Danaher Corp (DHR) 2007 Q4 法說會逐字稿

Good morning.

I will be your conference facilitator today.

At this time I would like to welcome everyone to the Danaher Corporation fourth quarter and full year 2007 earnings results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer period.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr.

Andy Wilson, Vice President of Investor Relations.

Mr.

Wilson, you may begin your conference.

Thanks, Theresa and 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've previously discussed, included in Tektronix results are certain non-cash acquisition related charges for purchased in process research and development and a fair value adjustments 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 28, 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.

The replay number is 888-203-1112 in the U.S.

And 719-457-0820 internationally, and the confirmation code is 9944717.

I'll repeat this information at the end of the call for late arrivals.

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 nd uncertainties including those set fourth 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 relating to those measures can be found in the investor section of our website under the subheading, earnings.

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

Thanks, Andy.

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.

2007 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 off 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 years comparable adjusted earnings per diluted share from continuing operations of $0.94.

For the full year, earnings per share from 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 reductions in certain international jurisdictions.

Excluding these gains, as well as the 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 in 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 these same factors.

SG&A expenses for the fourth quarter were [24.5%] of sales compared to 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 salesforce 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 months ended December 31, 2007, was 6.9% and 5.5% respectively.

As compared to 4.2% and 4.6% a year ago.

This increase was primarily due to the mix of newer businesses with higher R&D structures as well as a $60 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 dilutive impact on the quarters operating margins.

For the year, operating margins were 15.8% in line with 2006.

Operating margins adjusted to 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 in borrowings related to the acquisition of Tektronix.

Our effective income tax rate for the fourth quarter was 26.3% compared to 23.4% in the fourth quarter of '06.

The reduction in 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 was $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 the collection of indemnity proceeds, the impact of income tax reductions in certain international jurisdictions and the sales 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 periods in 20006.

Including a gain on the sale of the power quality business, in July of this year, in July of '07, full year net income was $1.4 billion.

Record operating cash flows 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 has 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 a 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, Professional Instrumentation revenues 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 the 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 businesses.

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

Environmental platform revenues for the quarter grew 22.5% with core revenues up 5.5%.

For the full year, environmental revenues increased 16.5% with revenues from existing businesses up 6%.

Water quality core revenues grew at a high single digit rate in the fourth quarter led by continued momentum from high quality process and lab products, particularly in China where we continue to expand our salesforce initiatives.

Sales across North America were also strong and Hach/Lange had posted its best quarter of the year with double digit growth.

At Trojan, we achieved double digit revenue growth for the year, with strength across most geographies and with particular success in both drinking and wastewater applications.

During the fourth quarter we shipped a multimillion 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 with the business achieving high single digit revenue growth in the quarter compared to its results in fourth quarter of '06 as a standalone Company.

Gilbarco/Veeder-Root quarter 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 improvements in the 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 growth contributed 8%.

Fluke core revenues grew a a high single digit rate for the quarter with solid international growth particularly in China, Latin America, and Australia, where sales were up double digit.

During the quarter, Flukes innovation efforts lead to the introduction of the new TI10 and TI25 breakthrough 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 and Measurement world magazine for its new benchtop digital multimeter design in our China development center.

Fluke Network sales were flat for the quarter, as a result of several large prior year orders that did not reoccur in 2007.

Avnet 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 so we're 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 core 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%.

MedTech operating margins for the fourth quarter were 15.3% compared to 14.6% the same period a year ago.

Absent the negative impact of approximately 120 basis points related to newly acquired businesses, adjusted margins for the fourth quarter of 2007 improved approximately 190 basis points over the fourth quarter of 2006, primarily driven by leverage from higher revenues.

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 in 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 resin restoring materials such as composites, bonding agents, and cements.

We launched the product back in August and since that time Kerr it's incurred 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 week 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 as ISI ICAT 3D imaging systems both in the U.S.

and in Europe where 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 firsthand piece in the market that combines the ergonomics of turbines with the power of electrics.

We believe this handpiece will set a new standard in the market and represents an excellent example of using our voice of customer and innovation DBS tools to create what we believe to be a multi-million dollar 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 instrument placements throughout Europe.

HUT, our point of 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 U.S.

Clinical trials are continuing and we obviously look forward to sharing early market feedback with you in the near future.

Like our micro systems core revenues grow at a low double digit rate in the quarter and a midteens rate for the year, driven by robust microscopy 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.

And Leica Biosystems business continued 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 the innovative bond immunohistro chemistry advanced standing systems, as well as increased sales of specimen preparation handling equipment a result of the successful integration of the Vision and Leica salesforces.

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, as 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 salesforce 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 increased 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 postal 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 marketing business was up mid single digits driven by strong performance in our laser business which grew more than 20%.

The primary growth driver has been the CO2 laser platform which provides permanent marking on a variety of surfaces through high speed, steered beam technology.

This platform which replace 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 with core revenues up 0.5 of 1%.

For the full year motion increased 2.5% with revenues from core businesses declining 1%.

Motion performance continues to be adversely impacted by softness in its tech end markets particularly in Semicon 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 [Dissencrop].

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 contract with Hagglunds, a division of BAE Systems for the design, development, and delivery of an electric propulsion system for military vehicles.

Motions custom design capabilities for high power motors and drives is proving to be very attractive to 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 hand 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.

Mechanics hand tool revenues declined 1.5% in the quarter.

For the year sales increased 1%.

Double digit growth at Lowe's helped to partially offset declines in sales to Sears, K-mart during the quarter.

Looking back on 2007 we see a year where we successfully reached 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 continue to see strength across most of the portfolio.

We are, however, well aware of the current global economic concerns and accordingly took some 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 to 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.

Thank you, Larry.

That concludes our formal comments.

We're now ready for questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go first to John Inch with Merrill Lynch.

Thank you, good morning.

Good morning, John.

Larry, 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 discernible change in any of your businesses other than the U.S.

or Europe or anywhere else?

John, I think since we saw you in December, obviously, the headlines have been consistently and persistently negative, but on balance, what we're 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.

Again, not that we're putting our heads in the sand but you'd look at the way we finish with a lot of the businesses , we have but what, 2.5 weeks of bookings so it's a little hard to read too much into January.

Obviously, we ended up being a little softer I think 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 the U.S, I think we've seen a little bit of I would say modest slowing in a place or two but really nothing that I think would correlate at this point with the headlines that are out there.

So I think we feel good about where

Yes, Larry if you go back to the recession of '01 when Danaher ultimately had to take a charge and downsize to a degree, I mean you're a much different Company.

That said there's alway I would think as part of your scenario planning you'd have to be thinking about those possibilities and even the possibilities that the information you're getting from the field perhaps is lagging or it's being filtered in some manner.

Can you talk about just sort of 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 but some of it start to turn South more quickly?

Yes.

You bet, John, and I think it really does start with the portfolio, right?

I mean, so many of the wonderful businesses that we have today like our medical technology businesses, most of or at least half of what we call test and measurement, our environmental businesses are a much bigger part of the portfolio today, so it's a very different Danaher.

I think it's a stronger portfolio than we had last time we saw a slowdown in terms of the economy.

When we were together in December what we tried 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 of DBS, plus obviously all of the procurement activity that we have going on.

As we watch the trip wires, if you will, in all of the businesses and we are watching everything we can right now, our own numbers and numbers with our distributor partners, our customers and the like, we will be 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 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 the 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 of the organization.

I think that is a sort of thing that should be evidence to you, John, that we're going to be proactive.

We're not going to wait necessarily until it's too late to do the things that we need to do to protect our profitability, our earnings as best we can in a, probably in a more uncertain environment here in '08.

Yes, thank you.

And just 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 and being able to redeploy the utilization?

John, 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 U.S.

consumer.

Thank you.

Thanks, John.

Thank you, John.

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

Thank you, good morning.

Good morning.

Larry just to 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 the something that you had planned all along in terms of headcount reductions?

I wouldn't say that those were actions that were in the plan, Deane.

I think as 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 U.S.

consumer and some of the OEM facing businesses and industrial technologies, we were making adjustments of 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 headcount reductions and the attendant facility moves, but we thought that was the right thing to do for those businesses.

We thought it was the right thing to do in, frankly in preparation for '08.

Great, and also, I'll point out that those charges were also flow through your operating results; that's correct?

Oh, yes.

We call it 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're already into not only contingency planning across-the-board but taking actions in those businesses where it's appropriate.

In many other businesses I would say we're prepared but we want to make sure we don't move in a way that hurts our growth prospects in '08.

Deane, maybe to just further quantify the activities, between the restructuring and the fire and most of it being the restructuring activities we took, probably -- it impacted the fourth quarter margins Corporatewide by almost 50 basis points.

Great, and then Larry, with regard to these contingency plans, and I'm sure you're hesitant to put specific numbers on it but just give us a sense of in priorities of business of where and how you can selectively pull back some discretionary spending if it works out that that needs to be done?

Well, rest assured, Deane, 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, right?

We've got strategies and budgets that are tailored to each business and its situation, but again whether we're talking about investments in headcount, 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 of the good growth investments that 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.

Great, thank you.

Thank you, Deane.

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

Thanks, good morning.

Good morning, Jeff.

I'll move into another topic but not to beat this theme, but just one other thought on what the you're observing.

Obviously, well, maybe not obviously but many of us would remember that before the prior slowdown, 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 has obviously changed a lot but when you look at that little bit of slowing around the edges that you said you saw in some businesses, were those the businesses that were flashing the signal last cycle?

Well, I think when we talk about where we saw the softness, obviously, 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 U.S.

consumer.

That go around versus this time around.

I think we're watching Gilbarco very closely given that ultimately they serve a number of retailers and obviously the retailers have the exposure of maybe alter it, they may adjust their capital budgets given what consumers are doing and we're also watching product ID very carefully.

But obviously, we didn't have either of those two businesses with us last time around.

Those were businesses fortunately we were able to acquire in the downturn from some folks that at the time were I think less prepared to preserve their portfolio, preserve their strategic options when things got soft.

And Jeff, you'll remember the last time the business where we had the most trouble, the biggest drop, and where we took the largest hit was the power quality business, which we divested this past summer.

Terrific, and then 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 standalone basis?

Yes, I think I wouldn't say it was muddy per se.

I mean, revenues were, 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, but I think all in all, we feel very good about that investment, and that acquisition, are excited about the way that team has embraced Danaher, DBS, Fluke and Fluke Networks and I think we're going to be very happy with having Tech on board here, Jeff.

I'm very pleased we were able to bring them in last year.

And then just finally, on MedTech, it did accelerate nicely.

Larry, you called out a couple things, Europe and a few others but it's always kind of tough to size those as you're bouncing through them.

What do you think was really kind of the main stand out performer there that kind of drove the uptick in the growth rate?

Well, I think Leica is just, they just had a terrific 2007.

I don't know how to describe it otherwise.

Virtually across-the-board as you look product -- by product and geography.

Radiometer as I mentioned was also very strong.

Cybron came in and contributed in the second half relative to the core calculations nicely, and we obviously don't, we don't yet include fully the Vision and the ISI contributions but they were also very helpful here, so very pleased with the MedTech performance and certainly if we are looking at a bumpy ride come '08, thrilled we've got $2.5 billion of MedTech businesses performing as they are currently.

Thanks a lot.

Thank you, Jeff.

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

Good morning.

Good morning, Nicole.

At the risk of piling on in the macro, I just have one quick follow-up on Europe.

When you think about kind of where you're seeing weakness and I think, Larry, in the press release you alluded to softness on the OEM side.

Is that just largely kind of the tech weakness that you had seen on the semiconductor side?

And then with respect to Europe, how you see that playing out?

Nicole, 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 [KoleMorgan] team just a week ago.

That situation is pretty steady right now.

It's very interesting.

I mean there's some puts and takes obviously.

It's not lighting the world on fire with respect to core growth.

We've got a number of good verticals like commercial construction workforce right now, the Otis program and the like, but it's steady.

It's not deteriorating.

And I think that's a really interesting data point, one we obviously are watching virtually daily, but it's an encouraging sign.

Okay.

Then I guess more specifically on Europe?

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.

Okay.

And just one last one on M&A.

Can you just give us kind of 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're thinking about it?

Sure.

Well, 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 sideline 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 dimension to a slowdown, and obviously as you saw, Nicole, 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 downturn so as we sit here in early January, the balance sheet is strong, you saw $1.5 billion of free cash.

I think we're in a good position to basically run our play book here from an M&A perspective.

Excellent, thank you.

You bet, Nicole, thank you.

We'll go next to Bob Cornell with Lehman Brothers.

Good morning, everybody.

Good morning, Bob.

Would you just flush out the thoughts you mentioned the combination of Tech and Fluke, just how they're starting to work together?

You mentioned some of the opportunities, can you give us a little more color there, please?

Sure, well, I got to be a little careful because I know there's some folks on the call who are looking for that page of the play book, but I think what we did first of all, Bob, as we always do is plug the senior team in to DBS.

They've gotten through the initial orientation.

They've begun to do their own ties in events to get a flavor for what this is all about.

They were already on the lean journey, so this was not a foreign concept to them.

They've taken it and just run hard.

We obviously have been plugging in our procurement activities as well, really from a Corporate perspective but Fluke had the point on that to make sure we get the vast majority of that $40 million and the early round cost reductions as Tech buys now as part of a $13 billion Company, not $1 billion Company.

From the strategic perspective, clearly, there are opportunities with Fluke and with Tech as they serve the same engineers bench through similar channels in a number of markets around the world, so we're 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 Networks team as we think about the communication side of Tektronix with F-Net so again both from a product and a go to market perspective, there are going to be things where I think each business is going to help the other.

And there's those four pillars just get stronger and stronger as we build the T&M business out.

You mentioned the Tech soft order book.

Have you had a chance to do further due diligence on that and have an increased perspective, maybe give a little color around that?

I think the additional exposure that we've had thus far is very consistent with what they said publicly and what we had discerned in our diligence.

We knew that some of 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 items they had flagged, as you may recall, is the weakness in Japan which has continued.

Just a comment on the Radiometer, new product, is that in the market?

I didn't quite get what the perspective was there.

Yes, I'm sorry, Bob, we are now shipping that product.

What's the impact?

How is it going, that type of thing?

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.

But we're as pumped up about that program as we ever have been.

How about the -- I didn't hear you say in guidance what the organic growth target was for the year.

I think you guided to mid single digits.

Is that still the target?

Yes, I think that's exactly -- there's no change in that regard, Bob, from what we said in December.

We thought we would 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 we have some of this headline risk out there.

Okay, I'll stay tuned.

We'll take our next question from Steve Tusa with JPMorgan.

Please go ahead.

Hi, good morning.

Hi, Steve.

Could you just run through what you'd expect from the different pieces of MedTech, maybe which you would be more worried about in a tough U.S.

environment?

I know that this business is thought of as less than cyclical, but I'm just curious as to which, there's got to be some slowing in a couple of them.

I'm just curious how you're thinking about that?

Yes, I think that's right, Steve.

Let's be clear.

This is the business that in all likelihood will be our best performer in if the economy does decelerate further, if the softness broadens.

I would say that Leica, in Radiometer, given that they serve research and clinical applications, are probably going to be well insulated, simply because I think budgets programs that they participate in tend to have a little bit longer cycle dynamic to them.

Once they start, they're hard to shut down.

They're 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 MedTech 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 caseloads.

We need to be watchful here relative to whether the U.S.

Consumer dynamic has any impact on the dental business.

Those that I talked to and respect have been in the business far longer than I have.

What I think supports the assumption in your question that it will be, there won't be a lot of impact but there could be some, so we want to just watch that given this is a new business for us and we obviously do have a large presence here in the U.S., but I think all in all, we like where these businesses are strategically.

We think they had a, they all had a very good fourth quarter and enter '08 with a lot of optimism.

We had a couple of kickoff sales meetings so far, and the sales teams are very enthusiastic about the new products and the programs here in '08.

And Steve, as you know, given these businesses are still relatively new to the portfolio, we think we've got a lot more room on the margin side, got over 100 basis points of core margin improvement in '07 and would be looking for sort of similar type result here in '08.

So I think you'll not only, steady growth but above average OP improvement here for the coming years.

Right and then 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 even grow earnings through a reasonably bad recession?

Well, Steve, I think that when you look at the portfolio, you look at this team, you look at DBS, come what may, we're confident we're going to outperform.

What that looks like, you can calibrate our model 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.

Great.

Thanks a lot.

You bet, Steve, thank you.

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

Hi, good morning, guys.

Good morning, Ann.

Sorry to beat the macro thing to death here.

That's okay.

But how are you thinking about organic growth by quarter or by progression through the year, Larry?

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?

Or do you think that interest rate cuts that are happening now may cause an acceleration in the back half, maybe you haven't thought about it by quarter but just the progression of your organic growth and how you're thinking about that?

Sure.

Well, I think right now, I mean it's obviously very early in the year.

We're watching all of our indicators, talking to as many customers as we can to make sure we understand how they're thinking about budgets and capital plans for the year.

What I'd say, Ann, is that as we shared with Bob a moment ago and 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'll get an offset as you talk about with JBS, but 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 whether 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 fiscal levers, policy levers being pulled aggressively right now.

That has to have positive impact when that hits.

I'm not sure our crystal ball is any better than anyone else's.

We want to be focused 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.

Well, thank you.

That's helpful on the Q1 kind of headwinds or tailwinds.

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 slowdown in the near term.

Is that kind of what you were insinuating on the product ID side?

Yes and yes, and I think that's a spot on look at where we might see some softening next, if you just look at the Danaher portfolio, and I think it's less on the consumables side per se but we watch that but also the new printers and new laser printer, our new TTO machine going into a production line, that presumably, if it's not a new product introduction, is something people could defer.

So, we try to look at those orders.

We break it down by consumables versus equipment to try to read in to what customers are really going to do here in '08.

I think right now we're watching that one very carefully.

And the other dynamic we have with our product ID and it is more within the AccuSort business, as you know they have large product business last couple of years with post office but also with people like UPS, and whether some of those projects get pushed out in sort of 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.

Okay, that's very helpful.

Thank you.

I'll talk to you offline.

Okay, thanks, Ann.

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

Good morning.

Hello, Scott.

Hi, Scott.

I was wondering if we could take a little bit of a step backwards and talk about 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 teaching if you could on that particular business?

Sure.

Well, keep in mind that you really break Tech down, roughly call it two-thirds, one-third.

Two-thirds being their core instrumentation business, oscilloscope and other benchtop products used often in research and development.

That's a business that is, Scott, 60, 65% direct.

The rest being through distribution, and it's in some but not all of those distribution channels where we often are listed literally side by side with Fluke.

So you'll see I think a fair bit of the channel synergy in that part of the business.

On the communication side, that is principally a direct business.

When we say communications, we're typically talking about network operators, carriers, and the like.

So it's a business where we have a lot of -- we have an ongoing conversation with many of the larger customers and obviously, do demand planning and the like with our distributor partners on an ongoing basis as well, and frankly that's been a strength of the Tech organization that we're keying the leverage going forward.

And when you think about revenue drivers, you think about is it Tech CapEx?

Is it new product cycles?

Is it, I mean, is Tech CapEx driven by the ebbs and 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.

Yes, sure.

I think you have I number of macro drivers there, but Tech is very focused in R&D, as opposed to manufacturing, and all of these companies obviously are wholly dependent on the next generation product being a winner, so 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, Scott, 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 in turn spending for Tech products.

On the communication side, obviously, we see the proliferation of services by the network operators and Tech helps these folks develop and deploy those new services.

So again that's something that we see as really a ubiquitous growth driver around the world for Tech and it's that combination that I think got us excited this was a good smart step in a new and adjacent market for our T&M business.

And that really serves to buffer the natural Tech cyclicality that's out there?

Is that what you're kind of implying?

I wouldn't say that it is completely buffered.

I think we acknowledge that to the extent that we serve some of those Tech markets if there's volatility or cyclicality there that we'll be exposed to some of that, but it's far more modest in R&D and so many of the other favorable attributes of the acquisition made this one that we felt very strongly about and obviously consummated.

Okay, that's actually very helpful.

Thanks, guys, appreciate it.

You bet.

Thanks, Scott.

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

Good morning.

Good morning.

A couple of quick questions.

The first one is just looking at your cash flows, the operating cash flows and free cash flows and as you just mentioned I think your free cash flows continue to exceed your net earnings by quite a margin but in terms of growth rates you're looking at 11% growth 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 a continuing operations and your net earnings include further acquisitions and how much of that has to do with the change in the pace at which you can generate cash flow?

The delta between your net earnings and your cash flows?

Growth?

Ajit, I'm not the sure exactly, if 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 a lot of benefit from a new acquisition coming in.

As you know Cybron 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.

Okay so when you're looking at the 21% growth in your net income and you're looking at the 10 to 11% growth in the operating cash flows and free cash flows, most the difference can be attributed to what you just mentioned?

Yes, and the dynamic of from '05 to '06 when the cash flow was up I believe in kind of the high 20s was because of the timing of the Cybron acquisition, when we brought it in and we got a lot of cash flow, that last quarter because of the difference in their year-end, we talked about that last year.

So if you look at kind of '05 to '07 which I think is a more representative look when you take out the impact of the timing of an acquisition, free cash flow is compounded at about 19% over that two year period.

Got it, okay, then just looking at the quality of your receivables right now and also the impact on some of the tightening in credit that's 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, whether it's a bank or anything at all?

And then secondly for your customers is there any change in tendency in your customers to actually delay the payments here?

Ajit, we have not seen any issues.

We're as you know an A plus credit, Tier 1 commercial paper issuer and we have not had any of the issues either in the U.S.

or in Europe.

Regarding the second point, nothing that I'm aware of.

I'm sure there's some instances somewhere where this tighter credit market is to be impacting a customer, but nothing to note.

Got it, and then just looking at your product ID business, I think you mentioned some pretty decent growth out of the laser products for marking and then you talked about the economic sensitivity of this business 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 sort of the major drivers that will sort of reaccelerate growth in this business?

Do we expect anything in the near term?

And do you plan to grow from the sort of fixed side and the desktop side in this business, more into the mobile side in this business?

Ajit, we don't have a desktop business in product ID.

We're really principally in marking and coating in production environments.

So there's really no opportunity I think in our view absent an acquisition to take that position off out of a production environment into a mobile environment.

I think the growth drivers there are going to continue to be good.

We didn't have -- we didn't report the year that we would have liked because of the tough top line comps from '06 because of the postal programs but I frankly, I was thrilled at the year we had in product ID, particularly at Videojet, where they had excellent core growth, good margin expansion, we're making some smart investments, that will yield things we'll talk about in '08 and '09, so I don't think we have anything but good opportunities like the trajectory we've been on in product ID .

It's just a business that clearly had a tough reporting comp in '07 but when you look underneath the covers, they did

Got it, thank you.

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

Yes, just a couple things, good morning, sorry.

Good morning.

On the test and measurement side of the business, the core growth rate at 5.5% was a little bit, well, certainly below trend line for the last couple of years and I know F-Net had a couple tough project compares year-over-year, but are you sensing that you're picking up any macro weakness in the test and measurement side of the business, excluding Tektronix, just if Fluke or Fluke Net?

I think the short answer, Rick, is no.

But again, I think 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 books, we tend in the fourth quarter to see some of that noise at F-Net, depending on whether there's a big year-end program here or think, so I didn't read anything.

I would encourage you not to read anything into the F-Net performance into the fourth quarter.

We need to obviously watch what customers do, as the year plays out but I think right now we feel very good about where T&M is, excluding Tech for '08.

Okay.

And just the last question, on the MedTech 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're far enough ahead on that curve that if we see revenue growth slow that we can comfortably deliver on the margin improvement in '08 that we're targeting?

Well, we would certainly intend to do that, Rick.

And keep in mind, I mean, we talk about these as European headquartered businesses but their cost structures really span the globe, it gives us an opportunity not only to deal with headcount 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 a larger organization, hopefully a sharper purchasing organization to boot.

I mean, those are all cost levers that we've been pulling that have been helping drive the margin expansion in addition to the volume and obviously are also levers that we think still have future impact on the business.

Almost regardless of the revenue environment.

Okay, very good, thank you.

Thanks, Rick.

That concludes the question and answer session today.

At this time, Mr.

Wilson, I'll turn the conference back over to you for any additional or closing remarks.

Thanks.

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