, that coupled with a few things that are controllable by us and we know will be better in the second quarter, better in the second half, I think give us the optimism to say that we see sequential improvement in the second quarter and through the year from this starting point with respect to organic growth.

Robert Cornell - Lehman Brothers

My last question, I mean, you gave the second quarter guidance and you reiterated full year. What is the organic growth expectation in guidance for the second quarter and the year at this point?

Larry Culp

I would think at this point, for the rest of the year, we should be in the mid single-digit range.

Operator

We’ll take our next question from Scott Davis - Morgan Stanley.

Scott Davis - Morgan Stanley

A couple of little things. Can you remind us why Sata Tools was weak in the quarter?

Dan Comas

What did we say there before?

Larry Culp

Sata was actually up double-digit.

Scott Davis - Morgan Stanley

I thought you said down double-digit.

Larry Culp

No. It was up double-digit.

Dan Comas

No, up double-digit.

Larry Culp

We were looking at each other.

Scott Davis - Morgan Stanley

Then I heard you incorrectly. Then that kind of answers that question, because I was a little taken back. It’s early in earnings and I’m already hearing things opposite.

Larry Culp

You were taken aback?

Scott Davis - Morgan Stanley

Yes, sorry. Guys, can you talk a little bit about the cycle history at Tektronix? I mean, I understand the driver here being R&D more than kind of tech budgets overall, and that it is more stable. But is there any history you can talk about of the volatility or variability of the order patterns there?

Larry Culp

I think when we look at TEK, clearly I mean, you really have two businesses, right? You’ve got the core Tektronix business and you have the communications business, and I think they tend to operate, Scott, to different beats. Clearly you’re going to see a little bit more of that on the communications side. We have two pieces there. We talked about network diagnostics, which is where we sell primarily into the equipment manufacturers, that has been soft and I think we would anticipate that on balance that will be soft through the course of this year. That tends to be more of a book and ship type business.

Then our management business, where we sell principally to the operators is more of a longer cycle business where you have contracts, operating agreements and the like. That’s a healthy, much more stable business, unfortunately a larger portion of that side of TEK.

I would say that on the core TEK business, it tends to operate in a more traditional way given it doesn’t have that exposure to some of the high-tech production volatility that other businesses might.

Dan Comas

Scott, I would add that one of the things is we did due diligence as best we could and one of the things we talked about with the company is if you look back over the past decade, there’s always been more volatility in orders than shipments with Tektronix. Particularly in the communications business, they would get large blanket orders, kind of service work that would get worked on over a 12- or 24-month period. They unfortunately were in the habit of reporting orders; one of the things they said to us during diligence, they wished they never got into that habit. There’s clearly more volatility in orders, but if you get down to shipments, it is less.

Scott Davis - Morgan Stanley

A last question on Tektronix. When you talk about the fairly high R&D number and then just on a back of a piece of paper I’m calculating out that it must be 10% of sales or something in that range, give or take. But the, as sales levels, is that a fixed number or do you get leverage off of that? Meaning when you are able to grow sales, do you feel like you’ve got the scale in that R&D facility to kind of hold that expense pretty steady or does that need to grow with sales?

Larry Culp

Well I think as we find additional opportunities, Scott, we’re obviously going to fund that, but I think there’s a lot of leverage to be had here. Again, this gets back to the comment I made earlier to Deane with respect to both linking the R&D effort more tightly to the marketplace, and in turn being more aggressive, being more effective in our go-to-market activities. Some of that is just in a more decentralized, more market-based approach in how we sell in market but there are a number of other things that I think we can do here to help the great R&D engine that Tektronix has had be more meaningful to shareholders.

Operator

We’ll go next to Jeff Sprague - Citigroup.

Jeff Sprague - Citigroup

On the TEK digestion, are we all done now with the non-cash charges and all that?

Dan Comas

As we said in December and January, there is about $0.12 or $0.13 for the year. We had $0.06 of that charge in the first quarter, so there’ll be about $0.06 or $0.07 of that through the balance of the year and we’ll be done in the fourth quarter with it.

Jeff Sprague - Citigroup

On Motion I was unclear, Larry, the comment about double-digit orders in March, was that just relating to the standard motors where you had the weakness or was that entirely across all of Motion?

Dan Comas

Jeff, that was across all of Motion and it was for the first quarter.

Jeff Sprague - Citigroup

On TEK I was wondering if you could elaborate, you had said that the mid single-digit strength in the first quarter was stronger than you were expecting over the balance of the year on TEK as a standalone basis. Would you expect revenues to actually be contracting here now for a quarter or two as you digest, or flattish, or what’s kind of the basic direction?

Larry Culp

I think as you look through the rest of the year Jeff, I think we’ll be up but we won’t be up at the rate that we were in the first quarter.

Jeff Sprague - Citigroup

Finally on Dental, you called out possible benefit from accelerated depreciation. Does that imply that you’ve actually seen some anticipatory weakness in equipment sales? Do you think people are holding back waiting for that? Was there something discernible there around larger equipment sales that you can call out?

Larry Culp

Jeff from where we sit, and I’ve asked that question myself of a lot of folks, I mean we had a good quarter with respect to large ticket equipment in the U.S., particularly given how strong the second half of last year was. Everybody that I talk to who has been in this business has seen these type of plays in the dental world before are of the view that as the second half is upon us dentists, their accountants, understand the opportunity when we began to make plans to take full advantage of the accelerated depreciation toward the end of the year.

So I think we won’t see much; hopefully we won’t see a fall-off, but I think as the year plays out it will be a real positive for us; it should be a positive for us with the digital imaging products as well.

Jeff Sprague - Citigroup

Just on the cosmetic elective side, I guess you called out a little bit of softness there?

Dan Comas

Yes.

Jeff Sprague - Citigroup

Larry, what do you see going on in the M&A pipeline?

Larry Culp

We had our review just on Tuesday here Jeff. Clearly there is a bit of a seachange going on with respect to certain potential competitors falling to the sidelines, but I think on balance we’ve looked at this year as the year in which we’re likely to have another big year with respect to new businesses coming on board.

Obviously if things continue to get sloppy, that’s a net positive for us in this regard; we have every intention of taking full advantage of that. So on balance, I am very encouraged about where we are positioned, how we are positioned for this to be another active year on the M&A front.

Operator

We’ll take our next question from Nicole Parent - Credit Suisse.

Nicole Parent - Credit Suisse

Just to follow up on Jeff’s question on Dental, I can understand on the equipment side based on the distribution issues in Asia improving, you could understand why that should pick up over the balance of the year. Could you maybe give us a sense, with cosmetics a little bit soft in the first quarter, differentiate between consumables and equipment and then also kind of sensitivity to the high end versus mid or lower end?

Larry Culp

With respect to equipment?

Nicole Parent - Credit Suisse

I would say yes, on that front, sure. I’d also just say, when you think about the cosmetic size and restorative and orthodontics, I guess sensitivity of the customer base to changes in discretionary income?

Larry Culp

I think with respect to equipment again, we saw a very solid quarter in the U.S. and in Europe. I think the softness that we are referring to at the high-end procedure-wise, really did not present itself in our equipment sales. I think that was particularly true given what we’ve seen in the 3D world where obviously this is a significant six-digit investment for doctors.

So, when we talk about some of the elective procedure volumes softening up, case starts and the like, I think that on balance it was an impact we saw on the consumable side. Again, it’s hard to segment that off from the effect of the sales comp year at Sybron, both in Ormco and Kerr, but we are watching that space very carefully; I’ll be out with the team next week in fact making sure that we are going for all the growth that we can, but also supporting our investments internationally where I think we have a lot of growth that we have yet to tap into.

Nicole Parent - Credit Suisse

A follow up on M&A. With respect to seller viewpoints on willingness to come down on price, given the tightness in the credit markets, the U.S. slowing, have you seen any willingness on the part of sellers to come down and negotiate more, or are they still looking in the rearview mirror?

Dan Comas

I would say over the past quarter it’s gotten better, but I think there is more room to go, and that’s just our sense of it. We’ve had some discussions over the last 90 days; sellers have come down and maybe not in our view enough. So I think its trending the right way, and in our view I think it continues to get better here in the next quarter or too.

Nicole Parent - Credit Suisse

One last one just on motion with the orders up double-digits. Could you maybe elaborate on the difference between elevator growth versus aerospace and defense, I mean particularly in light of UTX this morning, I think for the first time acknowledging it looks like commercial is going to slow in the U.S. and Europe?

Larry Culp

I think if we just speak to what we have seen here of late, both of those customers/markets were very healthy in the first quarter.

Dan Comas

But in terms of going forward, Nicole, if you just looked at the order book that we have in Motion today we would have a extremely robust view for growth for Motion for the balance of the year, but we’re discounting that because of comments -- if you look at the order book and be very optimistic but I think given the environment, given some comments from customers we’ve sort of scaled that back down, if you will.

Operator

We’ll take our next question from John Baliotti - FTN Midwest Securities.

John Baliotti - FTN Midwest Securities

A question about working capital and free cash flow. I mean certainly you’ve still put up a respectable conversion. I’m sure knowing you guys that you are not comfortable with where the working capital was in the quarter, especially relative to last year, but my calculation if you get back to the turns you were at the end of last year, it’s a couple of hundred million dollars of free cash flow just on its own and I am wondering if that’s realistic? I mean obviously doing an acquisition towards the end of the year there is some things you take on there that you got to digest, but is that realistic do you think at the end of the year?

Dan Comas

John, what I would say is I agree with your point of view we were not happy with our working capital performance in the quarter. Our expectation is it will improve. We’ve talked about $5 per share of free cash flow for the year, and working capital needs to improve to hit that target and we’re confident that it will.

Larry Culp

John, if I can just add to that and I would agree. We’re not happy with the way the quarter played out. I mean at 106%, I think that’s still strong conversion. Keep in mind that we had $20 million of cash charges at TEK of a one-time nature; you give us that, obviously the conversion is on par with a year ago.

I don’t want to rationalize the performance though with the Easter impact on collections and the backlog build perhaps having some impact on inventory. It’s not the way I think about it, it’s not the way we think about it, it’s certainly not the conversation we’re having internally. We’re going to be driving DBS fundamentals here on the process side, it just comes down to daily management, we’d like to making sure we’re getting results there that we want. So, I think we’re going to do better there and we’re already seeing that with respect to the European collections. Again, I think to the point Dan is making about $5 a share from a cash perspective, we’re confident we’re going to have a very strong year this year.

John Baliotti - FTN Midwest Securities

I would just imagine that given what you’re able to do historically with DBS that mid single-digit core growth along with the recent acquisition of Tektronix that it seems like getting back to where you were just on a turns basis last year should not be an insurmountable task.

Larry Culp

We have work to do, but we don’t have a disagreement with you.

Operator

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

John Inch - Merrill Lynch

Environmental continues to be the star of the portfolio, tough comps though, heading into the rest of this year. Could you guys talk a little bit about why you think those numbers continue to stay good,and maybe a little bit more color on what’s going on there?

Larry Culp

I think clearly, John, the strength we’ve seen at Water really across the board at Hach-Lange, at Trojan, with the new business ChemTreat, however you want to cut it by geography, by product category, just very strong momentum; a very good tone. Clearly, we’re going to watch carefully what happens here in the U.S. and in Western Europe, but they’ve also I think have probably done as good a job as any Danaher company in stepping up their investments, stepping up their execution, not only in China -- I know we talk about that a lot -- but really throughout Asia-Pac, Eastern Europe, Latin America. There are a number of things that I think will allow us to accelerate some of our growth in particular regions this year as a result.

I think it’s the momentum that they have, it’s the absence of even a murmur right now of softness in the core markets and it’s the international exposure that we have that gives us confidence that again our water quality business will be a real star for us this year and one of our growth leaders.

John Inch - Merrill Lynch

Larry, you go back to the pipeline discussion and it just strikes me these businesses are showing themselves to be, at least for now, relatively impervious to this economic malaise. What about the dynamic of adding maybe some critical mass to some of these areas? Is it that the deals are just too expensive? I know ChemTreat was going to be isolated, but what about sort of building some of this portfolio out over time and if not the U.S. other parts of the world, how should we think about those opportunities?

Larry Culp

John, we’ve been in the market for good water quality businesses for 15 years and that doesn’t change; I think both with respect to value and frankly quality of the asset anything that is in the strike zone we are going to go after. No change in approach there.

John Inch - Merrill Lynch

I’m just wondering if the market opportunity lends itself now given valuations to maybe executing a transaction sooner versus later.

Larry Culp

Well I think we are optimistic, as Dan suggested, I think in a number of areas expectations are coming in but that doesn’t suggest at least at this point that they’ve come in where they need to for us to make something happen.

John Inch - Merrill Lynch

I understand.

Larry Culp

John, rest assured, it’s a high priority for us; we work that very hard on a daily basis.

John Inch - Merrill Lynch

If you were to look at your organic growth, do you have a sense of what was it in the U.S. versus Europe versus maybe Asia or rest of world?

Dan Comas

John, Asia and Latin America continue to be very strong probably high single-digit. The U.S. was flat to probably slightly down and Europe, probably a modest decile from Q4 but still pretty healthy, most of our larger businesses continue to perform well in Europe.

John Inch - Merrill Lynch

So, you don’t see any warnings signs in your European businesses, just based on mix or anything like that?

Dan Comas

Again, it’s slightly less; a little less growth than we saw in the second half but still -- and Larry and I have been there a number of times in the quarter, and a good performance in the first quarter and still a pretty positive outlook.

John Inch - Merrill Lynch

If you go back to ‘01, I’m juxtaposing the $60 million charge you took as part of that downturn versus say last quarter’s $13 million and I guess there is a little bit more baked in this quarter and expected over the second quarter.

Larry, I know the portfolio has changed, you’re obviously a much bigger company. Would you say that the actions you have taken kind of position you comparably to the results of the actions that you took heading into the recession of ’01? How should we be thinking about Danaher’s positioning at this point? Because you were early in taking this action, I think a lot of us are trying to surmise are you going to be more permeable versus other companies that may be more late to the action story?

Dan Comas

John, one difference there is -- and then obviously for Larry -- but the restructuring charge we took in 2001 was kind of a cash restructuring charge to reposition our businesses. The charge we talked about here in the balance of the year is a non-cash acquisition charge related to Tektronix, and the restructuring charges we took in Q4 and Q1 and we plan to take in Q2 are part of our continuing earnings per share.

John Inch - Merrill Lynch

No, I understand; but I’m still saying 13 versus the 60, that was sort of the comparison. It is a smaller number and obviously we wonder does that mean you are going to have to take more if this recession or whatever you want to call it in the States actually gets a little bit worse? That’s all.

Larry Culp

Right, well again, I think it’s a bit apples and oranges, but if you were think about the fourth quarter of ‘07 compared to what we did back then I would encourage you, John, to incorporate the $10 million that we took in the first quarter of this year and perhaps the $10 million we’re going to take in the second quarter. That’s a basket of activity, if you will, that we’re just going to take along the way here to make sure that we’re prepared to deliver to outperform as this environment plays out.

I mean, I think as we look at it, again there are a lot of things to be encouraged by: the growth drivers, the international side, the backlog build, the U.S. stimulus coming. But we’ve got to focus on what we can control, so we’re trying to make sure we protect our growth investments, short-term product launches, AQT, some other things that are forthcoming, the go-to-market investments; we talked about emerging markets. Certainly the long-term opportunities as well, be it M&A, be it the technology investments.

But to make sure that we are aligning the cost structure with the reality and with the potential downside risks. So, that’s what we can control. Are we prudent? Are we are overly conservative? You choose. But I think what we want to do is have a balanced approach that allows us to perform, deliver in the short-term here and over the long haul.

John Inch - Merrill Lynch

Balance is what we want to see. Thank you very much.

Operator

We’ll take our next question from Nigel Coe - Deutsche Bank.

Nigel Coe - Deutsche Bank

I guess with global growth probably on a downward path there’s probably a risk that core growth remains closer to 2% than 5%. How much buffer is there in your full year guidance? I mean, can you still make the range with 2% core growth for the full year?

Dan Comas

We did in the first quarter; we delivered 15% earnings growth on 2% and the high end of the range is 15% for the full year. Now I wouldn’t want to count on it, but I think it suggests that it doesn’t have to be 5% for us to deliver our range; it’s probably somewhere between the two numbers.

Nigel Coe - Deutsche Bank

The healthcare margins, I think you called out three factors: you called out AQT, the euro, and I think Dental. Could you just maybe put some numbers around those three factors?

Dan Comas

Well, I think the impact of flat revenues in Dental, I’m not sure I’d be able to quantify it right now; I could probably do it offline. I think on Radiometer we’ve had the lowest operating margins at Radiometer since the time of the acquisition and that was entirely driven by the launch of AQT where we’re still -- and this will be the last quarter -- we’ve got a lot of R&D and a lot of launch costs. That R&D has already begun to ramp down so you will see Radiometer’s margins accelerate.

Radiometer’s margins year-on-year were down 300 basis points centered around the launch and that will go away here starting in the second quarter.

Nigel Coe - Deutsche Bank

Maybe the way to think about that would be Radiometer gets back to maybe flat margins by the second half of the year or maybe down slightly?

Dan Comas

I think that’s fair. I think for the balance of the year Radiometer will be relatively flat, still with a lot of launch costs for the AQT line.

Nigel Coe - Deutsche Bank

Finally on FNET, you talked about some lumpiness in the prior year, but is there any underlying weakness at all in the telecom markets that you can see?

Larry Culp

Well keep in mind, Nigel, that at FNET we really serve the enterprise -- the telecom, the operators -- are really more of the focus for us at TEK. I think the enterprise environment from our view has decelerated. There were a couple of bright lights, a couple of areas of concern so it’s kind of a mixed read right now. But with the very tough comp we had, a small part of the business but when we get these big one-off projects we love them when we have them; obviously it nicks us from a growth perspective the following year.

I think from a TEK perspective clearly we see the equipment manufacturers going through some difficult times right now. But with respect to the operators there are opportunities; they are spending money around technology and that’s what that business is about, that’s why we acquired it.

Nigel Coe - Deutsche Bank

Just one quick one as well on Tools in the U.S., maybe Craftsman. I mean is this all due to point-of-sales weakness or are there some inventory adjustments going on there as well?

Larry Culp

It’s by and large POS.

Operator

We’ll take our last question from Richard Eastman - Robert Baird.

Richard Eastman - Robert Baird

On the MedTech business I guess you went a long way there in explaining the operating margin decline. Is the DBS driven improvement at Leica and KaVo is that on plan in the quarter as we push into ‘08?

Larry Culp

I would say Leica is performing very well in that regard, Rick. I would say that at KaVo, particularly in Germany, we’ve got some improvements opportunities that we’re all over. Phil’s there this week in fact making sure that as we gear up for the next leg here in the second quarter that we’re very focused on driving those deeper to fundamental changes to our process both with respect to cost and the P&L and the balance sheet.

Richard Eastman - Robert Baird

As we’ve made the changes in distribution on the equipment side in Asia and you mentioned Japan and China in particular, have there been -- I realize the sales impact of those changes -- but has there been some disproportionate cost impact there as well?

Dan Comas

I can’t quantify it but you’re right, I mean there clearly would be some impact of that.

Richard Eastman - Robert Baird

Lastly from a consolidated perspective, it looks like pricing added about a point to the quarter. Should we assume that continues for the balance of the year?

Dan Comas

It’s just under 1.5 and that’s probably the right way to model it for the balance of the year.

Operator

That does conclude the question-and-answer session today. At this time, I’d like to turn the call back to Mr. Andy Wilson for any additional or closing remarks.

Andy Wilson

Just as a reminder, the replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally; confirmation code 2384639. I want to thank everybody for joining us and as always we are available for questions after the call. Thank you.

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Source: Danaher Corporation Q1 2008 Earnings Call Transcript
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