Danaher Corp (DHR) 2008 Q3 法說會逐字稿

Good morning.

My name is Audrey, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Danaher Corporation third quarter 2008 results conference.

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

After the speaker's remarks there will be a question and answer period.

(OPERATOR INSTRUCTIONS).

Please limit your questions to one and one follow-up.

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

Andy Wilson, Vice President of Investor Relations.

Mr.

Wilson, please go ahead.

Thanks Audrey.

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, form 10-Q, and slide presentation supplementing today's call and reconciling other information required by SEC Regulation G related to any non-GAAP financial measures provided during the call are all available in the investor sections of the website, which is up and running at www.Danaher.com, under the heading "earnings", it will be made available following the call.

In addition the audio portion of this call will be archived on the investor section of our website later today under the heading "web events" and will remain archived until our next quarterly call.

A replay of this call will also be available until October 22.

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

And 719-457-0820 internationally, and the confirmation code is 2942719.

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

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

Please refer to the accompanying slide presentation and other related presentation materials supplementing today's call as well as the MD & A section of our third 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 operation of Danaher's business unless otherwise noted.

Our earnings for the period include the results of operation of Tektronix, which was acquired in the fourth quarter 2007.

Included in our earnings are certain non-cash charges related to the Tektronix acquisition, For fair value adjustments to recorded inventory and deferred revenue which reduced total net earnings by approximately $10 million or $0.03 per diluted share in the third quarter and approximately $39 million or $0.12 per diluted share year-to-date.

These are included in our reported results for the third quarter and year-to-date 2008 but are excluded from the adjusted earnings per share guidance that we will provide at the end of the prepared remarks.

The amount of these non-cash charges related to Tektronix acquisition is expected to reduce earnings by approximately $0.01 per share in the fourth quarter and approximately $0.13 for full year 2008.

Throughout the call all references to non-cash acquisition-related charges for Tektronix relate to these items.

I'd also like to note we'll be making forward-looking statements during the call including statements regarding events or developments we believe will occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set fourth in our SEC filings.

It's possible that actual results might differ materially from any forward-looking statements that we might make today.

These forward-looking statements speak only of the date they are made, and we do not assume any obligation or intend to update any forward-looking statements.

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

Andy, thank you.

Good morning everyone.

Today, we reported third quarter earnings per diluted share of $1.11 representing an 8% increase over last year.

Adjusted earnings per diluted share for the third quarter was $1.14, a 13% increase over last year.

Revenues for the quarter increased 17.5% to $3.2 billion with core revenues up 4%.

Acquisitions contributed 11% and we had a positive currency effect of 2.5%.

Continued strength in our Water Quality and Med Tech businesses and improved performances at Motion and Gilbarco Veeder-Root was partially offset by continued soft demand at Fluke Networks and at Accu-Sort.

Year-to-date revenues are up 20.5% to $9.5 billion, as core revenues grew 4%.

Year-over-year, gross margins for the third quarter improved approximately 140 basis points to 47.1% primarily due to the impact of higher gross margins in the newly acquired businesses.

Leverage from higher sales volumes as well as ongoing cost saving initiatives.

In addition, higher commodity costs incurred in the quarter were mitigated somewhat by price increases.

SG&A expenses were 25.1% of sales compared to 24% a year ago, due primarily to higher SG&A levels in our newer businesses and incremental investment in emerging market sales resources.

R & D spending as a percentage of sales for the quarter was 5.7%, as compared to 4.8% a year ago.

This increase was largely due to the impact of Tektronix as well as investment in our med tech businesses.

Operating profit for the quarter was $522 million, representing a 13% increase over last year.

Adjusted operating profit for the third quarter increased 15.5% compared to last year.

Year-to-date, operating profit was $1.4 billion, a 13.5% increase over last year, and year-to-date adjusted operating profit increased 18.5% compared to the same period a year ago.

Our operating margin in the third quarter was 16.3%, a 70 basis point decrease from last year.

The impact of newer businesses, including the non-cash acquisition related charges for Tektronix, negatively impacted margins by approximately 65 basis points.

Adjusted operating margin in the third quarter was essentially flat compared to the adjusted operating margin last year as follow through from core revenues was offset by investments in R & D and salesforce initiatives continued restructuring and hopefully a high watermark for commodity prices.

Our effective income tax rate for the third quarter was 24.5% as compared to 23.6% in the prior year period.

Our overall tax rate was slightly less than we experienced in the first half of 2008, as a result of the mix of domestic and international earnings.

We expect our effective tax rate for the fourth quarter to be approximately 24%, which will include the benefit of the research and experimentation credit, which was recently extended as a result of the emergency economic stabilization act.

Net earnings were $372 million for the quarter, an increase of 11% compared to the prior year.

Year-to-date, net earnings were $1 billion, an increase of 13%.

Adjusted net earnings for the third quarter and first nine months improved 16.5% and 18.5% respectively compared to the prior year.

Our operating cash flow for the first nine months was $1.3 billion, 19.5% higher than the prior year.

Year-to-date free cash flow was $1.2 billion representing a 20% increase.

Our free cash flow to net income conversion ratio was 108% for the third quarter and stands at 122% for the first nine months.

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.

Our ability to generate free cash flow during these challenging economic times has allowed us to continue to strengthen both our balance sheet and our portfolio by way of strategic acquisitions.

During the quarter we made four acquisitions, comprising about $150 million of revenue, making key additions to our environmental, test and measurement and dental platforms.

We believe the acquisition environment continues to become more attractive and that we are well positioned to capitalize on strategic acquisition opportunities.

We believe we are in terrific financial shape since the beginning of the year, and we have reduced our outstanding debt by approximately $1 billion and our debt to total capital ratio at the end of the quarter was 21%.

In addition, we had over $285 million in cash and cash equivalents at quarters end.

Now, turning to some of the highlights from the operating segments, Professional Instrumentation revenues were up 38% for the quarter and 48% year-to-date, with core revenues up 4.5% for both periods.

Our operating margin for the third quarter was 20.1% as compared to 22.7% last year, as the dilutive impact of recent acquisitions and the non-cash acquisition related charges for Tektronix essentially accounted for the difference.

Year-to-date operating margins decreased 290 basis points to 19% when compared to last year, due principally to the same factors.

Environmental revenues grew 9.5% with core revenues up 6% in the quarter.

Year-to-date, sales increased 18.5% with core revenues contributing 6.5%.

Water quality core revenues grew to mid single digit rate in the third quarter as our Hach-Lange business continued to see solid demand in both their process and laboratory product lines, including healthy growth in consumables and service revenues.

Geographically, a strong performance in Europe and continued double digit growth in China drove this performance.

ChemTreat achieved low double digit revenue growth in the quarter, representing their best quarter of this year.

During the third quarter, we completed the acquisition of Arcan Environmental, a manufacturer of UV or ultraviolet treatment solutions, which will compliment Trojan's existing low flow product offerings.

At Gilbarco Veeder-Root, core revenues grew at a high single digit rate in the quarter, as increased sales of payment and point-of-sales systems was partially offset by soft dispenser sales.

Veeder-Root is awaiting final California Air Resources Board, or CARB, approval for its enhanced beta recovery solution which helps retailers reduce hydrocarbon emissions and comply with State regulations.

We anticipate receiving this approval in the fourth quarter of this year.

During the third quarter, we completed the acquisition of AutoTank Group, based in Finland which we highlighted during our last call.

Moving to test and measurement, revenues grew 94% in the quarter and approximately 100% year-to-date with core revenues up 1.5% in each period.

At Fluke, core revenues grew at a mid single digit rate for the quarter, lead by strong emerging market growth and continued demand for our lower price point thermography it products.

Our green initiatives aimed at increasing energy efficiency helped drive low double digit growth for our indoor air quality and digital multi-meter products this quarter.

Additionally Fluke was awarded more than $20 million of government contracts in the quarter.

During the third quarter, we also completed the acquisition of Janos Technology which adds optical component design and manufacturing capability to Fluke's high growth thermography it business.

Fluke Network sales were down double digit during the quarter resulting from continued soft sales to telecom carriers as well as the effect of slower IT spending, which has impacted our higher end enterprise performance management products.

As we indicated on our last call, we expect those results to remain challenging for the balance of this year.

At Tektronix, revenues were down in a low single digit rate in the quarter as double digit core revenue growth at Tek Communications was offset by weaker demand in our instruments business.

Recent product launches in our our oscilloscope product line drove low double digit growth in the distributer segment of that business.

Our network management business grew more than 20% in the quarter due in part to a multi million dollar contract win, Telstra, Australia's leading Telecom and Information Services Company will deploy Tek's market leading unified insurance network management suite which will provide end-to-end monitoring solutions throughout Telstra's high speed wireless broadband network.

We are very pleased with Tek's performance, particularly regarding their high operating margin in the quarter, which excludes the non-cash acquisition related charges.

It is a testament to the hard work at the Tek team and the impact of DBS.

It's been a very good first year together with Tektronix.

Over at Med Tech, revenues for the quarter increased 12.5% compared to 2007 and core revenues were up 5.5%.

Year-to-date revenues increased 14% with core revenues growing 6%.

Med Tech operating margin for the third quarter was 12.3% compared to 13% a year ago due to increased spending on growth initiatives, which has driven above market growth at both Leica and Radiometer, higher cost at our cable operation, and the impact of lower operating margins from some recent acquisitions.

Year-to-date, operating margins also declined 70 basis points to 11.5% compared to the prior year, a result of the these same factors.

Core revenues in our dental business grew at a mid single digit rate in the quarter.

Sybron was up at a mid single digit rate, lead by demand for general dentistry consumables, and strength in both our side run endodontic and our total care infection prevention product lines.

Sybron Endo was up at a high single digit rate in the quarter due to strong sales of their new twisted file product line as well as the launch of RS-1, a resin based bond used to protect the root canal wall and prevent infection after an endodontic or root canal treatment.

Also during the quarter we acquired Pentron Corporation, which provides complimentary consumable products for endodontic and other restorative applications at Sybron.

KaVo grew at a low single digit rate in the quarter as continued strong demand for our imaging products was partially offset by a general slowing of instrument and treatment unit sales.

At radiometer, core revenues grew at a mid single digit rate for the quarter, driven primarily by strong consumable sales across all major geographies.

Instrument places grew at a mid single digit rate with particular strength in portable applications due in part to the launch of the ABL-80 analyzer.

Leica core revenues grew at a high single digit rate in the quarter, driven by compound microscopy demand as well as more than 20% growth at Leica Biosystems, our pathology diagnostics business.

We experienced growth across all major geographies with solid demand in both Asia and Europe.

During the quarter, we launched the new DCM3D microscope, which provides fast and accurate surface assessment required for metrology applications.

Customer demand has been very positive.

Moving to industrial technologies, revenues increased 6% for the quarter with core revenues up 3.5%.

Year-to-date revenues increased 6% with core revenues contributing 2%.

The operating margin for the third quarter was 18.2%, a 120 basis point increase compared to the same period last year, a result of restructuring efforts undertaken earlier this year.

Year-to-date, operating margins decreased 40 basis points to 16.7% due primarily to a prior year gain on indemnity proceeds from a litigation matter and the sale of real estate which benefited 2007 margins by approximately 60 basis points.

Product ID core revenues were down 3% in the quarter.

Our traditional marking and coating business grew at a low single digit rate in the quarter, lead by strengthen consumables.

Offsetting this performance was a continuation of large parcel project delays, and a reduction in traditional USPS projects at Accu-Sort.

Year-to-date product ID sales increased 3%, with core revenues down 1.5% due again to the softness at Accu-Sort.

Over in Motion, revenues were up 8% in the quarter, with core revenues contributing 5% growth.

Growth in our aerospace and defense elevator, flat-panel display and medical vertical markets were the key drivers to this performance.

Partially offsetting this growth was continued soft demand in the U.S.

and Europe for standard motor and drive products.

Year-to-date, sales were up 6.5% with core revenues contributing 1%.

During the quarter, Kollmorgan announced an agreement with Volvo to produce electrical motors and drives for the fleet of heavy duty hybrid vehicles.

These hybrid applications represent a multi-million dollar strategic opportunity for the Kollmorgan team.

Finally moving over to tools and components, revenues for the quarter and year-to-date are up 1% with core revenues contributing about half a point in each period.

Half a percentage point in each period.

Operating margin for the quarter was 14%, a decline of approximately 190 basis points from the prior year, largely due to increased commodity costs, principally steel, and the impact of lower production levels, offset somewhat by price increases.

Year-to-date operating margins decreased 60 basis points to 13%, due principally to to these same factors.

Mechanics hand tool revenues increased 1% in the quarter, primarily due to the initial stocking order of our Deer Wrench' brand of tools at Advance Auto Parts, which we referenced during our last call.

Year-to-date, mechanics hand tools core revenues declined 2.5%

So to wrap up our prepared remarks, we are quite pleased with our growth, earnings, cash flow performance, and the strength of our balance sheet.

We have continued our restructuring investments that we began late last year and believe these actions have helped our businesses deliver these good results.

But given the events of the last month, more challenges are clearly on the horizon.

We are keenly aware of the impact of the constrained credit markets and the effect of the constrained credit markets are having and will likely continue to have on the global economy.

Accordingly, we believe it is prudent to accelerate the pace of our restructuring activities.

As a result, we are currently estimating an additional investment of approximately $75 million, or $0.17 per diluted share in the fourth quarter to fund additional cost reduction and restructuring activities.

These activities will likely result in the reduction of over 1,000 positions and the closure of a dozen facilities.

We believe these actions, which will affect a number of our businesses will better position us in 2009 and beyond.

With that as a back drop, we expect adjusted earnings in the fourth quarter to be in the range of $1.17 to $1.25, excluding the non-cash charges related to the Tektronix acquisition and before the restructuring charges.

We expect our full year 2008 adjusted earnings per share to be $4.29 to $4.37, which excludes acquisition charges related to Tek, the benefit of the $0.03 per share of discrete tax items realized in the second quarter and again, the fourth quarter restructuring charges.

The mid point of our full year adjusted guidance represents a 13% increase compared to prior years earnings per share and a 9% increase after taking into account a $.17 per share impact from the anticipated fourth quarter restructuring.

We've often said that Danaher's position to out perform during difficult times and now is certainly one of those times.

We believe that the composition of our portfolio, combined with our disciplined execution, via DBS, and the strength of our balance sheet will help us achieve positive results going forward.

I'm confident that our talented and seasoned team can execute on the business plans we have in place.

In turbulent times we believe our ability to be nimble and to react quickly to changing market conditions will help us capture additional market share from our competitors and to set us apart from many of our peers.

Thank you, Larry.

That concludes our prepared remarks.

We're now ready for questions, Audrey.

(OPERATOR INSTRUCTIONS).

Our first question today will come from Bob Cornell with Barclays Capital..

Yeah, hi, guys.

You gave the fourth quarter guidance and earnings Larry but not the core growth comment.

What is the core growth contribution in the fourth quarter that drives the fourth quarter earnings you mentioned?

Bob, it's interesting.

I think if you look across the portfolio and the way we finish the third quarter, we're actually continuing to see I think a good level of strength across many of the businesses but as we look to the fourth quarter clearly we've got a rather tempered outlook in light of the headlines and the concerns about the macro economy.

I think right now when we look at the fourth quarter, we think core will be positive but at a rate below the 4% year-to-date number that we've registered.

I think if you take a quick run through the segments, I think instrumentation will be up low to mid single digits.

We would expect T& M and water to continue to set the pace.

I think we'll see some softness at Gilbarco again because of the soft dispenser demand.

Obviously with price at the pump coming down that means margins are good, we'll see.

At Med Tech, I think we're in the same range there, low to mid.

We just had a few weeks back where we were over in Europe with a number of the businesses for their strategic reviews, feel very good about the share take at Leica, at Radiometer.

I think we're also very pleased with where Sybron is.

Obviously work to do at KaVo.

I'd say at KaVo, clearly the 179 tax incentive is a bit of a wildcard here in the fourth quarter.

We'll see how that plays out and keep in mind with instrumentation and Med Tech we're talking about 2/3 of Danaher today.

Industrial text probably pretty much in line, maybe slightly below where they were in the third quarter, call that low singles and I think tools will be down probably low singles again largely because of the retail softness and what may come in that regard.

A second question would be just when did you start putting together the $75 million plan and maybe give us a little more detail, a 12 plan sounds like a lot but then in the environment we're in it's sort of understandable so maybe flesh out just how you guys evolve the $75 million restructuring plan and how much it might benefit '09 and 2010.

Bob, it's hard to pick a date as to when we began simply because as you know, we're always in this mode.

We've been on a steady pace I think of restructuring since the second half of last year when we began to have concerns about the trajectory of the economy, obviously couldn't call what's happened in the last month but certainly given recent events we're of the view that we should accelerate the plans that have been on the drawing board as we get ready for 2009 so what we're really talking about doing in essence is pulling forward many of the plans, thoughts, what have you, that were under discussion and were likely to have been put in place over the next say four to eight quarters so we're just pulling those in, we're accelerating.

Clearly, we're at a point now where we want to be respectful to our associates.

These are plans that are still being worked through and finalized.

I want to be careful about the specifics that we provide externally until we complete our internal communications but as you would guess, the businesses that are going to be perhaps most impacted are those with lower margins currently.

Those that are feeling or likely to feel the impact of the economy most directly, but again, it's widespread, and even some of our higher margin better performing businesses will be taking some actions here to get ready for what may come so again, we are talking about a thousand or more net positions being reduced, a dozen facilities, and we're looking at that as again a $75 million number approximately that could, there's a band there probably of plus or minus 5 or 10 million given what we can get done this year.

The majority of it will be a cash charge and we would expect to get more or less a one year payback on what we do.

We'll keep you very well apprized of the details.

We're obviously going to be together here once we get through budgets in November at our Analyst meeting in early December in New York and we'll give you a full update at that time but that's really where we are right now.

I think it's the right thing to accelerate these actions given the environment we're in.

Got it.

Thanks.

And next we'll hear from Deane Dray with Goldman Sachs.

Thank you, good morning.

Good morning Deane.

Could we start with Dan to give us a quick update on the current financing status?

It looked like just to clarify on where you stand at commercial paper, your ability to term that out, and if you're also on the other side seeing stresses on the credit situation on your customers today?

Deane, I'll take the first one.

As Larry mentioned, really the first nine months have done a lot to really substantially improve the balance sheet.

We've paid down a billion of debt.

Our debt to total cap is all the way down to 21%.

At the end of September we had approximately $500 million of commercial paper.

That's backed up by a bank facility that's three times the size of that current borrowings and a facility that does not expire until 2012.

In terms of CP, we're really benefiting from two things.

One is we're a top tier credit in A1 P1 credit but two as importantly in this environment just the absolute size of our program is relatively modest so we've had no issues accessing capital.

We just paid off yesterday our $250 million U.S.

bond.

We did that entirely with CP.

We had no issues accessing that capital and we also have a favorable interest arbitrage on that.

We paid off the bond which was at 6%, we were able to issue C P with about a month duration and that's at approximately 2% today so at least to date we've had no issues accessing the C P market.

Great and then the comment about how the credit cycle now is affecting your customers.

Deane, this is Larry.

We can't point where I think a distinct trend in any way , I think what we've seen thus far has been episodic.

As we mentioned in our prepared remarks, clearly the consumer facing businesses, small part of Danaher of course but that's where we're seeing softness and you can relate that to what's happened here.

I think we're seeing some of our larger corporate customers delay, push out, some cases cancel, some higher ticket discretionary purchases.

I'm not sure that's as much a function of their inability to access capital as much as it is them taking actions unlike our own.

I think we have seen a number of situations though, and again this is episodic where I think some of our businesses that go to market through distribution are picking up some share and partnership with some of our larger distributors who clearly are able to finance their operations, probably taking share from some smaller distributors, smaller businesses who I think are having or who are on the front lines if you will of what we've all been reading

And then just to clarify, on the Med Tech at 5.5% core revenues, are you immune from some of the headwinds, the hospital CapEx freezes because of the price points on the radiometer products and so forth and are you feeling any sort of pressure there?

I wouldn't say that we're immune, Deane, either at Radiometer, or Leica, that would be sheer hubris on our part but obviously the performance of the business speaks for itself but I think we have seen in the U.S.

Certain projects, certain purchase decisions being pushed out, taking a little longer to get approved but we haven't seen wholesale cancellations or anything getting hung up because as you point out, our instrument price points are rather modest and again particularly at the radiometer, 70% of that business are the consumables that are really a function of procedure and patient flow, not capital financing.

Great.

Thank you.

Thanks, Deane.

Next we'll hear from John Inch with Merrill Lynch.

Oh, thank you, good morning.

Good morning, John.

So maybe just if you could put this charge into a context , how does this compare given you've done some restructuring action earlier this year last year throughout this year and then how does this compare kind of with 2001 the charge you took then and then the portfolio today?

What sort of a back drop perhaps more importantly, Larry then does this kind of assume?

Are you assuming as bad as are exception as then or just a little more color because we obviously want to know what the obvious risks that you'll have to do again in six months if the economy continues to

Well, again, this is an acceleration of the work that we began in the second half of last year without trying to pinpoint our outlook for '09, John.

I think you should interpret the announcement here this morning as Danaher accelerating a program well under way.

Danaher doing as much as it can, here in the short-term to get ready for what I think will be a very challenging 2009.

We'll take the businesses through budgeting.

As you know here in the month of November, and come back or come out of those sessions and brief you on the detailed outlook for 2009 but because we're always in the mode of taking cost out by way of DBS, taking these sorts of actions , I don't think this is necessarily the sum total of what we're going to do but we'll take it through any additional updates or actions in December but what we do in 09, I think we'll fall short of what we're talking about here this

John, what we did six, seven years ago was a number that was a little bit smaller than the $75 million but of course the business was about a quarter of the size.

I would add that the last four quarters will be under the third quarter.

We've done probably a little bit, we've probably done approximately $40 million of restructuring, kind of averaged about 10 million a quarter during the last four quarters and almost regardless, I would expect that sort of pace to continue in 2009.

Okay, so the 75 doesn't pull forward all your anticipated restructuring in 09.

You're saying that's kind of in response to the environment and you'll still do this continuous pay as you go restructuring?

Yes, and there will likely be some tails and some of the restructuring we're doing right now but there will be other pay as you go that is kind of the normal course here for us particularly in any sort of challenging environment.

So just as we think about the environment, tools obviously, the core could go negative there next year but how are you thinking about the rest of the portfolio?

Do you believe that despite, well there's obviously a big drop off in the last few weeks, do you think the rest of Danaher can sustain positive organic growth through 2009?

That would certainly be the headset we would take into budgeting, John.

I mean, I think we all recognize here on the call that we are in a rather unprecedented situation here as what's happened on Wall Street spreads out with the politicians keep referring to as main street.

I don't think our crystal ball is anymore clear in this regard than anyone else's.

I think we're pleased with the way the business has performed in the third quarter and while there's uncertainty obviously, we think we've got a much better portfolio going into tougher times than we did back in 2001.

These Med Tech businesses for example, we were with all of them recently for our reviews and just walk away feeling very good about the investments they want to make, the opportunities they have, and that's not to sell short anything that we have going on in instrumentation or elsewhere.

I think our businesses are going to play offense in this environment.

We'll play offense with respect to M & A, but I think it would just be sheer folly for us to sit back and not be in a mode where we're accelerating this activity, this restructuring activity, preparing the cost structure while protecting our investments for what could be a very challenging period here in the months to come.

Agreed.

Thanks very much.

Thanks, John.

We'll move on to Nicole Parent with Credit Suisse.

Hello?

Nicole?

Good morning.

We're here.

Doing good.

I guest Larry could you just characterize kind of what you felt September looked like for us, maybe you guys were more conservative throughout the year in terms of just bracing for a downturn.

We heard a lot about Europe falling off a cliff in kind of July-August and then also with just the credit crunch what happened the last two weeks of September, maybe give us a sense by geography what you saw?

Sure, Nicole.

I think for the quarter, again, we saw positive growth across all geographies.

I mean the U.S.

hung in there, and even there at the end at a low single digit rate.

Europe certainly decelerated and came in at a low single digit rate.

I think in the Spring, I may have said that Europe may be a year behind the U.S, they're catching up fast.

It was very rocky as things decelerated there.

And obviously, I'm sure a lot of companies have shared with you, the emerging markets by and large were still very strong.

We were up double digit with that group.

September specifically was in line and slightly lower than the July and August were but I think we were pretty pleased with what we saw.

Again, I think where we see the weakness tends to correlate pretty well to the headlines, consumer soft, discretionary spending for big companies clearly getting more attention, but we have a lot to be pleased with.

Again, I think we're taking share at Leica, Radiometer, Fluke, I think all had very good quarters coming in with record backlog at Trojan.

Don't forget we've got a third of our mix new in consumables and after mark the didn't have much of that.

I think it's 2 X on a relative basis of what we had last time and went into the fog, so I think we are navigating cautiously as we end '08 and get ready for '09 but that said I feel very good about our ability to out perform in what may come here.

Okay, and just one question on M & A.

You mentioned there's lots of attractive things out there and you're well positioned to capitalize.

As you sit here and think about just the environment in general, do you feel like you'd be more inclined to wait just given kind of the market environment rather than kind of Danaher's own liquidity situation just given how much cash you have and fire power and I guess as you step back and just think about the market, is it reasonable to think that you guys will step in now that we've seen prices fall off a cliff?

Well, Nicole, I mean as you know, you could tell from our cash flow statement we've been pretty quiet the first nine months of the year and I would say that a number of assets, a number of companies we were talking to, those businesses have not traded and they're by and large at lower prices today, and we don't try to pick the bottom here but we're obviously close to the bottom than we were six months ago and we feel very good about the opportunities right now.

We have a fair amount of discussion going on.

We're obviously trying to make some judgments here when bottom might be in some of these businesses but I think I feel very good about the balance sheet right now and I think you could expect us to be relatively active here.

Now whether it's this quarter or '09, time will tell, but we've done a lot to really put the balance sheet in a position so we can be active here.

And Nicole, you'll remember that back in 01/02, we basically built out product ID with the Video Jet acquisition and between Verador and Gilbarco, we doubled up the size environmental business so I think history is a bit of a guide, a bit of a lesson here for us as we think about the opportunity to represent themselves in the quarters and months to come.

Understood and just not to beat a dead horse on the pay as you go restructuring, can you give us a sense in terms of obviously you guys are always continuously DBSing everything and proactively restructuring the businesses.

Can you give us a sense of what that number has been that you've absorbed over the last couple of years?

I say over the last four quarters, we've averaged about $10 million a quarter.

Okay.

So probably 35 to $40 million in the last four quarters but I would say 2007 other than the fourth quarter that was a lower amount.

Okay.

That's helpful, thank you.

Thanks Nicole.

We'll hear from Jeff Sprague with Citigroup.

Thank you, good morning everyone.

Good morning Jeff.

Just to jump to Dan first, just back to the financing question.

Dan, is that using CP to take this bond out, was that just kind of your normal transitional funding or are you making a proactive decision here to actually place CP a little bit more actively to work the arbitrage?

Well, no.

I mean, I think that was more of a discrete event.

It was 250 million bond so it was not a huge bond we were taking out.

As well as the fact that we expect pretty strong cash flow here in Q4.

So maybe sort of a timing issue where we could end up back at sort of a sub 500 million CP level but that could happen by the end of the year.

And what is your appetite or thought about testing the market with longer term bond offering here if an acquisition materializes or should we think about kind of smaller scale things where you would be using some transitional CP and just kind of cash flow?

I think that being an A1 P1 commercial paper issuer is very important to us.

It's always important particularly I think in this environment so I think because of our cash flow, because we're at the ratios that would even suggest a rating probably a notch above where we are, I think we have a fair amount of latitude but it does suggest probably in the near term something very large would be less likely.

And then Larry, it sounds like great progress at Tek, so you jump off 08 with high teens margins.

Could you give us a sense of the confidence level there and a down revenue environment to continue to take the margins up in 09, to what degree is revenue an important part of the equation or is it still just a lot of heavy cost out and redundancy out that can take the margins up?

Well, I think, Jeff, you're right.

We are rather bullish on where we are with Tek.

We're about a month away here from the one year anniversary.

It's been an excellent year.

I think as we look at '09, we know we've generated a lot of momentum here.

Yeah, it's been kind of a flattish revenue year at Tek but frankly it was very much in line with our expectations.

Obviously a number of good things going on.

The emerging markets have been good high single digit growers for Tek.

I mentioned the new scope line.

What we're doing in network Management.

Clearly, DBS has had a lot of impact.

You're talking about the margin expansion.

We're probably up over 300 bips at the op margin line this year, but I don't think we're anywhere close to being finished with respect to that cost structure, but that said, I think as we move forward, clearly we've got a growth expectation unchanged from what we said when we bought this Company.

We think this is going to be a contributor to Danaher on a standalone basis let alone in concert with Fluke where we continue to see and gain traction with the synergies.

I think with everybody, we're going to be somewhat conservative as we think about revenue for '09 so we'll continue to push those growth programs, but at the same time, make sure that we're using DBS to lean Tek to the extent possible, and again I feel that the team there has embraced DBS, has a year now in place that we really can build on.

Finally you called out cost.

Are you actually behind on price cost year-to-date so theoretically we have kind of a narrowing of that negative spread or are you just kind of thinking in aggregate obviously cost is downward pressure and there for, we just naturally get some help?

I think in the tool business, price is definitely behind cost year-to-date.

I wouldn't say that for the other segments.

Obviously in the tool business we should get some relief here starting this quarter in commodities, the offset here is I think we'll continue to see volume declines.

Thanks, Jeff.

Thank you, guys.

Audrey?

Next we'll hear from Scott Davis with Morgan Stanley.

Good morning guys.

Good morning Scott.

A couple kind of questions here.

One thing that hasn't come up is you talked a little bit about distributors gaining share, but what's your sense of inventory levels through this system?

Do you sense as you walk through early October, end of September that there's any panic in the system where people are starting to destock or the inventories were built up pretty aggressively, maybe had price increases, anything that leads you to believe we might see some change there?

Scott, I haven't seen panic but I think in a number of instances we've got some well run distributors, distributer partners who are looking at all aspects of their business as they think about '09 just as we are.

So I don't think we've seen anything radical take place, but at the same time, we want to make sure that we're working with our distributer partners to set their inventory levels along ours in the right way for what's going to be a tough '09, but again, nothing dramatic yet.

Okay.

And I know this question has been asked every quarter I think for probably a year now, but given just the wealth disruption at the consumer level, can you talk a little bit about dental mix?

I mean, has your view changed as far as the cyclicality of this business at all from Q2?

It's just a big unknown I think for a lot of people but are we really at risk here of seeing a big decline in that business?

Well, I think the business to the extent that it has that exposure to patient flow and patients obviously are our consumers has held up rather well.

I Hate to be the bread and butter type procedures that result in products for our general products businesses be it restorative, be it endodontics and the like and that's held in there pretty darn well.

Clearly, when you look back over 30, 40 years, through a number of downturns, dental spending has continued to chug along and that's U.S.

Government data.

I think a lot of people look to that as a foundation for being optimistic around the space and its ability to not swing wildly with the economy.

That said, clearly, on the KaVo side, where we do sell some higher ticket items be it our 3D imaging systems or our operatory treatment units and the like, I would not be surprised to see dentists be somewhat conservative relative to their capital spending and not only in the U.S.

but I think also in Europe in light of the uncertainty out there.

I think in the U.S, here at year's end, we'll be working against a very tough comp, I think the positive, albeit a wildcard is the 179 incentives that will be out there and everyone I talk to is still at this point, Scott, somewhat unclear but that's really a short-term measure.

I think as we look at the business that we've built out with Sybron, those businesses, Kavo, and the related equipment business, we are very pleased to have these businesses on board.

Clearly, Sybron is making great progress.

We've got work to do at Kavo and the margins specifically this business will I think out perform in its market as we go through this tougher period and be a very strong contributor to Danaher for years to come.

Good.

And just last on just understand a little bit the order patterns in Tek.

I know '07 you had some big telecom orders.

Is that something that the lumpiness there particularly in Telecom is that something that comes around every two years , three years, Is this some sort of pattern or was that a bit of a one

Well, I mean, clearly, the win at Telstra is exciting for us but the network Management business that I mentioned, the orders may be big tickets but the shipments or the revenue recognition is more of a steady Eddie type situation, Scott.

And that's, we celebrate the Telstra win but we like network Management growth because it is not lumpy at the revenue level.

That's a business Tek was growing before and we've been able to go in and as we not only have improved the margins I think we've also been able to improve the quality and delivery execution at network Management and free up resources to continue to fund the growth potential the team continues to see there.

Okay, great.

Thanks guys.

Thanks, Scott.

You bet Scott.

We'll hear from Steve Tusa with JPMorgan.

Hi, good morning.

Good morning Steve.

Good morning Steve.

Just a question on price.

I don't recall the Q's previously having all of the detail.

Almost every segment you talked about how much price you're getting.

I'm not sure if you had that before but can you talk about the dynamic of it's great raw materials, costs are coming down, how quickly does this pretty positive front end inflation environment turn on you?

Steve, I would say that if I kind of exclude tools for the moment, our ability to sort of get 1.5 to 2% price in our other businesses is largely driven by our consumable business and that tends to be less commodity and more of the ability to just kind of get that year on year.

So I think we have done a much better job on price outside commodities in an outside tool and I think our ability to sustain that is much better than it's been at any point kind of in our history.

I think we've just got better processes, better approaches on that and better execution.

I think within tools, that is a risk, where we will get less price; however, price has not been offsetting the significant rise we've seen here at least through August and commodities, so we may get less price but I'll take that in tools because I think we'll get some commodity benefit here and are starting to see that.

Can you just talk outside of tools about on the commodity front, how much that base is, as a percentage of whatever sales or costs or you can even throw tools in there and then what you're talking abo?

Do you guys have highlighted these commodity pressures pretty specifically in your Q, so I'm just wondering if you could put some metrics around that to help us out to better analyze the dynamics here.

Steve, I'd have to look at it and come back to you.

I mean, again, outside tools, and metals, things like copper within motion, it's not a significant number relative to our cost of goods sold, but I'd have to try to look at it and come back to you.

Steve, just to add a little bit of color to what Dan said , outside of tools, what has been the most insidious pressure that we've faced hasn't been any single commodity per se but really in transport and logistics

I guess that was my question.

I guess that was employ question.

The base of what you're talking about here, maybe if you can just give some more color around that.

Yeah, we'll come back as Dan suggests but it's that T& L dynamic that has been most challenging and there will be a lag effect obviously from price per barrel to the surcharges but it's by and large formulaic.

We didn't get much of that in the third.

We'll get a little bit in the fourth but I think come the New Year, that should be if things hang in just where they are today should be a positive for us.

Larry you guys have always had pretty good insight into what's going on in China.

Maybe you could just comment on what you're seeing specifically in China, you know there's a lot of debate around the economy there.

Well I'm headed over there in a couple of weeks Steve so I'll be more current then, but going through with the team a few days ago, I think the team had a good quarter across-the-board.

They're optimistic that they are going to continue to perform but recognize that even China is not immune to what's happening globally and we may see a deceleration but at this point, that's really the team extrapolating from headlines as opposed to conversation conversations with customers let alone order books but I'll be over there in a couple weeks and I think that will obviously be an important factor for us come next year.

Great.

Thanks a lot.

Thanks, Steve.

We'll now hear from Nigel Coe with Deutsche Bank.

Yeah, thanks, good morning.

Good morning, Nigel.

So obviously you're a different Company 2001-2002.

Have you done some work pro forma in that period for your portfolio and had the organic growth trended over that time, given Danaher how it is now?

Nigel, I'm not sure we've got the specific math in front of me, but the period we were down high single digits, the different mix if we layer in the Med Tech businesses, that by and large, were slower than mid single digit but we're still positive in an environment where we were down eight, a number of our other peers were down double digit.

That number might have been low single digit to flat.

I don't know if you could say what's a comparable environment but it would have been five, six, 700 basis points better core growth.

Okay, that's great color.

And then Siemens, if revenues do go negative next year which sounds like it's possible, do you think you can still grow margins in that kind of environment and kind of adding on to Steve's question, do you have any sense on how much margin you've lost in the last four or five years from being from negative price commodity inflation?

Well, we certainly would be of the view, Nigel, that on a net basis we've been reducing material cost spend for like items.

So while we've been dealing with metals and tools as Dan suggested and some other pressures here and there, we've also been accelerating our low cost region initiatives, sharpening our purchasing capabilities as well and that's been helpful to us.

How much on a gross basis, how much pressure we've seen, how much of that may be relieved here over a four or five year period, we don't have that for you this morning.

Okay, we can follow-up on that.

And then finally, just do you think you can still grow margins next year, if we have say a negative 2% revenue growth?

I think give us the time to get the businesses through budgets but clearly, we are taking the actions that we're announcing this morning as well as other activities to make sure that we've got the best top line and the best bottom line we possibly can deliver come next year.

Oh, great, thanks.

Just one final one for Dan.

For Q4, what's FX rate are you baking in for Q4?

Well, it's, I think the Euro, if we use that as a proxy averaged about 145 a year ago, it's 135, 136 today, so that would be probably a negative 2%, 3% hit to revenues.

So that will be unlike it's been in the last couple years that will be a headwind in Q4.

Thanks.

Thank you, Nigel.

And now we'll hear from Ajit Pai with Thomas Weisel Partners.

Yeah, good morning.

Good morning Ajit.

A quick question on your cash flow and use of cash flows, just looking at your share authorization, share buyback authorization, so at what point do you start finding the share so attractive that you start sort of buying your own shares as to what's happening in the broader market and potential acquisitions and then on the second front, you have made a large acquisition for awhile which means you do have a lot of fire power right now so the scale of acquisitions that you're looking at do you have something that potentially could be significantly larger than the scale of Tektronix or portfolio?

Do you have some color over there?

On the buyback, we do not have a systematic buyback program.

We tend to be sort of opportunistic.

At the end of every earnings period, Larry and I and the team sit down and sort of evaluate the situation and obviously maybe a little bit more opportunity today than in the past but we do not for obviously a variety of reasons foreshadow what we may or may not do in the open market.

Regarding acquisitions and potential size, as I mentioned earlier, I think we will be very active in this environment.

There is a lot of good small medium sized bolt on sort of adjacent type opportunities across Med Tech, test and measurement, product ID, and water that I Suspect our activities will be not unlike what it was during the last downturn, not one very large, it could be but if I had to predict one very large opportunity but a series of medium sized, small and medium sized opportunities that would build up our existing platforms.

Got it and on the share buyback, you still have an authorization there.

Are there any plans to expand that authorization and what drives the math on that decision?

When you sit down after the quarter and you decide that whether to do a share buyback or not, is it more to do with opportunities out there or is it more for acquisitions and other use of cash or more to do with the accretion that you'll have if you actually buyback your own stock?

Well it's a function of all of those, but it's largely a function of what we think our return on invested capital is on that buyback, and again, we will be sitting down here shortly to discuss that.

Got it.

Thank you.

Thanks, Ajit .

Due to time constraints our last question will come from Richard Eastman with Robert Baird.

Can I just circle back for a second as we track through the September quarter, the trends, let me think of the trends geographically but certainly in North America as well as the emerging markets seem to be relatively consistent where they were in the first half.

It appears to me that obviously Europe has turned down fairly quickly.

You mentioned it decelerated fairly quickly, has caught up to the U.S.

Is Europe the primary reason that we've accelerated the cost reduction efforts and then secondly, on the same note, the strength in the dollar, Dan if I do the quick math it would appear as you commented it will be a minus 2 or 3% hit to revenue.

That would at a conversion rate of 12% that would look like maybe four pennies of adjustment to the fourth quarter guidance due to currency.

I did the math and I came up with $0.03.

In terms of year on year.

Okay.

Rick, good morning.

You're right.

Europe is decelerating here.

We saw that through the Summer.

We saw that in September, but I think what we're talking about this morning, the acceleration of the ongoing restructuring activities is primarily a function of our macrocall, that there is great uncertainty, the risks clearly are on the downside and our balance here really has to be more weighted toward making sure the cost structures across the portfolio are in place to allow us to invest, to allow us to out perform, and what could be a very tough economy here for awhile.

I I think Europe is one manifestation of that.

The headlines and some of the early signs of the credit crisis that we've seen per I think Deane's question is another representation.

Maybe we're wrong.

Maybe this will all pass.

Maybe the governments activities here will make this a short-term event but again, I don't think we do shareholders , we don't do our team or our customers any favors by looking for the silver lining here because it's just an operating environment I don't think any of us have ever been in so we want to make sure we're ready, and I intend to make sure we are very

Okay, very good.

Thank you.

Thanks, Rick.

And that does conclude the question and answer session.

Gentlemen, I'll turn things back to you for any additional or closing remarks.

Thanks, Audrey.

Just as a reminder the replay is 888-203-1112 in the U.S.

And 719-457-0820 internationally, confirmation code 2942719.

As always, Dan and I will be available after the call to cover any questions that we were unable to cover today or any additional questions you might have.

Thanks for joining us.

And that does conclude today's conference call.

Thank you for your participation.

Have a wonderful day.