Danaher Corp (DHR) 2009 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Danaher Corporation third quarter 2009 earnings results conference call.

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

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

(Operator Instructions) Thank you.

I would like to turn the call over to Mr.

Matt McGrew, Vice President of Investor Relations.

Mr.

McGrew, you may begin your conference.

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, slide presentation supplementing today's call and the reconciling and other information required by the SEC, regulation G relating to any non-GAAP financial measures provided during the call are all available in the investor's section of our website, www.danaher.com under the heading earnings and will remain available throughout the call.

Also the audio portion of this call will be archived on the investor section of our website 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 October 27th.

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

The confirmation code is 8728742.

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

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

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

I'd 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 they are made, and we do not assume any obligation to update any forward-looking statements.

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

Matt, thanks.

Good morning, everyone.

We'll start this morning by providing an overview of what we are seeing across our businesses and then Mark gets to lay a framework for our quarterly results, and our outlook for the balance of the year.

We are pleased with how we are executing in a stabilizing yet still challenging economy.

Results within our Professional Instrumentation segment were essentially in line with our overall business results.

Environmental continues to be relatively resilient while Test and Measurement saw a sequential improvement, though overall remains weak.

Our Medical Technology segment, a [desection] of KaVo, largely out performed as a result of its high consumables mix.

The Industrial Technology segment, absent our niche Aerospace and Defense businesses improved sequentially, particularly in North America, while Tools and Components businesses continue to experience soft demand.

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

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

Geographically, China was our best performer with mid single digit revenue growth in the quarter.

Europe and the emerging economies continue to be very soft, while the US saw modest sequential improvement in many end markets.

Our margin performance was again strong in the third quarter with our core operating margins improving sequentially by 140 basis points from 14.2% in the second quarter to 15.6% in the third.

In addition, each segment saw a sequential improvement in core margins.

Additionally, our cash flow was once again robust as we generated $472 million of free cash flow in the quarter.

Despite the incremental restructuring costs and lower volumes experienced across our businesses, year to date free cash flow was down only modestly.

During the quarter we announced a top-up to our previously communicated 2009 restructuring initiatives, which are now expected to approximate $250 million, and are expected to provide annual cost savings of approximately $220 million.

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

We reported today third quarter GAAP earnings per share of $1.05, representing a 5.5% decrease from last year.

Adjusted net earnings per diluted share was $0.89, which was $0.02 above the high end of the $0.77 to $0.87 adjusted EPS guidance range we provided in July.

Revenues for the quarter decreased 14.5% year over year to $2.75 billion, with core revenues down 14%.

The impact of currency translations reduced revenues by 2%, offset by acquisitions, which contributed 1.5% to sales growth.

Across our businesses, orders solidly outpaced shipments as we built approximately $100 million of backlog during the quarter.

Year over year gross margin for the third quarter increased 90 basis points to 48%, largely due to year over year cost savings related to our restructuring initiatives and ongoing cost reduction efforts as well as lower commodity costs, which more than offset the impact of lower sales volumes and additional restructuring costs in 2009.

Operating margin in the third quarter increased 60 basis points on a year over year basis to 16.9% with lower sales volumes across most businesses and the impact of incremental year over year restructuring costs more than offset by a onetime gain, resulting from a litigation settlement with Align Technology, and the benefit of restructuring and cost reduction activities.

Our affected income tax rate for the third quarter was 19.1%, as compared to 24.5% in the prior-year period.

Our effective income tax rate was favorably impacted by discrete tax benefits of $37 million, or $0.11 per share related to the favorable resolution of various international and domestic tax matters, which was previously included in our guidance for the quarter.

For the balance of the year, we anticipate our tax rate to be approximately 25%.

Operating cash flows for the third quarter were $503 million, a 16% increase year over year.

For the first nine months, operating cash flows were $1.3 billion, a 3% decline year over year.

Free cash flow for the third quarter was $472 million, and our free cash flow to net income conversion ratio was 134%.

Our year to date cash flow performance includes $136 million of cash payments as a result of our restructuring initiatives.

Of particular note, we reduced inventories by over $113 million, or 10% year to date, which is roughly in line with our core sales decline of 13%.

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

During the quarter, we completed the acquisition of six companies with aggregate annual revenues of about $130 million to strengthen our Environmental, Test and Measurement, Product Identification, and Dental businesses.

We also announced our intention to acquire AB SCIEX, Molecular Devices and PaloDEx, all of which we anticipate closing in the fourth quarter.

We are optimistic about our ability to deploy capital in this environment, and are encouraged by our active opportunities.

Now turning to our Operating segments, professional instrumentation revenues decreased 12.5% for the quarter with core revenues down 13.5%.

For the first nine months of 2009, revenues decreased 14%, with core revenues down 13.5%.

Operating margin for the third quarter declined 450 basis points to 15.6%, primarily due to lower sales volumes and the incremental impact of year over year restructuring costs incurred during the quarter.

Our environmental platform revenues declined 2.5% in the quarter with core revenues down 2%.

For the first nine months revenues decreased 2.5% with core revenues down 1% year over year.

While our quality core revenues increased at a low single digit rate in the quarter, at Hach Lange core revenues declined at a low single-digit rate but with lab and process sales improving sequentially from the prior quarter due to an increase in project activity.

Despite the top-line declines in prior-year restructuring costs, Hach Lange's operating margin expanded more than 100 basis points over last year.

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

ChemTreat's revenues were up low single digits year over year driven by sales of our boil cooler water applications.

[UOTAU] generation continues to be robust and we believe we are capturing share in many of our end markets.

During the quarter we acquired [Hexus Scientifica], a Brazilian based distributor of laboratory instruments, microbiology products and basic lab equipment.

Hexus is the primary distributor of Hach Lange products in this strategically important emerging economy.

Also in the quarter, we acquired Para-Chem technology, a US based provider of geothermal solutions for steam, brine and cooling water systems.

The Geothermal segment is an attractive adjacency for ChemTreat and provides access to end markets poised for accelerated growth in the coming years as the demand for clean and renewable energy increases.

Gilbarco -- Veeder-Root's revenues declined at a high single digit rate year over year.

At Gilbarco, sales declined at a low single digit rate as continued growth in our Passport point of sales systems was more than offset by lower dispenser sales, principally in Europe.

Veeder-Root sales were down in the quarter with sales of our enhanced recovery solutions slowing in advance of the year-end implementations deadline in California.

Moving to Test and Measurement, revenues declined 23.5% in the quarter with core revenues down 25.5%.

Fluke, Tektronix and Fluke Networks all improved sequentially from the previous quarter with signs of stabilization in the US and China, while Europe continues to experience weak demand.

For the first nine months of 2009, core revenues decreased 25.5%.

Fluke core revenues declined at a mid-teens rate in the quarter, with sales declines of core test products in Europe, more than offsetting growth in China.

Across Asia, we ship more than 100 thermography units, which are being used for H1N1 flu detection at airports and schools.

In the US, we believe that the inventory reductions and the distribution channel are largely behind us.

During the quarter, Fluke launched a series of new important products, including the 233 Digital remote display multimeter with wireless capabilities, and the Ti32 Thermal Imager a thermographer at the mid price point range.

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

Like Fluke, we believe we have worked through the US distributor inventory destocking issues and in the third quarter, our orders improved at a high single digit rate over the second.

Sales from our Fluke Networks and Tech Communications businesses collectively declined at a double digit rate partially due to a difficult year over year comparison at Tech Communications, which benefited from a large Australian management shipment last year.

During the quarter we acquired AirMagnet, a leading enterprise wi-fi and analysis and security provider based in California.

This business complements Fluke Networks by providing product leadership in wireless test solutions.

Moving to Med Tech, revenues for the quarter decreased 8% compared to 2008 with core revenues down 8.5%.

For the first nine months of 2009, revenues decreased 9% with core revenues down 6%.

Med Tech operating margin for the third quarter was up 960 basis point from the prior year, to 21.9%, due primarily to the onetime litigation settlement gain.

Despite the revenue decline, core operating margin was essentially flat versus the prior year.

Within our Dow business, core revenues declined at a mid teens rate in the quarter.

Sybron core sales were relatively flat in the quarter with higher sales of our orthodontia solutions and disinfection product lines offset by soft sales of general dentistry consumables.

Sybron enjoyed mid single digit growth in orthodontics driven by a smaller response to our new [DAMONQ] product, which provides dentists greater treatment flexibility, easier wire changeovers and a smaller bracket profile for improved patients aesthetics.

During the quarter, Ormco announced an exclusive collaboration arrangement with Align Technology to jointly develop and market an orthodontics solution combining Align's Invisalign system, and Ormco's Insignia custom orthodontic bracket and arch wire system.

We remain very excited about this strategic opportunity.

KaVo revenues declined at a double digit rate in the quarter with weak demand across the major geographies and product categories, as [stanus] continued to delay capital spending.

In addition channel inventory reductions continue in certain geographies.

In the quarter, DEXUS launched its new platinum sensor, which has the ability to take vertical and horizontal bite wing x-rays with a single sensor, eliminating the cost and inconvenience of using multiple sensors.

While the environment remains challenging, we are encouraging by the cost actions we have taken, and with the recent number of new products.

We believe that we see sequential improvement in both top and bottom-line performance in the fourth quarter.

During the quarter, we announced the acquisition of Axis Dental, a leader in dental rotary instrumentation.

Axis provides Sybron with a strong sales force, an established brand and valuable channel relationships in the sizable rotary segment.

Subsequent to quarter end, we also announced our intention to acquire PaloDEx holding, a finish-base manufacturer of dental imaging products.

With the pending addition of instrumentation -- Instrumentarium Dental and SOREDEX, we will add two strong brands to our imaging group, which is expected to strengthen our product portfolio in all key categories of digital imaging.

This acquisition is subject to regulatory approval and customary closing conditions.

Leica core revenues declined at a mid single digit rate in the third quarter with strength across Asia, more than offset by weak demand in the US and European industrial analyzed science research markets.

During the quarter, Leica received a $10 million microscopy order in Japan, the largest single order in the company's history.

This was a great win for the team in a region where we have significant local competition.

The order will begin shipping in the fourth quarter, and will continue into next year.

In addition, Leica launched the SCN400, a new digital pathology slide scanner, during the quarter, and additional feedback in the US and in Europe has been quite positive.

Recent reports from our sales team indicate that orders related to US stimulus funding have increased sequentially.

However shipments have only begun to materialize.

Leica Biosystems core revenues were essentially flat in the quarter with strong growth of our advanced standing consumables offset by soft instrument sales.

In Europe distributor inventory levels were adversely impacted pending the launch of the new [Bond3] system which is due out this month.

The Bond3 Advanced Standing system provides faster standing capability, greater flexibility and increased efficiency to the histologist.

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

In Asia sales benefited from double digit growth in Japan as well as the recent launch of the ABL80 compact lead gas analyzer in China.

In the quarter, we announced the pending acquisition of AB SCIEX and Molecular Devices.

As a reminder, AB SCIEX is a leading designer and manufacturer of mass spectrometers used by researchers and clinicians to identify and quantify specific molecules in complex samples.

Molecular Devices supplies high performance bioanalytical instruments and consumables that accelerate and improve research productivity and effectiveness in life science research and direct discovery.

The acquired distances will expand Med Tech annual revenues by more than $650 million to nearly $4 billion.

The acquisition remains subject to regulatory approvals and customary closing conditions, but we believe we are on track to support closing in the fourth quarter.

Moving to Industrial Technologies, revenues declined 20% for the quarter with core revenues down 18%.

For the first nine months of 2009, revenues decreased 21.5%, with core revenues down 16.5%.

Operating margin for the quarter was 17%, a 120-basis-point decrease compared to the same period last year due primarily to lower sales volumes across the segment as well as incremental restructuring costs incurred in the quarter.

Product ID revenues were down 11% in the quarter with core revenues declining 8.5%.

For the first nine months, Product ID sales decreased 15.5% with core revenues down 9.5%.

In Videojet, we have begun to see stabilization across most geographies with printer placements improving sequentially from the prior quarter.

We launched the 1610 small character continuous ink jet printer ideal for high-speed applications in the quarter, the third version of our 1000 series product platform.

And while it's still early, market feedback is again for this new product being quite positive.

During the quarter, we acquired FOBA technology, a German-based manufacturer of laser based marking and engraving systems.

FOBA's strength and Videojet's channel in Europe and America in core parts marking applications and increases its exposure in vast growing niche verticals such as medical and smart cards.

Also in the quarter, we acquired Wolke inks and printers based in Hersbruck, Germany.

Wolke markets a leading thermal ink jet printer with significant channel presence with major pharmaceutical customers and OEMs.

The business expands Videojet's presence in the attractive pharmaceutical vertical market with specific functionality to target track and trace applications.

Motion revenues were down 34% in the quarter with core revenues down 30.5%.

Year to date, sales decreased 36.5% with core revenues down 30%.

We saw sequential improvement in several end markets during the quarter, including electronic assembly, semi conductors and elevators, particularly in the US, though overall levels are still soft.

European end markets did not show the same sequential improvement as customer factory shut-downs across Germany continue to impact performance.

During the quarter, Kollmorgen launched the AKD servo family of drives designed to expand machine performance and increase integration speeds with easy to use plug and play capability -- or excuse me, compatibility with Kollmorgen motors.

Customer feedback has been very favorable here as well.

Finally moving to Tools and Components, revenues for the quarter decreased 20.5%, with core revenues down 20%.

Year to date revenues decreased 21.5% with core revenues down 21%.

Operating margin for the quarter was 15.6%, an increase of 160 basis points from the prior year, due to the benefit of lower commodity costs, increased productivity and cost savings attributable to the prior-year restructuring initiatives, which helped to offset both lower sales volumes and incremental year over year restructuring costs incurred in the quarter.

Mechanic Hand Tool core revenues declined 16% in the third quarter and 11.5% year to date primarily due to lower sales to both consumer and professional channels.

Performance in the third quarter was also negatively impacted by a difficult year over year comparison with Advance Auto -- with the Advance Auto stocking order which occurred in the prior-year period.

Sales of our domestic China tool brand [SADA] grew at a low single digit rate during the quarter.

So to wrap up, we continue to execute well in a difficult economic environment.

Our investments in innovation, sales and marketing are clearly driving market share gains.

Our restructuring and cost reduction progress is evident in our margins.

Our free cash flow remains strong, and we're putting it to use in acquisitions aimed at strengthening our competitive positions and accelerating our sales and earnings growth potential.

We strongly believe we will emerge from this downturn as an even stronger and more competitive Company in 2010 and beyond.

Our expectation is for the fourth quarter core revenues to be down about 10%, a sequential improvement from the third quarter, notwithstanding four fewer selling days in the fourth quarter.

Given our strong performance in the third quarter, we are increasing our full-year adjusted earnings per share outlook from $3.28 to $3.48 per share to $3.40 to $3.50 per share.

Fourth quarter adjusted earnings per share outlook is now $0.99 to $1.09.

The additional restructuring charges that we approved in April and August are expected to reduce GAAP EPS by approximately $0.30 per share in the fourth quarter and $0.45 per share for the full year.

As a result, we expect our GAAP earnings per share in the fourth quarter of 2009 to be in the range of $0.65 to $0.75.

For the full year 2009, we expect GAAP earnings per share to be in the range of $3.31 to $3.41.

These ranges include the additional restructuring items just mentioned, but exclude the impact of acquisition-related costs for deals that we have not yet announced resulting from the adoption of the new business combination accounting standard that went into effect

Thanks Larry.

That concludes our formal comments.

We are now ready for questions.

(Operator Instructions) Our first question comes from Deane Dray with FBR Capital Markets.

Thank you.

Good morning, everyone.

Good morning, Dean.

Hey, a couple questions.

First would be, could you just give us a sense of how the month of September tracked versus your earlier comments in the quarter that July and August had done well or just above expectations?

And then, if you could you don't often comment about backlog, and that interested in hearing more about that $100 million in backlog.

Would that be contributing to core revenues, or what's the mix within that backlog?

Well Dean I think, as we look at September, it played out more or less as we had anticipated and certainly had hoped.

So we really went wire to wire in the quarter with good inflow.

We certainly saw some of the destocking end early in the quarter, but that was a firm dynamic throughout.

We kept waiting for Europe maybe to show itself in September a little stronger in line with what we were certainly seeing in the US, certainly in China and India.

And that didn't materialize.

I don't think we were expecting that.

I think all in all, we were pretty pleased with the way the quarter started.

And certainly with the way it ended.

With respect to the backlog, clearly, we don't talk about that a lot, but certainly there's a lot of interest out there in what's happening sequentially, what's the current book of business.

We throw that out there to provide a little more color.

Certainly building backlog as we did during the quarter would suggest our order books were up year over year more strongly than the core revenue number that we printed, and we're certainly encouraged by that, particularly given that we built some backlog in some businesses that have really felt the full brunt of the downturn right test and measurement.

So all in all, I think it's one point among several that suggests we do have a stabilizing economy in hand, and the businesses by and large are performing well in it.

Just to clarify within the composition of that backlog, will that all flow through core revenues, or is there a mix in there?

That will all come in the next couple of quarters.

When we ship it will be core.

Okay.

That's what I was looking for.

And just lastly, the commentary about gaining market share, and you gave a full array of businesses.

Maybe it's tough to generalize, but how much of that is coming from new product launches, or is it pricing competition or maybe even some of your weakened competitors.

How would you characterize that?

Yes.

I think it's tough to paint the full parade.

I would not attribute much to a pricing or being us being advantaged vis-a-vis weaker competitors as a result of the economy.

I think it comes down to two things, hard to quantify.

But, clearly we're in a very good place with our product launch cycle.

You heard us talk about the new products -- at Videojet one example, two [DEXUS sensor] is something we're very excited about.

Gilbarco has done a great job both with the point of sale program, which we call passport and what they've done with the advanced (inaudible) recovery.

And you heard in our prepared remarks, a number of new products coming to market here in the fourth quarter -- the slide scanner at Leica -- another exciting technology we're going to bring to market.

So that's one big piece.

The other is a lot of what we've done to improve our go to market, making sure that we're protecting our spend in that area as we have obviously cut dramatically throughout the organization elsewhere.

You see at ChemTreat, we're clearly just putting feet on the street.

Good selling execution there is helping us.

I think you see that with the -- with the improvements that we're seeing at Videojet certainly.

What we've been able to do in some of our international markets.

I would attribute it to just better sales and marketing execution, and those growth tools within DBS, I think get greater traction across Danaher.

Thank you.

Thank you, Dean.

Our next question comes from Nigel Coe with Deutsche Bank.

Hi.

Good morning.

Good morning, Nigel.

Just the [down temp sent] a call for 4Q.

You called out (inaudible) it was 4, not 3, right?

Yes, 4.

What impact is that having?

It seems if I just do some back (inaudible) calculations that maybe it was a 7-point impact from the [selnase], but can you just try to put some numbers around that, please?

Nigel it's a little hard to calculate.

I think you could mathematically say it's 5 points -- 4 or 5 points.

I don't think it's that much.

It has more of an impact on the consumables business, which is more of a daily order run rate business, less on the capital purchases.

My guess is it's a 2 to 3-point impact, hard to quantify.

But I don't think it's the full mathematical impact.

Then you just called out the fact that consumables would be hit harder than the equipment business is.

Obviously consumables is higher margin.

Does that mean we should expect a bit more pressure on the growth margin on 4Q?

No.

I think we're very pleased with our sequential improvement in margins, and I think we'll see another improvement in the core margins here in Q4.

I haven't looked enough at the gross margin mix for Q4, but I don't think it will be that much of an impact.

Do you want to give us some detail on your business by business -- segment by segment core revenue outlook for 4Q.

I think, from a revenue perspective, Nigel -- we just looked at it from a segment perspective, I think we've got the potential for instrumentation to be a little bit better.

I think that Med Tech should be significantly better in part, because we're going to get through a lot of the stocking that we've seen around KaVo.

I think industrial will probably be in line.

Maybe a little better.

And I think tools will be better, and if for no other reason than the absence of that Advance Auto comp that we talked about in our prepared remarks .

Great.

Thank you.

Thank you, Nigel.

Our next question comes from Bob Cornell with Barclays Capital.

Yes.

I was going to ask you again a growth question, but I got beaten to it, but that was -- previously you had been saying you had about $160 million of cost savings rolling over into 2010, we've done more in the way of restructuring.

Maybe you can go into a little more detail about maybe what you've been doing on all those restructurings.

I think you had programs that started in last year's fourth quarter.

You ratchet them up over the course of this year, and you had an increment in the current quarter.

What is the outlook for 2010 in terms of restructuring benefit, and maybe a little more color on what's going on with all these restructuring programs?

Sure.

Let me just provide a couple of key points.

I start with just reminding everybody that we're always in restructuring mode.

We're always looking to take cost, waste, [moota] out of the business.

That's a key tenant in the Danaher business system.

We accelerated that activity beginning late last year.

You saw us call that out, as we did in the fourth quarter with a program that has been further accelerated during the course of the year, we're going to end up spending the better part of $250 million this year on top of the $80 million plus we did last year.

So we're talking about an investment all up of approximately $320 million.

What we've done is obviously exited a number of positions out of the organization, as well as reduced our overall footprint, both in manufacturing and in selling and other administrative activities.

So if look from a -- from a facility count.

We're going to end up being down 43 rooftops when this program is over.

We will have exited about 10% of our associate population, about 5,100 jobs.

And again, I think we feel optimistic that the execution has gone well this year.

That's why we topped it up a few months ago, yet again, and see that really occupying our activity through the rest of the year.

We try to protect obviously selling and R&D as best we can and root out the waste and the unnecessary capacity everywhere else.

I don't think Bob you should expect to see us top this up yet again this year.

I think it's our hope that as the economy stabilizes we're not talking about these sorts of call-outs next year, but that we will perhaps get back to a quiet restructuring, a pay as you go activity that you see us implement in more normal times.

Got it.

You mentioned stocking, destocking a couple of times in discussing various businesses.

Where would you characterize the whole destocking phenomenon when you look across the portfolio at Danaher businesses, and are you, in fact, benefiting a little bit from some restocking in some businesses?

How would you characterize that evolution in stocking, destocking, stocking.

I think on balance, we are certainly being helped by the end of the destocking.

I don't think we've yet seen a material positive effect from restocking.

Certainly in environmental we don't do a lot of distribution.

Much of what we do is directed -- Hach Lange, others obviously some the distribution is more important Gilbarco, Veeder-Root -- I don't think we've seen a positive benefit there.

Certainly the absence of some of these dramatic declines in test and measurement, as we indicated are going to help Fluke and Tech as we go forward, even before we see a pickup.

I think Med Tech is certainly where we have seen some of most dramatic perhaps inventory reductions in the channel particularly around KaVo.

To a lesser degree at Sybron, but even Sybron felt a little bit of that around the consumables business here in the third quarter.

The sell out numbers at retail were certainly better in the US than our sell in numbers.

Product ID, by and large, direct business doesn't apply, though internationally we've seen some of the smaller distributors take down consumables.

Motion we've certainly seen it, but no positive effect yet from a restock, and tools has certainly felt it both in industrial distribution, and at retail.

But again, I think, we welcome the stability.

We await the restock.

But are really watching sell-through at this point to see when the real uptick will presently itself.

And final question for me.

How would you characterize the benefit to Danaher from holding price relative to some of the commodity price declines we've seen in the last nine months relative to any hedges you have in place.

Are we still getting a bit of a tailwind there, or how is that working?

We are.

You can see it most noticeably, Bob in the tool margins, where our core margins were up 300 basis points year on year.

The tail wind was less in Q3 than it was in Q2, and it will be less in the coming quarters.

I would note that the core margin increase in tools -- probably about half of that is commodity benefits, but half of that is execution.

So we're not going to see the big multihundred improvement -- point improvement in margins in tools because it's going to become much less of a tailwind commodities.

But I think because of execution, we're still going to do fine from a margin perspective there.

How come you guys haven't gotten more pressure to give up price in some of those markets.

I would say we have a little bit -- our overall price has gone from a point and a half to more like a point, point two, and that is a sign that we're still getting roughly the same amount of pricing consumables, but more of the industrial equipment products, we're getting a little less priced.

Okay.

Thanks very much, Dan and Larry.

Thanks, Bob.

Our next question comes from Steven Winoker with Sanford Bernstein.

Good morning.

Steve, good morning.

Can you give us an updated view on your thoughts around capacity for new acquisitions coming up in the next couple of quarters, given the $1.6 billion in cash that you've got in the CP line.

Steve, of the $1.6 billion we ended the quarter with, about, $1.3 billion or $1.4 billion is spoken for between MDS and the PaloDEx deal that -- both of which are signed and announced, but are not closed.

But if you just look at our next five quarters of cash flow, our $1 billion of capacity under commercial paper, it's probably well north of $2 billion in the next three or four quarters without even thinking about having to really raise any term debt or impact to our credit rating.

Okay.

And as you talk about AB SCIEX, given the complex deal structure, that closing still is on track timing wise?

Yes.

We just got shareholder approval at MDS.

There is some regulatory approvals we're waiting for that we think are coming shortly, and we're still confident there will be a fourth quarter closing.

And is the environment -- the [big out] spreads that are out there continue to improve to your favor?

Well, I would say the fact we've signed eight deals in the last eight weeks is a positive sign, and I think a number of discussions we're having right now are encouraging.

And if you look at the impact of acquisitions in your free cash flow for the quarter, can you give us some color about that?

I have to look at it.

It's -- you actually have a little bit of a negative now, because under the new accounting rules, your expenses run through your cash flow.

But I can look that up off line.

I don't think it's a big impact, because we didn't have a lot of acquisitions the last three, four quarters, and the deals that we just closed, we closed late in September.

So it didn't have much of an impact.

I don't think they had much of an impact to Q3 cash flow.

Okay.

And as we look at the sequential changes in the sub-reported business units segment -- I'm sorry -- from the second quarter to the third quarter and the first -- that dental business, again, endodontics and consumables is what's dragging that down versus orthodontics and infection, because that's the one that's down mid teens now versus low double digits in the last quarter?

Yes.

We probably weren't as clear as we could have been in the script -- and the Sybron business was essentially flat in the quarter, and ortho was up a little bit.

General dentistry was down.

The equipment business was down 20%, and that blended to a down low teens.

And the equipment business you think is -- you're explaining mostly through inventory destocking still?

Well, I think the first issue there Steve, clearly is a lower level of spend particularly for big-ticket items, both in the US and in Europe.

I think that coupled with the destocking that we're seeing this year are, I think, the two primary reasons why we're down the way that we are.

But again, as I said, I think we have a lot of improvement opportunities in front of us at KaVo.

I'm encouraged by what I've seen.

I was with a team in Europe two weeks ago.

I'm with a team in the US, in fact, tomorrow.

I think we're getting the traction I'd like to see us have in that business.

And a final -- a final comment on tech margins would be helpful.

The tech margins absent restructuring were comparable to Q2, just low double digits.

We believe they're going to move sequentially to mid teens here in the fourth quarter, again, absent restructuring.

Thank you.

Our next question comes from Jeff Sprague with Citi Investment Research.

Thank you.

Good morning, everyone.

Good morning, Jeff.

Good morning, Jeff.

Good morning.

Could we just follow up a little bit more on restructuring, Larry or Dan, and just help us thinking about the benefit variance as we move from '09 to 2010?

Jeff, the way we're looking at it is of the $250 million spend this year, there is an annualized benefit of $220 million.

Roughly a quarter of that we're going to get in the second half, or call it $60 million in the second half.

We're pleased with what we've gotten in the third quarter, and we think we're tracking well in that regard and we have about $150 million, $160 million benefit rolling forward into 2010.

That's the incremental on top of the $60 million.

Yes.

A $220 million total, $60 million this year, $160 million leftover for next year.

But I see there's a comment in the queue that some of this $250 million maybe actually doesn't get spent or executed on until the first half of next year.

Does that weight the benefits, then, for next year more into the second half, or does that come through in a linear fashion over the course of the year?

I think that's right.

I think, as you -- as we've tried to highlight, I think we've bitten off a lot here to get done.

Some of it may spill into early next year in terms of the spend, and if we execute on that path, clearly some of the benefit will be more back loaded and potentially a little less.

But I think we are pleased with the execution we've seen through nine months.

We have a lot of work to do here in the fourth quarter, and we're hopeful we'll get -- we'll get through that.

But it will be tight, which is why we flagged it again in the queue.

Is there any spillover benefit into 2010 from the $80 million of '08 actions?

Very little.

I mean, we thought we'd get $100 million this year , and we're tracking awfully closer

And Larry, when you were just piecing together the GAAP walk on guidance can you just true us up, maybe Dan really, on the tax items?

You said tax, 25% in Q4, so there's no more unusuals in tax?

Correct.

So we should -- in the fourth quarter -- and we have posted this on our web site with a quarter by quarter look with the onetime items.

We'll have about $0.30 of restructuring in fourth quarter, and probably about $0.04 of M&A expense, and that's primarily the deal expenses on the PaloDEx and the AB SCIEX deal.

So, at the midpoint of a $1.04 of adjusted EPS, you have $0.70 GAAP EPS, adding back, you get to an adjusted $0.30 of restructuring, and $0.04 of M&A expense.

Okay.

Just on deals, just the complexion of things, as you said, Dan, eight deals in eight weeks, obviously AB SCIEX is sizable, but should we -- is there anything to glean here from what we've seen?

Should we expect a lot of little deals?

Is that's what's breaking free, or are there actually sizable things in the pipeline?

Jeff, I think what you're seeing is that another frankly typical Danaher acquisition year, where you're going to have a couple of big deals, and we put the SCIEX mold of paring in that zone, smaller situations and a number of [bullpons] to put together an average year of 12 or 15 deals.

So I think that distribution is shaping up as it has in years past, but the six deals we have flagged here, that some of you may not have known about, that we closed out in the quarter, tended to be our bread and butter, but there certainly are some larger situations still very much percolating in the M&A process that we're optimistic about.

And I'm not sure you can glean too much prospectively, but of these six deals closed and the two deals pending, the collective purchase price is about 1.5 times revenues, which is lower than the last couple of years.

Now part of that reflects lower margins given the downturn, but that often -- often bodes from a return perspective is going in at a little lower revenue multiple.

Just one other thing that's got two parts.

It's just, I think all companies here are struggling with trying to get their arms around what costs actually come back.

Everybody has leaned on 401(k) and merit raise and all kinds of things as we progress through '09.

I'm sure you're looking at some -- some commodity price pressure in -- or commodity cost pressure, I should say -- into 2010, and is there anything else that just leads in that we should be thinking about as we're thinking about this restructuring walk we talked about a little earlier just on my set of questions.

Jeff, in addition to that, some potential commodity headwinds next year, and again, that would primarily be around Motion and Tools for us.

We like a lot of companies have done things around wages this year, whether it's in furloughs, wage freezes, decreases, by and large lower bonuses.

We are in the process of looking through a lot of that as we go through budgets.

Some of it will depend upon, how the overall environment is, and we'll talk more about this in December, but there will be some headwind from some of those type of items.

Okay.

Thank you.

And we'll have some restructuring investment type activity around AB SCIEX given the nature of that carve-out from the two parings which will -- probably falls into that bucket.

Okay.

Thank you.

Our next question comes from Steve Tusa with JPMorgan.

Hi, good morning.

Good morning, Steve.

Hey, Steve.

Can you just -- I might have missed this.

So what was the restructuring benefit in the quarter?

You said $16 million in the second half?

What was it in the quarter ?

Well, it's probably a little -- my guess would be $20 million, $25 million from what we've done year to date, plus another what we did in Q4.

We thought we would get $100 million this year, and we're tracking roughly $25 million a quarter, so you might be $20 million from what we've done this year and $25 million from what we've done last year, and you see that in the sequential lift in core margins Q2 to Q3

Right.

And on the commodity front, what was -- you talked about tools being half commodity.

Does that include modest price benefit of tools, or is that -- all of just the cost side of the equation?

Maybe you can tell us for the Company what the cost side of the equation benefited you.

Steve, I don't have that out of tools, because it's not that significant outside of tools.

But I would say, sequentially, commodities were more of a headwind than it was in Q2.

So quarter over quarter?

Yes.

Quarter over quarter, we got significant margin improvement, and that was despite slightly higher commodity costs.

Got it.

In the queue, you had an added disclosure around tax legislation that's being debated, and the last sentence said that changes here would adversely impact you guys.

Are there -- is there anything specific that we should be watching that would hurt you guys more than -- more than any of the other changes?

Nothing specific other than what some of the general discussions about raising the effective tax rate for US multinationals.

Okay.

And then one last question.

Just on the deal, the M&A expenses, which deals were those for?

Was the $0.04 for which deals?

It was for deals we had signed like MD -- like SCIEX and PaloDEx, that we know we're going to have here in the fourth quarter.

There is also a small amount of onetime non-cash charges related to inventory step-up and deferred revenues from deals we had closed in the third quarter.

So these are, like, smaller deals?

Yes.

So going forward, given these deals that you guys do -- a ton of smaller deals every year -- are we going to have basically an adjusted EPS number every quarter now given that you're going to do a few deals every quarter and be showing $0.02 to $0.03 a quarter, or will this be absorbed going forward as the economy improves?

I suspect, Steve, given the new accounting rules, which again I think particularly the expense -- having to have transaction expenses run through the P&L, which I don't think is indicative of the performance of the business.

We'll be calling it out.

Isn't that, though, part of your ongoing business.

Wouldn't you consider doing deals given the frequency of that just basically part of what you guys do as a Company?

Yes.

And that's very much reflected in our cash flow statement.

Io view it as, my view, and a lot of us have the view that -- that's part of the cost of buying a company -- the transaction cost.

All right.

Okay.

Thank you very much.

Thanks, Steve.

Just as a reminder given the time for the call we ask that you limit yourself to one question and one follow-up question.

And our next question comes from Mr.

John Inch with Merrill Lynch.

Good morning, John?

Are you there?

I think we may have lost Mr.

Inch.

And your next question comes from Ajit Pai with Thomas Weisel Partners.

Yes, good morning.

Good morning.

A couple of -- one question and one follow-up.

But the main question would be just looking at your businesses in terms of geography.

Can you give us color on how much China is a percentage of your business right now and emerging markets as a whole, and then also looking at the three major geographies -- North America, Europe and Asia where the trends are the most positive and where they are the most negative across your businesses?

Asia is the most positive when we focus on China and on India, which in aggregate will be about $1.1 billion $1.2 billion for us this year.

We were pleased that -- they were actually both up for us in the third quarter.

We hadn't seen that pairing in a while, both up about a mid single digit range.

As we said in our prepared remarks, the rest of the fast-growth or so called emerging markets were soft.

We saw that in Latin America.

We saw that in Eastern Europe, but China and India were the standouts for us.

The US, I would say, was probably number two, not that we were growing, but again, the stabilization was encouraging, the backlog build was encouraging.

Of the three, I slot Europe last, just given that the stabilization did not firm up as much as it did in the US.

But obviously a pretty big gap between what we saw in North America and in Europe compared to those two high growth countries in Asia.

Got it.

And then the second question would be just looking at the business development environment and just looking at acquisitions.

In the pipeline of acquisitions you have right now, is it mainly add-ons and build-ons, and maybe even significant acquisitions in existing verticals you're in on the strategic platforms or is there some material -- a potential to get an additional (inaudible)?

Well, I think that as we were talking a moment ago, the funnels are always chock full of every type of opportunity, from big potentially transformational situations all the way down to small channel or product bolt-ons.

I think, as we look forward here, certainly for the rest of this year, I continue to believe that it is highly unlikely that you're going to see us create a brand-new platform.

Obviously, with SCIEX and [Moldev] coming in, the Med Tech business is going to be close to four billion in size.

What we think of as our Life Science diagnostic group is going to be up 40%, which is not a small number obviously, so we're excited about that.

Obviously lots of activity around Product ID, Test and Measurement and Environmental as well.

But again, just don't think we'll see a new platform in the near term.

Got it.

Thank you so much.

Thank you.

Thank you.

Our next question comes from Jason Feldman with UBS.

Good morning.

Good morning, Jason.

Jason, good morning.

You've already covered quite a bit.

But a couple quick ones here.

Specifically in Motion, a couple of distributors in that industry have been commenting on the increasing pricing pressure.

Has that business been more problematic than most from a pricing perspective lately?

Not to date, but I wouldn't refute what you're hearing from distribution in that business.

And there specifically as well, is destocking more or less as far as it can go from your perspective, or is there still some room to see some additional destocking going forward?

Well, those are very different questions.

I wouldn't rule out the possibility that we can see it go down further, but I doubt it.

I think there as we've seen in other businesses, I think folks are pretty close or at levels they are comfortable with.

We might argue that maybe they're a little light.

So at this point I think the destocking absent another external shock to the system has probably by and large run its course.

So again, I think we'll see a little bit of that, for us at least -- still play out around certain dental lines and to a degree, in tools.

But otherwise particularly in Motion, I think we're pretty close.

Okay.

Thank you very much.

Thanks, Jason.

Our next question comes from Richard Eastman with Robert W.

Baird.

Larry, Dan.

Could you -- Larry, in the past, you've talked about certainly pieces of your business being internal maybe leading indicators.

I think the Motion business fell in there, Product ID.

If you were to sum the -- take a snapshot of that at the end of September, just characterize where we are.

It sounds like we're maybe a little past stabilization in the US and maybe not quite there in Europe, or how would you characterize those businesses that you look at as being leading indicators.

Well, I think clearly Rick, we look at a lot of data points, both in our own order books and the sellout and build schedules with our own customers.

It's hard to circle a date on a calendar, but I think we're clearly at a point where the US is quite firm.

Whether you look at the book to bill and [TNM], sell-through at Fluke just, again, this inventory issue assuming it's run its course.

What we're seeing with, say, the consumables at Hach Lange and Videojet as well, a lot of different data points would suggest the worst is over, and we'll build off of this base.

I think you're spot on.

Europe is just not there yet, in as broad and clear a way as we see it here in the US, but I don't want to suggest Europe is in a bad place.

It just feels, if you will, it feels like we're behind a bit what we're seeing in the US right now.

And again, I think the real contrast is everything kicking in in our types of businesses at least are right now in China and in India.

Okay.

And then just the last question.

Larry on the dental equipment side, maybe I'm weighting this a little bit incorrectly, but certainly dental equipment being down 20% plus, I think, would seem worse than the industry.

Can you just -- we have an easier fourth quarter comparison.

I think last year dental equipment was down low double digits.

How do you expect that business to perform, and am I correct or incorrect in saying that at least in that piece of the business it feels like you're underperforming the industry a bit?

I think we make no bones about the fact that KaVo was short of its full potential.

I've said that externally, internally.

But I also want to reiterate my confidence for us to achieve that full potential in the business.

I think sequentially as we indicated in our prepared remarks, we would anticipate much better performance at the top.

Certainly on the bottom as well.

We have dedicated a fair bit of restructuring monies that we have spent this year to adjusting the cost structure particularly in Europe and elsewhere around the world .

But again, I also think this is a good growth market over the long term.

We're in a bit of an air pocket if you will.

Right now I think others see that as dentists postpone upgrading [opporturies], upgrading their practices.

I think that will pass, I really do, and as the market recovers and we improve, we should be beneficiaries of that.

That's the objective.

That's what we and the team have agreed to.

But, again, work to do, and we're not there today, but we'll be working hard to be there in the not too

Thank you.

Thanks, Greg.

We do have time for one final question, and that will come from Scott Davis with Morgan Stanley.

Hey, guys.

Good morning, Scott.

I think you guys maybe overcovered -- a lot of analysts.

We're okay with that.

Yes.

It's a high-class problem.

I just have one quick question, and again, I just want to come back to Tektronix a little bit.

Can you give us a sense of the book to bill, where you're at now, where you've been tracking through the year to get a sense of when the comps get easier next year?

Well, the book to bill through the second quarter was running below one.

We were over -- tech instruments in tech communications were both over one and combined were, like, 1.1.

So obviously an encouraging sign there.

That will be a slight benefit in Q4, but I think that as that book to bill grows, it should help going into 2010.

What's the typical lag when you see an order and when you make a delivery?

It's all over the map.

When they were a public company, they would talk about two to three quarters when the book to bill would slip one way or the other, it would this two to three quarters before you'd see that play out in shipments.

Okay.

That's all I have.

Thanks, guys.

Mr.

McGrew, I would like to turn the conference back over to you for any additional or closing remarks.

Thanks, Laura.

Just as a reminder, the replay number is 888-203-1112 in the US and 719-457-0820 internationally with confirmation code of 8728742.

Dan and I will be around all day today for follow-up calls.

Thanks, everybody.

That concludes today's conference.

Thank you for your participation.