Danaher Corp (DHR) 2008 Q1 法說會逐字稿

Good morning.

My name is Melissa, and I'll be your conference facilitator today.

At this time, I would like to welcome everyone to the Danaher Corporation 2008 first quarter 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).

Thank you.

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, 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 the 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 the website later today and will be available until the next quarterly call.

In addition, a replay of this call will be available until April 21st.

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

And 719-457-0820 internationally, and the confirmation code is 2384639.

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

During the presentation we will describe certain of the more significant factors that impacted year-over-year performance.

Please refer to the accompanying 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 pretax 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 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 would 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 relating 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.

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 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 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 mixed of revenue 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 was $277 million for the quarter, adjusted net earnings was $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 the 28th, 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 17th 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 overall -- 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 and 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 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.

And during the quarter, we delivered a multi-million 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 stand-alone company.

Gilbarco's core revenues grew at a low single digit rate for the quarter, driven by strength in 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, Exxon Mobil installed its 1000th 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 multi-meters, and a very strong performance from the TI-10 and the and the TI-25, our new lower cost thermography products which are aimed at broadening the hand held and portable thermography market.

During the quarter, Flukes' 88-08 digital multimeter was awarded Test and Measurement World magazine's best in test product award.

Fluke Network 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 stand-alone company.

As expected, 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 versus our original targets and believe the business will be well positioned for next year and beyond.

We have also just completed our strategic plan, identifying a number of exciting opportunities, many of which involve collaborative efforts with Fluke.

Probably most encouraging to me at this point has been the Tektronix's teams embrace of DBS.

Tektronix just received a Technology and Engineering Emmy award from the National Academy of Television Arts and 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, as core revenues were up 3%, led by strong growths at Radiometer and Leica.

MedTech 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 [Damand] 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 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 placements 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 strength in Asia and in Europe.

During the quarter, we acquired Baltec, a developer and producer of specimen preparation instruments and consumables used both in pathology and research applications.

Baltec 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 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 to network and design messages used in coating equipment.

Both Videojet and Links 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 coating 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 supplier agreement with Otis to supply traction machines for its Gen2 machine roomless elevators, as well as 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.

Mechanics hand tool revenues declined 6% in the first quarter, as (inaudible) 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-digit for the quarter, but customer demand at Sears remained soft.

And one quick note here, the repairs made as a result of our fire, the fire at our Shandong China facility last quarter had 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 of 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 where appropriate, while taking real cost actions where needed.

While it's early, we are very encouraged with the 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 the 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.

Thanks, Larry.

That concludes our prepared remarks.

Melissa, we're now ready for questions.

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS).

We'll go first to Steve Tusa with JPMorgan.

Hi, good morning.

Good morning, Steve.

Just a question on the comment around order rates.

Can you just maybe expand on that a little bit, maybe put some -- I don't know if it's numbers or just whether you're talking about in March specifically, could you just maybe provide some color on that comment?

Sure, Steve.

I think while -- if we looked 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, the order growth rate exceeded the shipment growth rate in all four segments.

That dynamic was broad based, I would say it was particularly pronounced in March as we saw sequential acceleration in a number of places.

So on balance, I think as 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.

How much of your business is book and ship?

I mean, what's the lead time on that kind of stuff?

Well, it's going to -- it's going to vary.

Obviously, as we built the 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.

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.

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.

I think when you look at MedTech 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 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 in the second quarter but I think we're going to -- 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.

Right.

One last quick one.

At any -- you guys did some restructuring in the fourth quarter to get out ahead of some economic weakness, perhaps.

Anything in the second -- anything in the first quarter?

Steve, you bet.

What we did -- 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 -- 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.

We're talking about a handful of facilities, several hundred folks that we're going to say good-bye 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.

Right.

Thanks a lot.

Thanks, Steve.

Thanks, Steve.

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

Good morning, everyone.

Good morning, Dean.

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?

And then I've got a question on Tektronix after.

Deane, primarily impacted dental equipment.

Outside of Asia, U.S., Europe, Latin America, our dental equipment business was up mid single digit.

In Asia we were down close to 50%.

As we change 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 kind of more regional players and we expect that while we don't expect a lot of year on year growth in Asia, we don't -- 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.

So there's less of a carry-over into the second quarter on the specific.

We changed out the distribution in the case of Japan.

We now have control over the distribution and we would expect that we would see an improved performance here in the second quarter.

Okay.

And then over on Tektronix, Larry, was interesting, you used the term that's usually our line about overdelivering.

But it's nice to hear that the integration is going well.

Could you give us the next layer of detail, I'd be very interested, is it applying DBS, how much of DBS is going into the pure manufacturing equation at Tektronix which was already operating at healthy margins?

I would be 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?

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 that it's very early.

The DBS efforts have taken some root there.

This was 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 benefit from the consolidated purchasing activities, which have moved forward at just 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 in network diagnostics.

That will 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 in the cost reductions, 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'll give you an update because we were just out there three weeks ago doing the strat plan reviews, I think the strategic logic 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're 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 focus on applications.

And 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.

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 a way -- the way we operate, we're going to show 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 that -- as we 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.

Terrific.

Just your point about the synergies, has that changed in terms of -- is that an additive to your assumption that $40 million, are there revenue synergies between Tektronix and F-net that look a little more attractive than they did previously?

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.

Terrific.

Thank you.

You bet, Deane.

Thanks, Deane.

We'll take our next question from Bob Cornell with Lehman Brothers.

Good morning, everybody.

Good morning, Bob.

Hi.

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 you mentioned the orders were double-digit, why were the standard products soft in the first quarter?

It is surprising.

Yeah, well 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 deliveries, 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.

So 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 -- if things take a turn for the worse.

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 taking some action 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?

I would say that on balance, Bob, it's hard to point to 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 it can be a little soft.

We're in that -- I think we saw that effect.

That'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 slowdown and 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.

It 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 (inaudible) push-outs I think are related to the macro environment, but again, I think 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.

In that context, my last question, you gave the second quarter guidance, you reiterated full year.

What is the organic growth expectation in guidance for the second quarter and the year at this point?

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

Okay.

Thanks, Larry.

Thanks, Bob.

Thanks, Bob.

We'll take our next question from Scott Davis with Morgan Stanley.

Hi, good morning, guys.

Hey, Scott.

A couple little things.

One, can you remind us why Sada tools was weak in the quarter?

Or Sada I guess you pronounce it.

What did we say there?

Sada was actually up double-digit.

I thought you said down double digits.

No, up double-digits.

Then I heard you incorrectly.

Then that kind of answers that question because I was a little taken back when I -- it's early in earnings and I'm already hearing things opposite.

You were taken aback?

Yes.

Sorry.

Guys, can you talk a little bit about the cycle history at Tektronix?

I understand the driver here being R&D more than kind of tech budgets overall and that's more stable.

Is there any kind of history you can talk about the volatility or the variability of that -- the order patterns there?

Well, I think when we look at tech, clearly they have -- 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.

The network 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 and that tends -- that's a healthy, much more stable business and fortunately a larger portion of that side of tech.

I would say that on the core tech business, it tends to operate in a more traditional way without -- given it doesn't have that exposure to some of the high tech production volatility that other businesses might.

Scott, I would add that one of the things that we -- 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.

And they would get, particularly in the communications business, they would get large blanket orders and that would get -- that would 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 wish they never got into that habit.

But so I think if you back away from -- there's clearly more volatility in orders but if you get down to shipments, it is less.

Okay.

And then last question on Tektronix.

When you talked about the fairly high R&D number and just on a back of a piece of paper I'm calcing out it must be kind of 10% of sales or something in that range, give or take.

As sales levels -- is that kind of a fixed number or do you get leverage off of that?

Meaning when you're able to grow sales do you feel like you've got the scale in the R&D facility to hold that expense pretty steady or does that need to grow with sales?

I think as we find additional opportunities, Scott, we're obviously going to fund that.

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 to how we sell and market but there are a number of other things I think we can do here to help the great R&D engine that Tektronix has had, be more meaningful to shareholders.

Makes sense, guys.

Thank you.

Thanks, Scott.

Thanks, Scott.

We'll go next to Jeff Sprague with Citigroup.

Thanks, good morning everyone.

Good morning, Jeff.

Just to maybe clean up a couple of things, just on the tech digestion, are we all done now with kind of the non-cash charges and all that?

Jeff, there's about -- as we said in December and January, about $0.12 or $0.13 for the year, we had $0.06 of that charge in the first quarter, so it will 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.

Just 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?

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

Okay.

And on tech, 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 kind of expecting over the balance of the year, on tech as a kind of a stand-alone 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?

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.

And then just 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 you could call out.

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 talked to has been in this business, has seen these tax plays in the dental world before, are of the view that as the second half is upon us, dentists, their accountants understand the opportunity and really begin 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 follow-up.

But I think as the year plays out, it will be a real positive for us.

Should be a positive for us at Pell.

Should be a positive for us with the digital imaging products as well.

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

Yes.

And then just finally, Larry, what do you see going on in the M&A pipeline?

We had our -- we had a review just on Tuesday here, Jeff.

Clearly, there's a bit of a sea change going on with respect to certain potential competitors, falling to the sidelines.

But I think on balance, we look 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'm very encouraged about where we're positioned, how we're positioned for this to be another active year on the M&A front.

Thanks a lot.

Thanks, Jeff.

We'll take our next question from Nicole Parent with Credit Suisse.

Good morning.

Good morning, Nicole.

Congratulations on that Emmy, Larry.

Thank you, Nicole.

Just to follow up on Jeff's question on dental, I guess 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?

With respect to equipment?

I'd say, yeah, on that front, sure.

I mean, and I would also just say when you thing about the cosmetic side and restorative and orthodontics, I guess sensitivity of the customer base to changes in discretionary income.

Sure.

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're referring to at the high end procedure-wise really did not present itself in our equipment sales.

And 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 was an impact we saw on the consumables side.

Again, it's hard to segment that off from the effect of the sales comp year end at Sybron, both in (inaudible) and at Kerr.

But we're watching that space very carefully.

I'll be out with the team next week, in fact, making sure that we're 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.

Okay.

And I guess just a follow-up on M&A, with respect to sellers' viewpoints on willingness to come down on price, I mean, given kind of 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 rear view mirror?

What I would say over the past quarter is it's gotten better, but I think there's 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, maybe not in our view kind of enough.

So I think it's trending the right way and in our view I think it continues to get better here in the next quarter or two.

Great.

And one last one.

Just on motion, with the orders up double-digit, could you maybe elaborate the difference between elevator growth versus aerospace and defense, particularly in light of UTX this morning, I think for the first time acknowledging that it looks like commercial is going to slow in the U.S.

and Europe?

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

But in terms of going forward, Nicole, if you just looked at the order book that we have in motion today, we would have an extremely robust view for growth for motion for the balance of the year.

But we're discounting that because of comments from some more -- 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.

Great.

That's helpful.

Thank you.

Thanks, Nicole.

We'll take our next question from John Baliotti with FTN Midwest Securities.

Good morning.

Good morning, John.

Hey, John.

Hey, guys.

Question about working capital and free cash flow.

I mean, certainly you still put up a respectable conversion.

I'm sure knowing you guys that you're 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, that's a couple hundred million dollars of free cash flow just on its own and I'm wondering if that's realistic?

I mean, obviously doing an acquisition toward the end of the year, there's some things you take on there that you got to digest.

But is that realistic, do you think, at the end of the year?

I think, John, I would say is I agree with your point of view, we were not happy with our working capital performance in the quarter.

Every expectation is it will improve.

We 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.

If I could just add to that, and I would agree, we're not happy with the way the quarter played out.

At 106%, I think that's still strong conversion.

Keep in mind that we had $20 million of cash charges at tech of a one-time nature.

You give us that, obviously the conversions on par with a year ago.

Don't want to rationalize the performance, though, with the Easter impact on collections and the backlog build perhaps having some impact on inventory.

That's not the way I think about it.

That's not the way we think about it.

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, with an eye toward making sure we're getting the results there that we want.

So I think we're going to do better there.

I think we're already seeing that with respect to the European collections.

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.

I mean I guess 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 seems like getting back to where you were just on a turns basis last year should not be an insurmountable task.

Work to do, but we don't have a disagreement with you.

Okay.

Great.

Thank you.

We'll take our next question from John Inch with Merrill Lynch.

Thank you.

Good morning.

Good morning, John.

Good morning, guys.

So environmental continues to be the stars of the portfolio.

Tough comps heading through into the rest of this year.

Could you guys talk a little bit about why you thing those numbers continue to stay good and maybe a little bit more color on what's going on there?

Yes, 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 throughout Asia Pac, eastern Europe, Latin America and there are a number of things that will allow us to accelerate some of our growth in particular regions this year, as a result.

So 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.

Larry, you go back to sort of 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 the deals are just too expensive?

I know ChemTreat was going to be isolated.

What about building some of the portfolio out over time, if not in the U.S., other parts of the world?

How should we think about those opportunities?

John, we've been in the market for good water quality businesses for 15 years.

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're going to go after.

No change in approach there.

Okay.

I'm just wondering if the market opportunity lends itself now, given sort of valuations to maybe execute on some transactions sooner versus later.

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

I understand.

Rest assured, it's a high priority for us.

We work that very hard on a daily basis.

If you were to look at your organic growth, give a sense of what was it in the U.S.

versus Europe versus maybe Asia or rest of world.

John, Asia, Latin America continue to be very strong, probably high single digit.

U.S.

was flat to probably slightly down.

And Europe, probably a modest decel from Q4 but still pretty healthy.

Most of our larger businesses continue to perform well in Europe.

You don't see any warning signs in your European businesses, based on mix or anything like that.

Slightly less.

Little less growth than we saw in the second half.

Larry and I have been there a number of times in the quarter.

Good performance in the first quarter.

Still a pretty positive outlook.

Just last question, if you go back to '01, I'm juxtaposing the $60 million charge you took as part of that downturn versus last quarter's 13, there's a little 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 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 position at this point.

You were early in taking this action.

I think a lot of us are trying to surmise are you going to be more impermeable versus other companies that might be more late to the action story?

One difference there is -- 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.

No, I understand.

But I'm still saying 13 versus the 60, that was sort of the comparison.

It's a smaller number and obviously you would wonder does that mean you're going to have to take more if this sort of recession or whatever you want to call it in the States actually gets a little bit worse.

That's all.

Right.

Well, again, I think it's a bit apples and oranges, but if you were to think about the fourth quarter of '07, compared to what we did back then, I would encourage you, John, to incorporate the $10 million 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, 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 technology investments.

But to make sure we are aligning the cost structure with reality and with the potential downside risks.

So that's what we can control.

Are we prudent?

Are we 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.

Balance is what we want to see.

Thank you very much.

Thanks, John.

We'll take our next question from Nigel Coe with Deutsche Bank.

Thanks.

Good morning.

Good morning, Nigel.

I guess with global growth probably on a downward path, probably a risk that core growth remains closer to 2% than 5%.

How much buffer is there in your full year guidance?

Can you still make the range with 2% core growth portfolio?

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.

No, I wouldn't want to count on it but I think it suggests that it doesn't have to be five for us to deliver our range.

It's probably somewhere between the two numbers.

Okay.

And then, the healthcare margins, I think you called out three factors.

You called out AQT, the Euro and I think dental.

Could you maybe put some numbers around those three factors?

I think the impact of flat revenues in dental was -- I'm not sure I'd be able to quantify it right now.

I could probably do it off line.

I think on Radiometer, we 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 -- this will be the last quarter, we had a lot of R&D and a lot of launch costs.

That R&D has already begun to ramp down so you'll see Radiometer's margins accelerate.

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

Okay.

So maybe 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?

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.

Finally, on F-net, you talked about some lumpiness in the prior year, but is there sort of underlying weakness at all in the Telecom markets that you can see?

Well, keep in mind, Nigel, that at F-net, we really serve the enterprise, the Telecom, the operators are really more of the focus for us at tech.

Okay.

I think the enterprise environment from our view is -- has decelerated, there were a couple of bright lights, there were a couple of areas of concern, so it's kind of a mixed read right now.

But with the very tough comp we had, small part of the business, but when we get these big one-off projects, we love them when we have them, obviously mix from a growth perspective the following year.

I think from a tech 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.

It's why we acquired it.

Okay.

Maybe just one quick one as well, on tools in the U.S., maybe (inaudible) is this all due to point of sales weakness or is there some inventory adjustment going on there as well.

It's by and large POS.

Okay.

Thanks.

Thanks, Nigel.

And we'll take our last question from Richard Eastman with Robert Baird.

Just two quick questions.

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?

And as we push into '08?

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 improvement opportunities that we're all over.

Phil's there this week, in fact, making sure that as we gear up for kind the next leg here in the second quarter, that we're very focused on driving those deep-rooted, fundamental changes to our process, both with respect to cost, the P&L and the balance sheet.

As we 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?

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

Okay.

And then just lastly, from a consolidated perspective, looks like pricing added about a point to the quarter.

Should we assume that continues for the balance of the year?

It's just under a point and-a-half and that's probably the right way to model it for the balance of the year.

Okay.

Very good.

Thank you.

Thanks, Rick.

Thanks, Rick.

Thanks, Rick.

That does conclude the question-and-answer session today.

At this time I would like to turn the call back to Mr.

Andy Wilson for any additional or closing remarks.

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Thank you.

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