Danaher Corp (DHR) 2009 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Danaher Corporation's second quarter 2009 earnings results conference call.

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

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

(Operator Instructions) I would now like to turn the conference over to Mr.

Matt McGrew, Vice President of Investor Relations.

Mr.

McGrew, you may begin.

Good morning, everyone.

Thanks for joining us.

On the call today are Larry Culp, our President and Chief Executive Officer, and Dan Comas, our Executive Vice President and Chief Financial Officer.

I would like to point out that our earnings release, Form 10-Q, a slide presentation supplementing today's call, and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, are all available in the Investor Relations section of our web site, www.danaher.com, under the heading Earnings and will remain available following the call.

Also, the audio portion of this call will be archived in the Investor section of our web site later today under the heading Investor Events and will remain archived until our next quarterly call.

A replay of this call will also be available until July 28th.

The replay number is 888-203-1112 in the US and 719-457-0820 internationally.

The confirmation code is 7112404.

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

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

Please refer to the accompanying slide presentation, our earnings release, Form 10-Q, and other related presentation materials supplementing today's call for additional factors that impacted year-over-year performance.

Please note that our EPS guidance to be provided at the end of the call excludes the impact of acquisition costs related to any future transactions resulting from the adoption of SFAS 141R.

Costs associated with closed transactions are included in our EPS guidance.

I would also like to note that we will 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 to update any forward-looking statements.

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

Matt, thanks.

Good morning, everyone.

As some of you know, Matt McGrew is our newly appointed Vice President of Investor Relations and has been in the role for a couple of months now.

Matt has been with Danaher since 2004 and has been an outstanding partner within both Internal Audit and M&A, most recently serving as our Director of M&A Finance.

I think Matt is a great addition to the IR team, and we are happy to have him in this role.

Let me start by providing some color around what we are seeing across the businesses and end markets.

So as to provide some context to the results we delivered in the second quarter and our outlook for the rest of the year.

Clearly, conditions remain challenging.

Geographically, Europe decelerated across most of our businesses in the quarter, while the US and emerging economies remained soft.

On a relative basis, China continues to be our best performer, notwithstanding the difficult year-on-year comparisons due to sales generated in the lead-up to the Beijing Olympics last summer.

Despite the environment, I am pleased with how we are executing.

Results within our professional instrumentation segment were essentially in line with our overall business results as strength in our environmental platform helped to offset continued weakness in test and measurement.

Our medical technology segment, absent KaVo, largely outperformed, as a result of its consumables mix.

Our Med Tech segment is now approaching the combined size of our industrial technologies and tools and components businesses.

And as a result, its performance helped mitigate the larger decline seen in those two segments due to their industrial and consumer exposure.

In this environment, we continue to focus our efforts on capturing market share.

Sybron, Videojet, Radiometer, Gilbarco, Veeder-Root, Matco and ChemTreat are among the Danaher businesses where we believe we have taken notable share from competition.

Our margin performance was again strong in the second quarter, despite a sequential deterioration in our core growth, our decremental margins were similar to our solid first quarter performance.

Additionally, I'm pleased to report that cash flow, perhaps the most significant metric for Danaher, was once again robust, as we generated $438 million of free cash flow in the quarter.

Despite the economy, we expect strong cash flow for all of 2009.

As previously announced, we anticipate a total of $150 million to $170 million of restructuring spending for 2009.

In the second quarter, we spent $46 million of these funds and eliminated approximately 1,000 positions.

This amount is approximately $34 million or $0.08 per share higher than our original budgeted plan for the second quarter, but consistent with our guidance provided last quarter.

We believe these restructuring actions will position us well to weather the storm and to outperform when the economy improves.

So with that as a backdrop, let's move to the details of the quarter.

Today, we reported second quarter earnings per diluted share of $0.89, representing an 18.5% decline from last year.

Despite the challenging economic environment, we were able to deliver EPS within our guidance range, primarily as a result of the savings generated by the restructuring actions initiated last year and taken in the first half of this year.

As well as the ongoing hard work of driving material costs and operating expense reductions across the Company.

Results for the quarter decreased 18.5% year-over-year to $2.7 billion, with core revenues down 15%.

The impact of currency translation reduced revenues by 5.5%, offset by acquisitions which contributed 2% to sales growth.

Year-to-date revenues decreased 16% to $5.3 billion, as core revenues declined 13%.

Year-on-year gross margin for the second quarter decreased approximately 30 basis points to 47.2%.

This modest decline is primarily explained by our 2009 restructuring spending, as our cost savings have largely offset the impact of the revenue decline.

SG&A expenses as a percentage of sales were 28.4%, compared to 26.2% a year ago, primarily due to reduced leverage on our SG&A cost base, as a result of the lower sales volumes and additional restructuring cost in 2009.

For the quarter, research and development spending as a percentage of sales was essentially flat year-over-year at 5.9%.

Operating profit for the quarter was $344 million, representing a 33% decrease over last year.

Incremental restructuring spending over the prior year accounted for approximately one fourth of this decrease.

For the first six months, operating profit was $684 million, a 26% decline over the same period a year ago.

Operating margin in the second quarter declined 260 basis points to 12.9%, primarily due to lower sales volumes across most businesses and the impact of incremental year-over-year restructuring costs, partially offset by benefit of restructuring and cost reduction activities.

Year-to-date, operating margin decreased 170 basis points to 12.9%, primarily as a result of these same factors.

Our effective income tax rate for the quarter was 6%, as compared to 24% in the prior year period.

Our effective income tax rate was favorably impacted by discreet tax benefits of $60 million, or $0.18 per share, related to the resolution of various international and domestic tax matters, which we included in our guidance for the quarter.

For the balance of this year, we anticipate our tax rate to be approximately 25%, absent the impact of additional anticipated favorable discreet tax items.

Net earnings were $296 million for the quarter, a decrease of 18.5% compared to the prior year, a result of lower revenues and additional restructuring spending, offset partially by the previously mentioned tax benefit.

For the first half, net earnings were $533 million, a decrease of 16.5% over last year.

Operating cash flows for the second quarter were $486 million, a 16.5% decrease year-over year.

For the first six months, operating cash flows were $802 million, a 12% decline over last year.

Free cash flow for the second quarter was $438 million, and our free cash flow to net income conversion ratio was 148%.

DBS is the driver behind this significant and sustained cash flow performance.

Our first half cash flow performance includes $95 million of cash payments, as a result of our restructuring initiatives.

Of particular note, we reduced inventories by over $90 million in the quarter.

We anticipate that our conversion ratio will remain strong over the balance of the year, and as a result, we are optimistic about our ability to deliver free cash flow in excess of net income for what would be our 18th year in a row.

Financially, we are in great shape with $1.3 billion of cash on hand, and over $1 billion available under our CP program.

As we referenced in our prior earnings call in early April, we completed the acquisition of three companies, with aggregate annual revenues of about $50 million, to strengthen our environmental, test and measurement, and sensors and controls businesses.

We remain confident in our ability to deploy capital in this environment and are encouraged by the opportunities in our acquisition funnels today.

Now turning to the operating segments, professional instrumentation revenues decreased 17% for the quarter with core revenues down 15.5%.

For the first half, revenues decreased 15% with core revenues down 13.5%.

Operating margin for the second quarter declined 500 basis points to 15.1%, primarily due to lower sales volumes and the incremental impact of year-over-year restructuring costs incurred during the quarter.

Year-to-date, operating margin decreased 200 basis points to 16.4%, when compared to 2008, due principally to these same factors.

Environmental platform revenues declined 3.5% in the quarter with core revenues down 1%.

For the first half, revenues decreased 2.5% with core revenues flat.

Water quality core revenues declined at a low single digit rate in the quarter.

At Hach-Lange, core revenues declined at that mid-single digit level as growth in consumables in aftermarket service revenues was more than offset by soft instrumentation sales.

Despite the top line performance, Hach-Lange's operating margin expanded more than 50 basis points in the quarter.

Trojan's core revenues grew at a double digit rate in the quarter, with strong growth in waste water applications, as well as continued shipments for the New York City drinking water program.

This project is expected to positively impact Trojan's revenues for the balance of this year.

During the quarter, Trojan received the prestigious Stockholm Industry Water Award awarded by the Stockholm International Water Institute in recognition of several recent Trojan installations that illustrate the potential of UV treatment for waste water reuse applications.

At ChemTreat, revenues were essentially flat year-over-year, as unseasonably cool weather in April and May briefly delayed sales to boiler-cooler applications.

New account generation was robust in the quarter, and we believe we are capturing share in many of our vertical markets.

Gilbarco Veeder-Root's core revenues were up low single digits year-over-year, and Gilbarco sales grew at a mid-single digit rate.

Solid growth in our passport point-of-sales systems, where we think we are taking share, was partially offset by lower dispenser sales.

Veeder-Root's sales were down in the quarter with sales of our enhanced April recovery solution slowing as regulators delay enforcement actions until later this year.

Moving to test and measurement, revenues declined 30.5% in the quarter, with core revenues down 30% reflecting a very challenging market environment.

All businesses were down significantly with the exception of Tech Communications.

For the first six months, revenues decreased 26.5% with core revenues down 26%.

Fluke core revenues declined as sales of core test products in Europe decelerated rapidly during the quarter.

Inventory reductions in the distribution channel at Fluke continue to adversely impact revenues.

At Tektronics, sales were down across all product categories and geographies as customers continue to delay investments.

Electronics and computer endmarkets were particularly soft .

Sales from our Fluke networks and Tech Communications businesses collectively declined at a mid-teens rate as weak demand in our Enterprise Management Systems was partially offset by strong sales to North American carriers.

Despite the weak top line performance, Tektronics achieved double digit operating margins in the quarter, absent restructuring costs.

Moving to medical technologies, revenues for the quarter decreased 12% compared to last year with core revenues down 7.5%.

For the first six months, revenues decreased 9% with core revenues down 4.5%.

Med Tech operating margin for the second quarter was down 100 basis points to 9.8%, due primarily to incremental restructuring costs incurred in the quarter.

Operating margin for the first six months decreased 80 basis points to 10.3%, as compared to the first six months of last year, a result of incremental restructuring costs and lower sales volumes.

Within our dental business, core revenues declined at a low double digit rate in the quarter.

Sybron sales declined at a low single digit rate with higher sales of our disinfection product lines more than offset by soft sales of general dentistry consumables and orthodontia products.

Sales of TotalCare disinfectant wipes, used for medical applications, were particularly strong in the quarter with infection control experts using them to help prevent the spread of the H1N1 swine flu virus.

Despite the soft top line, we believe Sybron is capturing market share across a number of product categories.

KaVo revenues declined at a high teens rate in the quarter with a general slowing across all major geographies and most product categories.

The economic downturn continues to significantly impact sales of new dental equipment , as many doctors postpone capital investment in their practices.

A bright spot within the business has been our European demand for KaVo's E70 treatment unit which we launched earlier this year.

While we expect the third quarter to remain challenging, we are encouraged by the medium-term outlook.

We just completed a terrific sales meeting with a key distribution partner and are launching some important new products in the second half.

And we are seeing positive results from our cost reduction activities.

Leica core revenues declined at a mid-single digit rate in the quarter, driven by weak demand in the industrial and life science research markets.

While we have seen increased quote activity, a number of customers are delaying new equipment purchases pending the release of federal stimulus funding for qualified programs.

Leica Biosystems core revenues declined at a high single digit rate in the quarter, as a difficult year-over-year comparison in soft instrument sales more than offset sustained growth of our advanced staining consumables.

Encouragingly, new orders continued to grow at a mid-single digit rate in this business.

Radiometer's core revenues grew at a mid-single digit rate for the quarter driven by continued strong consumable sales, primarily in Europe and Asia resulting from past success in growing our install base.

China sales also benefited from the launch of the ABL80 compact, blood gas analyzer.

Moving to our industrial technology segment, revenues declined 25.5% for the quarter with core revenues down 19%.

For the first half, revenues declined 22% with core revenues down 16%.

Operating margin for the second quarter was 15.7%, a 140 basis points decline compared to last year due primarily to lower sales volumes, as well as incremental restructuring costs incurred in the quarter.

Year-to-date, operating margin decreased 130 basis points to 14.7%, largely due to these same factors.

Product ID revenues were down 19.5% in the quarter with core revenues down 12.5%.

For the first half, Product ID sales decreased 18% with core revenues down 10.5%.

At Videojet, sales of consumables and after-market services declined at a lower rate than equipment sales in the quarter.

We believe our medium and low price point CIJ printers which we launched at the end of last year are continuing to take share in a tough market.

Motion revenues were down 43.5% in the quarter with core revenues down 35%.

For the first half, sales declined 37.5% with core revenues down 29.5%.

Further deceleration in our elevator business which was down nearly 50%, and flat panel displays, which was down more than 70%, impacted our performance during the quarter.

Additionally customer shutdowns, particularly in Germany, contributed to a meaningful slowdown in our European business.

Finally, moving to tools and components, revenues for the quarter were down 23% with a core revenue decline of the 22.5%.

For the first half, revenues declined 22% with core revenues down 21.5%.

Operating margin for the quarter was 14.5%, an increase of 150 basis points from the prior year, due to the benefit of lower commodity costs, increased productivity cost savings attributable to prior year initiatives, as well as some favorable mix, which helped offset both lower sales volumes and incremental year-over-year restructuring costs incurred in the quarter.

Year-to-date, operating margin decreased 180 basis points to 10.6% with the difference from the three-month period largely a result of legal and commodity costs recorded in the first quarter.

Mechanics Hand Tool core revenues declined 12% in the second quarter and 13% for the first six months, primarily due to lower sales to both consumer and professional channels.

We were pleased with our sell-through at Sears in the quarter, which was the strongest in nearly two years, helped in part by good Father's Day sales.

Sales of our domestic China tool brand, [Sada], also rebounded this quarter.

To wrap up my prepared remarks, as we are all aware these are unprecedented economic times.

It is during times like these that we believe we have the ability to outperform.

When the economy and our end markets improve, we believe we will emerge as an even stronger and more competitive Company.

Our expectation is for third quarter core revenues to be in line with those of the second quarter.

For the full year, we are forecasting core revenue declines approximately in line with the first half of this year.

The additional restructuring charges that we announced in April are expected to reduce EPS by approximately $0.08 per share in the third quarter and $0.25 per share for the full year.

We expect the reductions in our tax reserves will increase EPS by approximately $0.12 per share in the third quarter and $0.30 per share for the full year.

As a result, we expect our earnings per share for the third quarter to be in the range of $0.80 to $0.90.

For the full year, we expect earnings per share to be in the range of $3.30 to $3.50.

These ranges include the tax and additional restructuring items just mentioned but exclude the impact of future acquisition-related costs, resulting from the adoption of

Thanks, Larry.

That concludes the formal comments.

We are now ready for questions.

(Operator Instructions) Our first question today comes from Bob Cornell, Barclay's Capital.

Good morning.

Good quarter, but tough quarter.

Maybe just first of all give us a little help, Larry, with how the quarter tracked?

April, May, June?

Was the exit rate June, significantly worse than the 15% organic growth decline?

Bob, good morning.

No, as you look across the last three months, we were pretty much in line with what we reported during the course of the quarter.

No real change in that regard.

Certainly not a decel as we exited June.

Some of the leading indicators -- whether it be quotations or funnels, our look at many of our distribution partners' inventories.

I think on balance, we are stabilizing.

And in some cases, dare I say encouraging, but in terms of what went out the door it was by and large linear during the quarter.

When you talked about gaining market share in a bunch of these businesses, some of the heavy lifting on restructuring.

Do you think you are setting yourself up -- Danaher up -- to grow faster than the 5% to 7% going forward in a comparable economic environment?

Is that something that is in the back of your mind at all in some of these programs?

I think everything that we do, Bob in that regard, both organically and frankly, inorganically, is aimed at delivering core growth in that range.

And obviously, we would like to over time think that we could do better.

I don't think we are going to reframe that long-term core growth rate on the call today.

I am optimistic that we will be in a different economic environment at some point.

But right now, I think we are well served by being tough on costs, being aggressive on share, and continuing to stoke the acquisition pipeline.

Which again, I think we are very optimistic about, and just play our game.

And when the headwinds subside -- let alone when the tailwinds present themselves -- I think we will be in good shape.

One final thought, Larry.

Is it fair to say the change in guidance is a function of the drop in Europe?

I think that's a large part of it, Bob.

We saw in Europe a marked decel from the first quarter.

We were working probably against one of our tougher comps over there.

But Europe got soft in almost every business during the second quarter in a way that, I think hopefully, is not a permanent state.

But it was a shock to the system.

Got it.

Thanks.

Thank you, Bob.

Your next question will come from Nigel Coe, Deutsche Bank.

Thanks, good morning.

Good morning, Nigel.

I guess sharp declines in test and measurements opens the door.

That could rebound quite quickly.

How did the book-to-build ratios look in that -- those businesses?

Unlike the first quarter, where our shipments were clearly better than our bookings, we saw more equalization of that in the second quarter.

So I am not sure we're forecasting a turn here in the second half, but that was an encouraging sign.

How does the new product launch cycle look for Tektronix through the second half of the year and maybe into 2010?

I I think the new product pipeline there, Nigel, is one where we are pretty encouraged by.

That team has certainly over the last two years been more focused around where we have been spending that money.

They obviously have a long history of being outstanding and bringing new technologies to market.

I would just add to your question -- another area we have been working hard on at Tek is to improve the global go-to-market capability.

It is one thing to have great products, but we need be able to sell those effectively, present that value prop to customers around the world.

As we anticipate that bounce you just referred to, which will come, we just don't know when.

But from a product and a go-to-market perspective, we will be in much better shape than we were when we went into the downturn here.

In that regard, how much of an opportunity do you think the 3G launches are in China?

I think China is hard for us to read right now, but within the [com] side at Tek, we are comfortable with our positioning.

But obviously, we want to see that play out a bit more than it has thus far.

One final one for me.

The industrial margin strength was a bit of a surprise given the volume headwinds.

Can you just break out price inflation?

For the whole of Danaher, the price inflation gap through the quarter?

And in particular, within tools and industrial tech?

Nigel, specifically on price.

We got about 1.5% of price across businesses, and I think its roughly in those segments.

So I think we were pleased the way price held up.

That clearly benefited margins in the quarter.

I think, particularly, with motion and tools, we are getting some commodity benefit right now.

You saw that play out in the very good tool margin performance.

I would add to that, we are executing well in the factories, both on the tool and the margin side, and I think that is helping as well.

We also have some commodity relief really starting to play out here in the second quarter in those two businesses.

Great.

Thanks very much.

Next, we will hear from Steve Tusa with JPMorgan.

Hi.

Good morning.

Good morning.

Hi, Steve.

So where did the -- it is tough to tell what the dynamics around the margin in professional instrumentation.

But where do the margins in Tektronix stand?

And I guess, if you can just talk about that versus just the margin dynamics between that and Fluke in the quarter?

Tektronix, all up, absent the [restructuring], was about 10% operating margin.

Fluke remained at north of 20%.

Okay.

Great.

And then, just looking at the back half of the year.

Any change in your foreign exchange assumptions?

Basically, based on where it was right now about 140, which is pretty close to where it was in April.

Okay.

Great.

Thanks a lot.

Thanks, Steve.

Our next question will come from Deane Dray with FBR Capital Markets.

Thank you.

Good morning.

Hey Deane.

Larry, I would like to pick up on your comment to Bob's earlier question regarding M&A.

You said that you are optimistic.

Just give us the latest update in terms of pipeline, asking prices for assets, and more specifically about how much acquisition capital you think you are willing to commit at this stage?

Sure.

Deane, I think again, we certainly are very busy right now on the M&A front.

We are pleased with the progress we are making both around, frankly, the active deals, as well as in our monthly funnel reviews with all of the businesses.

As we've said I think during the course of the year, time is our friend here as the 52-week highs come down, with the [public's] and the economy just wears on many private owners.

As we look at the balance sheet, clearly, with the cash on hand, mentioned the CP availability as well.

We are very comfortable with the prospect of deploying billions of dollars in this environment.

I think we will try to be as smart as we can, both strategically and financially, as we deploy that capital.

But we have a lot of conviction that these are the types of times in which we want to be an aggressive, strategic investor in our businesses.

Obviously, not a lot necessarily through the first is six months to show in that regard.

But again, I think this is going to be a good year for us as the environment only gets better.

Should we expect a larger deal or a number of smaller bolt-ons?

You are probably not willing to give more clarity on the 'billions', but can you narrow that down at all?

Deane, one way to frame that up is we have roughly $1 billion in cash on the balance sheet.

If we have comparable cash flow in the second half to the first half that would be another $0.75 billion.

And as Larry mentioned, we have $1 billion of availability on our commercial paper program.

So that could frame up our latitude, if you will, over the next two to three quarters from a capital structure point of view.

Deane, we never plan it this way, but, obviously, as you look at every dozen, fifteen deals that we do, the majority of those tend to be important bolt-ons with one or two or three larger transactions that are also consistent with the strategies.

As we try to provide you with a little bit of color, looking forward I don't think that the future will be much different than that past performance.

Sure.

Just a follow up for Dan.

At EPG, you all were quite explicit to say you were managing more to a decremental margin at this stage of the downturn and 25 was the bogey.

And it looks like you slipped a little bit above that.

How precise can that be managed?

And what are your expectations going forward?

Deane, in the second quarter if you excluded the incremental restructuring, our decrementals were actually about 23%, which is a little better than what we did in the first quarter, clearly.

If you add the incremental restructuring, we were slightly north of 25%.

We were very pleased with our decremental margin performance here in Q2, resulting from a couple of things.

One, the actions we have taken on the restructuring side.

Two, the fact that we still are getting some price.

And finally, we did get -- we are getting some commodity relief here.

Great.

Thank you.

Thanks, Deane.

Next is Jeff Sprague, Citigroup.

Thank you.

Good morning.

Good morning, Jeff.

Just on Tek versus Fluke.

It appears that the margins in Tek are coming down much more sharply than they are in Fluke?

Is that a correct statement?

Or is that just a function of where you are at in the integration?

I think it is a function of a couple of things, Jeff.

One is the -- Tek's down a little bit more than Fluke.

The gross margins are a little higher at Tek.

So that top line dynamic creates a little bit more downward pressure.

The third bit would be just what you described -- we, obviously, are much further along at Fluke than we are at Tek.

One business we've had for a decade.

The other, for a couple of years now.

But that said, as we move through the second half of this year, we would anticipate showing some sequential improvement in the margins at Tek.

I think they're doing a very good job on the cost side.

And as Nigel alluded to earlier, when the volumes come back, I think we are really going to like the performance out of that business.

The favorable price cost that you saw in the quarter.

I guess particularly for tools, but also in the motion and some of the other industrial businesses.

Do you have that magnitude of a benefit in the third quarter?

Or does it start to diminish from here?

How do we think about that?

You have seen some rise in some commodity prices, so it may not be quite as much.

Within tools, everything worked very well in the second quarter.

Our execution, the price, commodities -- we also had some favorable mix.

Within tools, I wouldn't expect quite as much of it at a year-on-year improvement.

That's probably more related to mix and maybe a little less commodity benefit.

Is there any favorable LIFO dynamics going on in the margins currently?

I think we bled through the high commodity costs.

Even though commodities came down the end of last year, it actually took through getting through the first quarter to really see the benefit.

And it really rolls into the second quarter.

And then, just finally from me.

On Trojan, a nice bright spot.

How long does that project play out over the next several quarters?

And anything else going on in the bid and proposal side of that business?

Regarding New York City, we will ship -- we will recognize most of that revenue this year.

And we will have a strong second half -- both quarters -- regarding Trojan here.

Jeff, we haven't really seen a dramatic tail-off in the big quote activity there, which is encouraging.

I think that is where the Stockholm award is particularly important because with everything going on in places like Australia and California.

The whole idea of this wastewater reuse is getting more attention.

I think Trojan is very well positioned in that regard.

Is there any stimulus that's actually pointed toward Trojan in some direct or indirect way?

Our view is that both Trojan and Hach-Lange will get some of this targeted water quality money.

This stuff is far from shovel-ready, as they say.

It is probably more of a dynamic for next year, and maybe even more so in '11 than anything that we might dial in here for the second half.

In contrast, whether you are talking about the US stimulus or maybe even what the Chinese and the Japanese are trying to do, we would anticipate maybe seeing a little bit more of that show up in Med Tech, particularly at Leica on the research side a little sooner.

But quite frankly, Jeff, we don't have a lot of that dialed in here to the second half.

Obviously, Fluke has got some exposure both around weatherization and the so-called smart grid.

But again, it is on the margins by and large, and we are not going -- what we have presented here is not a fourth quarter waiting for a handout.

Right.

Thank you.

Our next question will come from John Baliotti with FTN Equity Capital Markets.

Good morning.

Hi John.

Good morning.

Larry or Dan, collectively -- obviously, the balance sheet is very strong.

And you have had a very long history of deep due diligence even on small deals.

I am just wondering --we have seen some headlines on some macro data that makes people think that things are being better.

Some companies are saying that it is less negative or things are stabilizing.

Is that manifesting itself in any of the targets?

Do they have the impression that hey, they made it this far.

So they're not looking for the kind of valuations that they may have been considering earlier in the year?

Given that your restructuring is going up, it would appear that you are certainly not expecting things to just come right out of this any time soon.

I am wondering -- are the targets less realistic than you are?

Some may be listening in, so I don't want in any way to -- .

Academically.

Academically, of course.

John, I think everyone is mindful of the environment.

Obviously, what we do is driven by a long-term perspective on what's best for Danaher.

I think that general stabilization that we're seeing perhaps in a number of markets at least here in the US is helpful.

It is constructive.

Because in certain situations, it has been tough to talk about the numbers, the forecast, the model with things moving around the way they have the last six to nine months.

So I think in a number of situations, where people have perhaps decided to have a conversation with us or with others -- the current environment is actually, again, constructive because we can talk to a set of numbers that have perhaps less variability and risk in them than they might have three or six months ago.

It's obviously not just you.

Because there are a number of companies that have history of consistent M&A.

And they are pretty quiet also, and they are also very conservative and also very thorough.

It seems consistent that no one seems to be doing very much right now.

And the equity market running in spurts.

It seems like some people are thinking that we are just going to come right out of this.

And spending is going to resume the way it was going into it.

I would encourage you not too tightly link the absence of any announcement with the level of work that's being done.

No, I would expect it to be just as much, if not more.

But it seems like there's obviously no panic on anyone's part, given what's going on out there.

Is that fair to say?

John, I would add a couple things and maybe along the lines of what Larry referenced.

The improvement in the equity markets here the last couple of months.

Actually, it helped a few discussions.

There's a little bit less of a mindset from some sellers that I'm selling at the absolute bottom.

Naturally, that plays into price discussions.

I would also add that the expectation among sellers of a very quick recovery.

I would say is significantly dissipated versus our discussions four or five months ago.

And as we talk about forecast with potential sellers, you are seeing a lot fewer V-shaped recoveries.

If they do, you really drill down with them.

They realize that's kind of optimistic.

So I think just the economic climate -- the fact it has been now out there for three quarters -- does weigh on sellers.

Particularly around how good things could look or may not.

Or perhaps things that may not turn that quickly.

When they do turn, that again helps in terms of the price discussion.

That's good to hear.

Thank you.

Thanks, John.

Next is Steve Winoker, Sanford Bernstein.

Good morning.

Good morning, Steve.

Couple of questions.

One on restructuring.

You had talked about the $150 million to $170 million targeted for '09 charges that would lead to '09 savings of about $150 million and annualized to about $250 million.

You have talked a lot about that this call.

But could you give a little more color on how we should think about that quantitatively in terms of your progress against the savings side of that?

Steve, what we referenced was the $150 million to $170 million would generate about $50 million of savings in the back half year.

And about another $90 million next year, about $140 million in total.

I think what you are referencing is the $250 million in total of savings includes what we did in the fourth quarter of last year.

Yes.

So roughly, the $250 million of spend will get us annualized savings of $250 million.

But in terms of the payback we are seeing, we are pretty comfortable.

And we see it playing out in the decremental margin.

That we are getting kind of a one-year payback on what we have done so far.

And we have seen that play out pretty favorably here in the first half.

As you know, we are pretty high gross margin, high contribution margin business.

And our ability to keep the decremental down to 25% has been the result of what we have done.

.

So at least, what we have executed so far, the paybacks played out as we

Why not increase the restructuring at this point in terms of the forward commitment?

Is it a function of -- we feel like we have our hands full already just trying to balance capital allocations?

How should we think about increases in the actual charges?

Well, Steve, obviously, as Dan's walk just suggested, we did that not too long ago.

Virtually every one of our businesses is pretty busy in that regard.

But you raise a good question.

I wouldn't want to discount the possibility as we get a little further down the road this year -- as we see those types of projects present themselves if we continue to make the progress executing the approved programs.

We may come back and do just that.

Okay.

On working capital, I looked at inventory a couple of days better than prior quarter -- a couple of days worse than prior year.

Receivables a little bit longer by a few days.

Payables about in line.

Not dramatic changes.

As you look at that current in the environment, what dynamics are you seeing going forward ?

Overall, we were very pleased.

Particularly if you look at the end of the first quarter and what we did in the second quarter taken out about $90 million of inventory out of the system.

It is clearly a little bit of a negative to the net income line as we put less overhead into inventory.

But clearly the right thing to be doing from a cash flow perspective and managing the business appropriate with the inventory -- with the top line picture.

So overall, I would say, Steve, we are pretty pleased with what we have done on the working capital side here in the first half, particularly the second quarter.

In terms of receivables side, customer liquidity.

Are you seeing less pressure on your customers as well?

Steve, on the margin, it has probably gotten a little bit better.

It is still a little bit more of a challenge in the emerging economies, as you'd expect.

And that's where we are seeing challenges.

It tends to be in those economies.

I guess my final question in light of all the acquisition discussion.

You have talked about Tek versus Fluke a bit and given the core growth down over -- so dramatically.

How are you thinking about what are -- what is evidence of integration success here?

As we think about -- should another major acquisition come along, we can or cannot point to Tek as an example of Danaher's successful DBS implementation.

I just think that if you look at the margin performance both on an absolute and a decremental basis, in light of the economy, to me, the performance stacks up pretty well.

I also think if you look at what we are turning in here relative to competition, we fare pretty well.

Some of the things a little harder, Steve, to give you visibility on that I look at relative to the team's embrace of DBS and the lab and on the sales and marketing side.

What they are doing relative to what will move the share needle, if not the overall top line going forward.

I think this has been a very well executed integration.

I give that team out in Beaverton very high marks int hat regard.

Has it been perfect?

No, but an excellent effort in many ways.

And again, I think as some folks mentioned earlier, we simply need a little bit of tailwind in that marketplace for this business to be a very strong contributor to the overall Danaher performance.

Steve, just one data point.

As you know when we acquired the business, there was about a 12% operating profit business.

This quarter, top line was down over 30%, and we still achieved 10% operating margin.

For a 60% gross margin business, you can you can imagine the fall-off when you lose 30% of revenue.

Great.

Thank you.

Thank you, Steve.

Terry Darling of Goldman Sachs has a question.

Thanks.

Got on the call a little bit late.

I may have missed this.

Wondering if you could talk about expectations for second half free cash conversion?

We -- .

It generally won't be as strong as this quarter which was much better than we thought, but still pretty soft.

We suggested we thought that while we are proud of the second quarter, and that's a high bar at a minimum.

We thought we would have strong conversion in the second half.

And certainly thought the full year would be north of 100%, Terry.

Okay.

And then, Larry, can you talk about maybe the two swing factors that might push you to the high end of the range for the back half guidance?

And the two or three swing factors to the low end?

Yes.

I think that given what happened in in Europe in the second quarter, that's probably on both lists, Terry, to be frank.

I think one of the swings to the upside could well be inventory levels in the channel.

We have seen such a dramatic drop, even in the face of sell-through being down, but relatively stable, depending on how folks come back from Labor Day and are looking at their inventory levels.

We could see a little bit more of a pop in the top line than, frankly, what we have dialed in.

We have got a generally conservative top line for the second half, just given environment.

But that's where I would look to see a little bit of potential upside.

In terms of the down side.

Again, I think Europe is the geography that we have our eyes on right now.

And then lastly, buy back.

Is that on the radar screen at all?

Or are you just that optimistic about acquisitions that you want to remain in position for that?

Right now given what's in the pipe, we are going to be very focused on the M&A front.

Thanks very much.

Thanks, Terry.

Due to time constraints, we will now take our final question.

And it will come from Richard Eastman, Robert Baird.

Larry, just a couple of things on the geographic perspective.

One is, could you just lay out the second half as it applies to China terms of your expectations?

Can we see some growth there year-over-year in the second half?

I think we will see an improving situation in China.

We have seen a lot of projects get pushed, interestingly, at a time when the government is trying to stimulate the economy.

But I think that we have got an eye on returning to growth perhaps more so in the fourth than in the -- for the full second half.

Okay.

Would it be fair to say that any follow-on restructuring program or additional incremental restructuring program in the second half, again would be perhaps targeted more toward the European assets given where sales trends are?

Are you comfortable that you have scoped out enough cost savings given the relative decline in volumes out of Europe?

Rick, I think that's a very fair assumption.

But I wouldn't limit it to Europe, largely because as we tend to transform these cost structures in our best businesses and some of our businesses with the most improvement opportunity.

Regardless of where they're located, one improvement sets you up to go get the next one.

So there are things that we are working on now, even in the US, that may well set us up to access that next level of costs coming out.

But your point about Europe is very relevant, at least to our business.

And I suspect, others.

Alright.

Thank you.

Thanks, Rick.

And that does conclude our question-and-answer session.

We will now turn the conference over to Mr.

Matt McGrew for any closing or additional remarks.

Thanks, Mark.

Just as a reminder, the replay number is 888-203-1112 in the US and 719-457-0820 internationally with a confirmation code of 7112404.

Dan and I will be available today for any follow-up calls.

Thanks everyone for joining us.

And that does conclude our conference call.

Thank you for your participation.