Danaher Corp (DHR) 2006 Q4 法說會逐字稿

Good morning, my name is Mark Pennion, I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Danaher Corporation fourth quarter and full-year 2006 earnings results conference call.

[OPERATOR INSTRUCTIONS]

Thank you very much.

I would now like to turn the call to Mr. Andy Wilson, Vice President of Investor Relations.

Mr. Wilson, 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, Dan Comas, our Executive Vice President and Chief Financial Officer, and Pat Allender, our Executive Vice President.

I'd like to point out that our earnings release is available on our website under the heading investor events.

As our year end Form 10-K has not yet been filed, we have included as part of the earnings release the fourth quarter income statement, year end balance sheet and cash flow statement.

In addition, we've included data reflecting our business segmentation, as well as supplemental income statement data in the release to facilitate your analysis.

Access to a webcast presentation supplementing today's call can be found under the same heading of investor events.

This call will be replayed through January 29th, and the audio portion will be archived on our website later today and will remain archived until our next quarterly call.

Our website address is www.danaher.com.

The replay number is 888-203-1112 and the confirmation code is 1672354.

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

I would also like to note that in order to help you understand the Company's direction, we'll be making some forward-looking statements during the call, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those related to competition, our ability to develop and successfully market new products and technologies, our ability to expand our business in new geographic markets, our ability to identify, consummate, and integrate appropriate acquisitions, litigation, and other continued liabilities including intellectual property matters, our compliance with applicable laws and regulations, our ability to achieve projected efficiencies, cost reductions, sales growth and earnings, economic conditions and end markets we sell into it, commodity costs and surcharges, currency exchange rates, tax audits and general domestic and international economic conditions.

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

Additional information regarding the factors that may cause actual results to differ from those forward-looking statements is available in our SEC filings.

These forward-looking statements speak only as of the date that they were made and we do not intend to update any forward-looking statements.

With respect to any non-GAAP financial measures provided during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found in the investor section of our website under the heading earnings.

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

Thanks, Andy, and good morning, everyone.

Before we get started on the quarter, I would like to highlight a couple of items.

As Andy mentioned, Pat Allender is with us on the call today and as I suggested at the conference in December, this will be Pat's last earnings call as a Danaher employee.

As many of you know, Pat has been an extremely important member of the Company over many years.

Pat will formally retire at the end of February, but fortunately he has agreed to continue his relationship with Danaher as a consultant.

We will miss working with Pat on day to day basis, but are obviously delighted that he has agreed to keep working with us in this new capacity.

Pat, thank you very much.

In addition, I would like to point out some recent enhancements we have made in our financial reporting.

With the growth of the Professional Instrumentation segment, relative to our other segments, we thought it appropriate to review our existing reporting structure.

As a result of this review, our financial reporting has been expanded to encompass four segments.

The Medical Technology segment, previously included within the Professional Instrumentation segment, and today comprising approximately 25% of total company revenues, will now stand alone as its own reporting segment.

Professional Instrumentation will still include our electronic test and environmental platforms while the Industrial Technologies and Tools and Components segments remain unchanged.

Today's discussion and our upcoming 2006 10-K will reflect these changes.

To assist you with comparisons to prior periods, today's press release includes segment information prepared both on our new reporting structure as well as on a basis consistent with our historical methodology.

So let me move now to our financial performance.

We are very pleased to report this morning that our fourth quarter earnings per share were $1.00 even, representing another record fourth quarter for Danaher, and a 28% increase over last year's fourth quarter earnings per share of $0.78.

Included in the 2006 fourth quarter earnings was the benefit from a lower income tax provision of $17 million or $0.05 per diluted share from our estimated rate of 27%.

Included in the 2005 fourth quarter earnings per share was the negative impact from a litigation settlement of approximately $0.03 a share.

Absent these items and including the impact of stock option expensing in both years, fourth quarter earnings per share were $0.95, a 22% increase over the fourth quarter of 2005.

For the full year, earnings per share were $3.48, a 26% increase over 2005 EPS of $2.76.

In addition to the fourth quarter items, full-year 2006 earnings benefited from approximately $0.16 per share related to reductions and previously recorded income tax reserves and a gain of $0.03 per share on the sale of our interest in First Technologies, both of which occurred in the first half of this year.

Excluding these gains as well as the fourth quarter items just mentioned and including the impact of stock option expensing in both years, 2006 full-year earnings per share were $3.24, an increase of 22% compared to last year.

Revenues for the fourth quarter increased 17.5% to a record $2.7 billion, as revenues from existing businesses, also described as core revenues, grew 5.5%.

Acquisitions contributed an increase of 9%, and currency had a positive impact of 3% in the quarter.

For the year ended December 31, 2006, revenues increased 20% to a record $9.6 billion.

Core revenues contributed an increase of 6.5%, acquisitions contributed 13%, and currency effects for the year were 0.5 of 1%.

Year-over-year gross margin for the fourth quarter improved 180 basis points to 44.8%.

Several factors contributed to this improvement, including leverage from higher revenues, higher gross margins in our recently-acquired businesses, primarily Sybron, and the impact of ongoing cost reductions, including DBS and LCR or low cost region, sourcing and production initiatives in our existing businesses.

Gross margins for the full year improved 110 basis points to 44.2%, primarily due to these same factors.

SG&A expenses for the fourth quarter were 28% of sales compared to 26.8% a year ago.

For the full year 2006, SG&A expenses increased 140 basis points to 28.6% due to higher SG&A structures in the recently acquired Medical Technology business, primarily Sybron and Leica as well as the negative impact from the expensing of stock options in 2006.

Operating profit for the quarter was $447 million, a 27% increase over the fourth quarter of 2005.

For the full year, operating profit was $1.5 billion, a 20% increase compared to last year.

Operating margins for the quarter were 16.8%, a 120 basis point increase over 2005.

Excluding the impact from the fourth quarter 2005 legal settlement, the negative impact of lower margins in our 2006 acquisitions and the negative impact from the expensing of stock options, 2006 fourth quarter operating margins improved 125 basis points compared to the same period a year ago.

For the year, operating margins were 15.8%, essentially flat compared to 2005.

Included in these result was the negative impact of approximately 60 basis points related to lower margins in our 2006 acquisitions and a negative impact of approximately 60 basis points from the expensing of stock options.

The 2005 fourth quarter included a negative impact of approximately 25 basis points related to a previously disclosed legal settlement.

Absent these items, 2006 operating margins would have improved approximately 100 basis points compared to 2005.

Net interest expense for the fourth quarter was $24.7 million compared with $6.8 million for the fourth quarter of 2005.

The increase was mainly due to higher debt level funding 2006 acquisitions, including the euro bond notes we issued in the third quarter of 2006.

Our effective income tax rate for the fourth quarter was 23.4% compared to 27.1% in the fourth quarter of 2005, primarily due to the one-time affect of a change in German tax law, which entitles Danaher to cash payments in lieu of certain previously held tax credits.

We continue to estimate our ongoing effective tax rate to be approximately 27% for 2007.

Net income was $324 million, a 28.5% increase over the fourth quarter of 2005.

Net income for the full year was $1.1 billion, an increase of 25% over last year.

Record operating cash flows exceeded $1.5 billion for 2006, a 29% increase over 2005.

Free cash flow, defined as operating cash flow less capital expenditures, was a record $1.4 billion for 2006, a 30% increase over 2005.

Our free cash flow to net income conversion ratio for the year was 126%, making 2006 the 15th year in a row, consecutively, in which our free cash flow has exceeded our net income.

DBS continues to be the driver behind this significant and sustained cash flow performance, and we're particularly proud that in 2006 we had approximately $500 million of core revenue growth with no addition to our inventory levels.

Capital expenditures for 2006 increased approximately 14% to $138 million.

Our balance sheet remains strong with a debt to total capital ratio of 27% and over $300 million in cash and cash equivalents at year end.

Turning to the operating segments, Professional Instrumentation revenues consisting of our environmental and electronic test businesses increased 12.5% for the quarter to $799 million.

Revenues from existing businesses grew 6.5%, acquisitions contributed 3%, with currency having a positive impact of 3%.

Full-year revenues increased 12% to $2.9 billion, as revenues from existing businesses grew 7.5%.

Acquisitions contributed 4%, and currency having a positive impact of 0.5 of 1%.

Operating margins for the 2006 fourth quarter were 22.3%, 200 basis points higher than the prior year despite the approximately 20-basis point dilutive affect of recent acquisitions and the approximately 45-basis point negative impact from the expensing of stock options in 2006.

Margin improvement was broad based with particular strength at Gilbarco Veeder-Root.

For the 2006 full year, operating margins were 21.5%, 80 basis points higher than the prior year, despite the approximately 40-basis point dilutive effect of recent acquisitions and the approximately 50-basis point negative impact from the expensing of stock options.

Environmental platform revenues for the quarter grew 11% with core revenues up 6.5%, acquisitions contributing 1.5%, and a positive currency impact of 3%.

Both water quality and Gilbarco Veeder-Root delivered solid core growth performances during the quarter.

For the full year, environmental revenues increased 10.5% with revenues from existing businesses up 8%, acquisitions contributing 2%, and 0.05 of 1% from a positive currency impact.

Water quality core revenues grew at a high single digit rate in the fourth quarter led by continued momentum from Hach/Lange's core lab offering.

Hach/Lange's analytics core revenues were up in the mid-single digit range, largely driven by strength in Asia and Europe, as well as a launch during the course of the year of 12 new products.

Order rates at Trojan remain strong, up over 20% versus 2005 for the year, with particular strength in China.

Gilbarco Veeder-Root core revenues grew mid-single digits while operating margins also improved significantly versus 2005, a result of ongoing DBS improvements in the factory and higher margins from recently introduced new products.

Sales of Gilbarco's passport point of sale system and the Encore S dispenser along with strength from our air quality products contributed to this performance.

Electronic test revenues grew 15.5% in the quarter, with core revenue up 6.5%, acquisitions contributing 6.5%, and a favorable currency impact of 2.5%.

Full-year revenues for electronic test increased 14.5%, its core growth was up 7%, and acquisitions contributed 7.5%.

The impact of currency was negligible.

Fluke core revenues grew at a mid-single digit rate for the quarter with solid performances from both the industrial and electrical channels driven by demand for our thermography, temperature and power quality products.

During the quarter, Fluke's innovation efforts yielded another public recognition in the form of Test & Measurement magazine's Best in Test award.

In November, we acquired the assets of Veeder Group, a $40 million UK based manufacturer of temperature measurement products used in HVAC and industrial applications, which complements Fluke's existing temperature lineup and positions us well for accelerated growth.

Fluke Networks finished the year with their best quarter, as core revenues grew at a high single digit rate, driven by strength in the distributed network analysis and demand for the new products, including the Net Tools series 2, which is used by network technicians to quickly isolate and troubleshoot network connectivity issues.

Earlier this month, we acquired the assets of Crannog Software Limited, a leader in application performance management tools, a high-growth segment of the enterprise network test market.

Medical Technology revenues--excuse me, our newest reporting segment, Medical Technology revenues finished the quarter with revenues up 52% to $697 million.

Core revenues improved 8.5%, acquisitions contributed 38%, and currency had a positive affect of 5.5%.

Medical Technology revenues for the 2006 full year were $2.2 billion, up 88% compared to 2005, as core revenues contributed 8.5%.

Acquisitions added 78%, and currency had a positive impact of 1.5%.

Medical Technology operating margins for the quarter were 14.6%, 100 basis points higher than the prior year despite the approximately 50 basis points of dilutive effect from the recent acquisitions, mainly due to the December one-time non-cash write-off of approximately $6 million of acquired end process R&D, associated with the acquisition of Vision Systems, and the approximately 30-basis point negative impact from the expensing of stock options.

The write-off of in-process R&D at Vision Systems negatively impacted our fourth quarter earnings per share by approximately $0.01.

For the 2006 operating margins, operating margin improved 10 basis points to 11.8%, when compared to the prior year.

Impacting full-year margin comparisons was the approximately 45-basis point dilutive affect of recent acquisitions, the approximately 30-basis point negative impact from the expensing of stock options, and the approximately 20-basis point impact related to an impairment charge associated with an equity investment recorded in the first quarter of 2006.

Absent these items, margins would have been up approximately 105 basis points.

Turning to our dental business, fourth quarter revenues grew at a high-single digit rate.

Broad based strength in digital imaging products, including the new 8500 panoramic digital X-ray drove this performance.

In addition, we believe our full-year high single digit growth outpaced the overall market.

To strengthen further our digital imaging technology and product offering, we completed two important transactions earlier this month.

We acquired Imaging Sciences International, or ISI.

ISI is a $50 million leading manufacturer of 3D imaging systems used by oral surgeons, periodontists, orthodontists, and general dental practitioners.

This technology compliments our existing 2 dimensional product offering, and should accelerate our overall imaging growth, particularly in high growth areas, like implantology.

We also acquired the assets of Dentrix Imaging, a manufacturer of imaging software and sensors.

This acquisition enhances our Dexis intraoral product line and strengthens our position in the overall digital imaging category, even further.

We continue to be excited about the strong results in our dental consumables business, which enjoyed low double digit growth in 2006 compared to 2005, and we enter 2007 very optimistic about both the top line and margin expansion opportunities in the Sybron businesses.

Radiometer core revenues grew at a mid-single digit rate, driven by low double digit growth in diagnostic analyzers.

Growth was broad based geographically, with new products such as the enhanced ABL800, with a new creatinine sensor, and the ABL80, a compact blood analyzer for point of care use in decentralized hospital environments, contributing to the year-over-year improvement.

Leica Microsystems core revenues grew at a mid-single digit rate in the quarter driven by robust demand for confocal and stero microscopes.

On the margin front, we continue to make significant progress with fourth quarter operating margins up more than 200 basis points, compared with the fourth quarter of 2005, primarily the result of ongoing DBS success, both on the manufacturing floor and the leverage from higher sales.

As many of you already know, we recently announced the completion of our acquisition of Vision Systems, a global leader in instruments and consumables serving the pathology lab market, which nicely complements Leica's existing solutions for that same customer.

Those of you who were able to attend our Analyst and Investor Day in December were able to see some of the innovative products marketed by Vision and understand why we're very excited about this high-growth opportunity.

Moving over to Industrial Technologies, revenues increased 6.5% for the quarter to $792 million.

Revenues from core businesses were up 3%, acquisitions contributed 0.5 of 1%, and currency had a favorable impact of 3%. 2006 full year revenues for Industrial Technologies increased 7.5% to $3.1 billion.

As revenues from core businesses grew 6%, acquisitions contributed 1%, and currency contributed 0.5 of 1%.

Operating margins for the fourth quarter were 16.3%, a 210-basis point improvement compared to the same period last year. 2005 fourth quarter margins include the approximately 265-basis point negative impact related to a previously-disclosed litigation settlement.

While 2006 fourth quarter margins include the approximately 40-basis point negative impact from the expensing of stock options.

Also contributing to this performance was the additional spending for restructuring and growth initiatives during the quarter.

For the full year, operating margins increased 90 basis points to 15.6%.

Included in the full-year margin improvement is the benefit of approximately 65-basis points from the 2005 litigation, which is offset by approximately 80 basis points of negative impact, which includes the gains recorded in 2005 and the expensing of stock options.

Product identification revenues decreased 1.5% during the quarter, with core revenues declining 4.5%, and a positive currency impact of 3%.

Product identification 2006 full-year revenues increased 3.5%, as revenues from core businesses contributed 2.5% and currency gains added 1%.

As discussed on previous calls, the revenue performance at Accu-Sort and Video Jet continues to be negatively impacted by the completion of several large U.S.

Postal Service projects in the first half of 2006.

Absent the revenues from these projects, our core marketing revenues in the quarter would have been up at a mid-single digit rate driven by solid performance, particularly in TTO and from a geographic perspective, in Latin America and China.

During the quarter, we completed the acquisition of Light Laser, a manufacturer of miniature sealed Co2 laser tubes.

Light Laser provides key intellectual property and design capability, which will further enhance the competitiveness of the Video Jet laser marking product line.

Switching to Motion, revenues were up 7.5% in the quarter, with core revenues contributing 4% and a positive currency impact of 3.5%.

The 2006 revenues for Motion increased 6%, as revenues from core businesses grew 5%.

Acquisitions contributed 0.5 of 1%, and currency contributed 0.5 of 1%.

Motion revenue performance was led by strength in our AKM Servo and direct drive motor lines, as well as growth in several aerospace and defense programs.

The team also made significant progress in its mobility and lift truck initiatives.

Orders in North America for newly launched elevator products, in fact were up double digit in the quarter.

Finally, moving to the Tools and Components segment, revenue for the quarter grew 6.5% to $372 million, essentially all core growth.

For the full year, revenues for Tools and Components increased approximately 4.5% to $1.4 billion, again essentially all core growth.

Operating margins for the quarter were 14.7%, an increase of 10 basis points over the prior year.

This improvement was driven by the leverage from incremental revenues and the benefits from cost reduction and restructuring activities, which more than offset the approximately 65-basis point negative impact from the divestiture of a business line at Delta, and an approximately 45-point negative impact from the expensing of stock options.

For the full year, operating margins decreased approximately 100 basis points to 14.4%.

Contributing to this year-over-year decline were gains recognized in 2005 related to the sale of a business and certain real estate, which contributed approximately 40-basis points, as well as the full-year impact of the business divestiture at Delta, and option expensing, which together negatively impacted margin comparisons by approximately 75-basis points.

Mechanics Hand Tool revenues grew 7.5% in the fourth quarter led by high single digit growth and Craftsman shipments to Sears and another solid performance at Matco.

Mechanics Hand Tool revenues for the full year grew 4.5%, all of which was core growth.

High single digit revenue growth at Matco in the fourth quarter reflected strength across the breadth of the product portfolio there particularly with tool boxes and other hard lines.

In addition to Matco's continued solid financial performance, entrepreneur magazine recently ranked Matco the third best home-based franchise and the 24th best overall franchise opportunity for entrepreneurs in the U.S.

Looking back on 2006, we see a year where we successfully reached a number of positive milestones and generated another record year of sales, profits, and cash flow.

Our portfolio continues to strengthen, as evidenced by a solid topline performance coupled with continued margin expansion, particularly in our Motion, dental equipment, Gilbarco Veeder-Root, and Leica businesses.

During 2006, we completed 11 acquisitions.

In particular, we doubled the size of our dental business with the acquisition of Sybron, and more recently, we added an important consumables complement to our Life Sciences offering with the acquisition of Vision Systems.

Looking forward to 2007, our outlook remains positive as we continue to see momentum in our businesses and in our served markets.

Our acquisition efforts remain very active with three transactions completed already here in January.

Our performance throughout 2006 has given us confidence that 2007 can be another exciting year for Danaher.

Given this outlook, we are reaffirming our December EPS guidance for the first quarter to be in the range of $0.72 to $0.77 per share with full-year 2007 EPS to be in the range of $3.68 to $3.78.

Thanks, Larry.

That concludes our formal comments.

One point I would like to note, a reconciliation of operating margins for the year as well as a presentation are available on our website under the title Investor Events.

With that, we're now ready for questions.

Mark?

Thank you very much.

[OPERATOR INSTRUCTIONS]

Our first question of the day will come from Bob Cornell with Lehman Brothers.

Yes, thanks.

First of all, I would like to say thanks to Pat for the help over the years.

I was wondering, Pat, if you're there, where was Danaher stock when you joined the Company on a split basis?

Thanks, Bob.

I had to get up from my rocking chair here to answer this.

Was it over a 1.00?

Actually, it wasn't.

The stock is up about 150 fold since I started.

Actually the free cash flow this year is ten times our market cap when I started.

So it's been quite a change over time.

Well, I'm hoping you'll put up a website so you can keep us abreast of the DBS methodologies you're using in the desert mountain project.

Anyway, obviously it's a good quarter.

In terms of my expectation, I think the growth in Motion was a little below what I thought, and Larry, maybe you could help us with that, and I think you also said orders were strong, I didn't quite catch that.

Maybe just flush that thought out a little bit.

Sure, Bob, and keep in mind that I think that--let me start with Motion.

We saw some softness, I think in the Tech space.

It seemed to be more of a pushout nature really, so we had some projects basically slide into '07, and I think that's probably why you see Motion where it is.

I think with respect to what we saw in the fourth quarter, the way we ended, obviously it's hard to draw too many conclusions about what we've seen thus far in January.

But I think on balance, from a business perspective, business by business from a geographic perspective, I think we stand by the comments we made in New York in December.

I think things are pretty darn good and we feel like we're going to continue to grow organically.

The deal environment is positive.

We'll pick our shots, of course.

But I think all in all, I think we feel like we're in a good spot, excellent year.

What did you say about the orders?

What did you say about the orders in Motion?

The order momentum was encouraging.

Another--one question, I'll pass the baton.

What do you say with regard to your raw material input, and are you starting to see a tailwind there, or have you hedged the '07 year at higher prices?

Commodities have come down, is that going to be a help for you guys this year, or continue to be a headwind?

Bob, this is Dan, good morning.

I think as we kind of flagged in '06, given our higher gross margin, the evolution to kind of more instrumentation based businesses, the higher commodity prices in '06 hurt us, but really not that much given the makeup of most of our products.

Having said that, given the recent drop in a number of commodities, it should be a slight benefit, largely if we see it, we'll see it at tools in Motion.

I think just given the evolution of the Company is just [not] that significant and that's why we did not get hit that much in '06, but it should be a slight benefit for us where we were a year ago.

Okay, thanks, Dan.

That's all for me.

Thank you.

Thanks, Bob.

Our next question will come from Nicole Parent with Credit Suisse.

Good morning, guys.

Good morning, Nicole.

Could you just talk about the M&A landscape, we've seen some activity in the medical space and as you look out into 2007, you've broken out Medical Technologies, do we think we're done there, or would we expect to see anything of size happen as we move forward?

Well, Nicole, I don't think that we're done in Med Tech, is frankly, we're at the same posture we'd have anywhere.

I think the way you should think about our Med Tech activity from here is in many respects more of the same.

I think you see us first and foremost very focused on the dental space, clearly we made a big move to balance out the nature of the products and the cycles with dental with the Sybron acquisition.

We continue to be of the view that there are opportunities, both around equipment and consumables to change the practice of dentistry, which will be good for all concerned.

So you'll see us active in that space.

I think with respect to what you've seen us do in diagnostics and imaging, with Radiometer and Leica, is not try to run right into the middle of a $25 to $30 million--or billion dollar IBD market, but really pick our shot.

I think we did that with Radiometer and Critical Care, I think you've seen us do that at Leica, both in the path lab, particularly now with Vision, and obviously on the research side at Leica as well.

So I think we're mindful of some of the landscape changes that have occurred not only this year, but obviously were underway in 2005 as well.

So you should continue to expect us to be very aggressive in dental, and I think to be thoughtful, but still active in the other businesses that we're in today.

Terrific, and then just one other one.

When we think about organic growth as we roll through 2007, are there any puts and takes, difficult comparisons, orders, accelerations that we should be thinking about as we progress through the year?

Sure, well, I think what we tried to flag in December was certainly as we start the year, we're still in product ID going to be dealing with some tough comps because of these USPS projects.

And I think tools and components, particularly given the cliff that the class 8 market has fallen off is going to register some of that softness.

But I think other than that, we are still of the view that this should be a pretty good year for us.

Okay, thank you.

Thanks, Nicole.

Our next question will come from Jeffrey Sprague with Citigroup.

Thanks, good morning.

Good morning, Jeff.

Larry, you pretty much answered the Med Tech question, but just another little thought on that.

Sure.

That's kind of split into three platforms, obviously.

Is there other things on the Danaher strategy board that are subplatforms that you aspire to, maybe not in the near-term cards, but should we think about it as kind of a three-legged stool, or is there other places you could go over time?

I think that's an accurate description, Jeff because Leica straddles both the research and the clinical side of things, Radiometer obviously more of a clinical orientation, and dental on balance operates in its own orbit.

I think there's a fourth leg out there.

I think that would be consistent with what we've shared before about our ongoing activity looking at expanding the number of platforms that we have, but obviously, with what's going on particularly in dental, we're quite busy, I would not rule that out, but I don't think anything is going to happen tomorrow.

Okay, and just on medical margins what would be your longer term target.

And just thinking about near-term modeling, is there--now that we're kind of--see this a little bit more clearly, is there anything just seasonal or other things to take into account as we just think about the complexion of '07?

Jeff, this is Dan.

I think in terms of seasonality, given the medical businesses, given the fair amount of European orientation there as well, there definitely tends to be a back-end loaded impact to the margins, particularly in Q4.

I think going into the year I would expect that our biggest margin increase across the four segments would come in medical and would look at something north of 100 basis points for the year in that segment.

And then just one more from me.

FX is creeping in as a meaningful contributor, not just for you guys, but obviously everyone, but what are your thoughts on that for the year in terms of earnings impact?

If we just kind of hang at current currency rates?

I think based upon where we--the year is a little bit softer than where we were when we gave guidance in December, but just by a small amount.

So I don't, we haven't modified, I think it'd be an immaterial amount at this point.

Okay, thanks a lot.

Thanks, Jeff.

Next we'll hear from Robert LaGaipa with CIBC World Markets.

Hi, good morning.

Good morning.

Just had a few questions.

I guess one on dental, Larry, you mentioned that in the quarter it was up high single digits and it was higher than the market.

Can you maybe provide us with some color as to how that compared to the market, what was the market growing at?

And also when you look at your distributors, how do they stand in terms of inventory?

And some of that growth, should we expect that to continue with the momentum that you had in the fourth quarter, at least into the early part of this year?

I think the reason we got into the dental space is that we see a number of macrodrivers suggesting very sustainable growth, both in equipment and consumables.

I think our results--you can look at the fourth quarter, but clearly in '06, you saw us taking I think increased advantage of those trends, both in terms of what we do and certainly what we do with some of our distributor partners like Henry Shine, who are obviously key partners for us.

I think as we go into this year, you should see a continuation of that type of performance from us.

I'm of the view that you haven't seen the full impact of what Danaher can do with these businesses.

You won't see it in '07, but I think year by year, Dan mentioned some of the margin improvements.

I'm still of the view that we can have meaningful impact on the top line trajectory as well.

It's early, but I think that as we look at our business, certainly as we work with our distributor partners, who are important parts of the equation, we're excited about 2007.

Absolutely.

I guess what I'm just trying to put into context, do you think the market was up low single digits and you were up high single digits or how should I think about that?

I think what we believe is that we were up, as we indicated and we were growing slightly faster than the overall categories in which we compete.

Okay, secondly, when you talked about the restructuring in the Industrial Technologies segment, I assume that was in Motion.

Can you talk about what you actually did during the quarter, and is that expected to continue into the early part of '07, or when do we expect that to maybe shift into higher margin mode as a result of the restructuring?

I think going into the quarter, we saw early on it was going to be a very strong quarter from a margin perspective across the Company.

Because of that, within the quarter, we approved and executed upon some incremental both growth and restructuring activities.

A fair amount of that was in Industrial Tech.

Actually, it was both at Motion where we did some restructure and some reductions in European head count, as well as in product ID where we did some restructuring in the back office in Europe as well.

We also did some incremental growth investments in both those businesses.

So I wouldn't--it wasn't one very large project in Motion.

It was a number of--it was a couple of restructuring projects as well as a couple incremental growth projects.

But an amount--we spent more and we did more than we've done in the previous quarters here, because of what we saw was going to be a good quarter.

And is that expected to continue into the early part of '07, or is that something that you view as largely completed?

No, I think it's more discrete events.

Terrific.

Thanks very much.

Thanks, Bob.

Thank you.

[OPERATOR INSTRUCTIONS]

Our next question will come from John Baliotti with FTN Midwest Securities.

Good morning.

Hey, John.

Larry--well, first, Pat congratulations, and be careful, I heard these guys are tough on consultants.

Larry, on the water side, you mentioned strong order growth in Trojans, specifically in China, and Hach is doing well.

I was wondering, can you give us an idea of what types of projects those are going into, are they--I know there aren't a lot of existing facilities there relatively speaking, but are these new construction plants, are these upgrading existing plants?

From an overall perspective, and particularly with respect to China.

I think Trojan, if you look at the project mix, it's just that, it's a mix of both the greenfields and the upgrades.

At Hach, obviously, we do the same thing both on the Muni and frankly, on the industrial side.

Trojan is more of a Muni play for us.

Right.

Globally, are you seeing any difference in trends, North America, Europe, Asia?

In that business, John, or broadly?

Yes, in that business, sorry.

No, I would say no.

I was in China last month, India earlier this month.

Clearly when we go and talk to our customers, talk to government officials, they're very keen with respect to what we do both at Hach and at Trojan.

The order book, the pace of business, I think in Europe was better than we had anticipated in '06.

North America was good and we would anticipate those trends to basically continue.

Okay.

Just a follow up on that, would you expect that given how much demand it seems like they need for new plants that there's a lot of run way there for Trojan?

I sure hope so.

After the year they had, we need to translate those orders into shipments and continue that sort of trajectory for years to come.

Okay, great.

Thanks, Larry.

Thanks, John.

You bet, John.

Ann Duignan with Bear Stearns has a question.

Morning, Ann.

Good morning, everybody, and I'll echo everybody else's comments to Pat, best wishes, we'll miss you.

I'll roll all my questions into one in the interest of time.

We noticed that in Fluke, the organic growth was mid-single digit down from double digit prior quarter, and then on product ID, while core growth was mid-single, I think you noted that it was primarily driven by China and Latin America.

Can you just give us a little bit of an insight into what are the teams seeing from a macroenvironment, particularly in the manufacturing environment?

We're beginning to hear--we're getting a lot of different kind of conflicting data, December bad, November good, January looks okay.

What are the teams seeing there?

Fluke and Product ID are very good barometers of the industrial environment?

Yes, and in different ways, obviously in different verticals, Ann, but I think what we saw across the Fluke portfolio, not only in terms of what we do, in terms of our own shipments, but I think just as importantly, on a sell-through basis suggested that the verticals that we serve are still buying black and yellow product.

That was a trend we saw really during the course of the entire year.

I think there are some folks that--distributors, for example, who are probably hearing some of those same comments that you just quoted and are trying to discern just what will happen here in '07, particularly domestically here in the U.S.

But I think on balance from what's happening day to day, particularly with our products, at Fluke we feel very good about things.

Obviously at Video Jet, we've got the equipment business, ex the big project with USPS which we said was up at a mid-single digit rate, consumables, where we think we actually took some share in '06, the team did a nice job in that regard, would also tell us that things are steady.

I wouldn't say it's like hot, but I think again, given the guidance we gave you in December, the guidance that we reaffirmed today, we're of the view that things are steady, things are solid.

Just a quick follow-up on Jake Brake.

I know it's a small part of business, but you highlighted it.

What's the team seeing there?

They supply to the engine manufacturers, so they should be seeing a significant downturn in orders as we speak.

Can you give us any color from that team, are orders down as much as they had anticipated or less so or any insights you can give us on that segment would be welcome?

Ann, I think the simple answer is you're exactly right.

We, in December executed a very significant head count reduction at Jake Brake in anticipation of things slowing dramatically there.

That, in part, is what we've tried to flag with respect to what you should see in tools and components, particularly here early in the year.

Yes, a small business, but as you know, as well as anyone, what's happening there is rather dramatic right now.

Things will obviously improve as we go through the course of the year, but the team is I think dealing with that reality as we speak.

So they are seeing a significant decline as anticipated at that--

Yes.

Yes.

Next is John Inch with Merrill Lynch.

Thanks, Ann.

Thanks, Larry.

Congratulations.

I hope you pushed for a bigger office.

Hey, Dan.

What was the bottom line impact from FX this quarter?

Was there an EPS impact?

Versus a year ago?

Just the currency exchange in the quarter.

Versus the guidance we gave in December was nothing.

In fact it was a slight--in a month, it was a very slight negative.

Versus a year ago, it probably contributed $0.01.

Okay.

Europe.

Europe has been sort of a pretty important source of upside or theme of upside this quarter.

Can you guys maybe talk about your European businesses and the organic growth overall for the Company came in line, so did that suggest Europe did better and North America, the margin was slightly weaker, or how should we think about it?

I think you should think, John, about Europe as again coming in basically as it has during the course of the year.

The pleasant surprise for us, at least one of a handful in '06.

In the quarter, remember, we had that KaVo timing issue, where it helped us a little bit in the third quarter, nicked us a little bit here in the fourth quarter, and in turn given their European orientation, would show Europe a tad light, but I don't want read a lot into that quite honestly.

I think what we're seeing over there again on balance is pretty steady.

Do you get the sense, Larry, your European businesses may--or end markets may be strengthening, or do you just think it's sort of a sustainable improvement trend versus obviously years of very slow growth in Europe.

I wouldn't say that we would anticipate Europe accelerating in '07, John.

I think the teams in Europe feel confident about putting up another good year, but I think at this point, it would be premature to say we would see acceleration.

Okay.

Just as a final question, GE paid a huge price for Abbott.

I'm wondering, just going back to kind of the M&A within medical, would that business have been otherwise attractive to you guys, and I'm just kind of thinking back to when you did Radiometer, I think you paid sort of half the multiple for that that GE paid on an EBITDA basis.

Does this kind of inflate the potential properties and prices?

How are you thinking about this, Larry?

Are they applying the ointment here in terms of your runway or expectations, you have to pay more?

Just a little color on that.

Sure.

I think we got into the IVD space acknowledging that as a $25, $30 billion market, recognizing that not only GE, but let's not forget about the Siemens transaction last year with Byer, we knew the large medical equipment companies like GE, like Siemens had IBD in their cross hairs, we said we're entering into the blood gas space initially with Radiometer because we really want to pick niches where we think leadership positions focus best of breed products are relevant and are a formula for winning.

And as a result of what's happened here in the last nine months or so, I think we feel good both about what we were able to anticipate regarding the changed landscape, as well as our existing positions.

You're right, clearly the multiples of late for some of these larger properties are higher than what we were able to work out with Radiometer, but I don't think it necessarily changes our focused strategy.

Thank you.

Thanks, John.

Deane Dray with Goldman Sachs is next.

Thank you, good morning.

Good morning, Deane.

Isn't it interesting that as Danaher moves up the technology curve in its businesses here, you post some of the best organic growth in the legacy industrial business with tools.

So if I look at the 7.5% organic growth, yes, it was easier comp, but obviously there must be some good things going on in the consumer business and Sears.

Could you give us an update there?

Sure.

And don't forget about Matco.

Things are continuing to be very good at Matco, as the prepared remarks suggested, Deane.

I think at Sears, the sell-in was much better.

I think we saw some things during the holiday season which give us optimism going into '07.

Obviously at Lowes as well, we had an exceptional holiday season and we're very pleased with those results as well.

On balance, I think we've been working our plan, a little bit of stability, a little bit of investment, yielded obviously a pretty good quarter.

Any benefit yet from the Kmart conversion?

Yes, but I wouldn't say that that was--what drove the delta there.

That's a small amount.

Great, and then on Product ID, just to set expectations for the first quarter, this is going to be your toughest comp coming off the postal service contract.

Is that correct?

Yes.

I think the first half really started Q3.

So we've got to kind of get to the first half to anniversary the lasting of the postal contracts.

Got it, and then the acquisition in Product ID, you said it was Light Laser.

It's interesting, where is the growth coming in Product ID ink versus Laser Marking?

Obviously there's more consumables in ink, but is this just an opportunistic acquisition, or you think there's going to be more growth coming from Laser?

I think that what we have seen for some time now is that the technologies like Laser, the technologies like TTO are growing more rapidly than the core ink jet products are from an equipment perspective, Deane, because we're able to mark more frequently on a broader range of materials and substrates.

I think what you see with Light Laser is really a small transaction, a technology investment that just strengthens the position that we've been able to build both organically and through some other smaller acquisitions over time.

That strategy that we have of being able to go to customers, the fast-moving consumer goods people, for example, and to be able to mark on the primary and secondary packaging, regardless of the product, the speed of the line, the marked desire, all of that, I think continues to set us up as real winners over the long haul.

I think on the ink side, as I indicated, the aftermarket share position, between the second half, picked up nicely, just a marketing execution effort on our part, and that helped us a little bit, and going forward should continue to yield some benefit.

Great, thank you.

Thanks, Deane.

Thanks, Deane.

Next we'll hear from Chris Kotowicz with A.G. Edwards.

Hey, good morning, guys.

Good morning, Chris.

Good quarter.

I may have missed this, but did you guys comment specifically on the KaVo core growth rate?

We commented on dental equipment being up high single digit in the quarter, and KaVo obviously being a big piece of that.

Okay, I heard consumables I think low double digit, I just had missed KaVo.

Okay, so on Med Tech more broadly, I know we talked about 100-basis points of margin expansion in 2007, how much of that do you think is going to come from the ongoing businesses as opposed to an incremental boost from Sybron, which brought in significantly higher margins?

Well, I think if you look at the equipment side of the business, as we've indicated, we're probably not--we're at or slightly past the midpoint in terms of where those operating margins should be.

There's no reason the dental equipment business shouldn't be a high teens, 20% OP business and we have a lot of runway ahead of us in respect to making that happen.

Some excellent progress I think during the course of '06, but you should continue to see us execute in that regard.

Sybron obviously helps us on a reported basis with respect to the mix dynamic, but again as we indicated, we see margin expansion potential at Sybron as well.

Okay.

Just kind of seems like Sybron alone probably gets you half way there.

You guys have a--

We don't want to think about it that way.

Again, you can reweight the portfolio and get there, it's not the way I think about it.

I want to make sure that we're driving margin expansion at KaVo.

I want to make sure we're doing that at Pellton and the rest of the -- with the other equipment brands as well.

You might see it before we're actually satisfied that it's happening where it should be.

And Chris, what I said was on a reported basis absent any new acquisitions, we'd expect that segment to be up more than 100-basis points.

Okay, fair enough, and then the recent acquisitions that you talked about, are those generally going to be dilutive to margins in '07?

In other words to your 100-basis point plus expansion?

They're small.

It could be a slight impact.

Okay.

Nothing major.

Okay.

Thanks guys.

You bet, Chris, thank you.

We have time for one final question, and that final question will come from Richard Eastman with Robert Baird.

Larry, could you just review the margin improvement in the Professional Instrumentation segment for the quarter?

Some pretty significant improvement there.

Was that mix or did Gilbarco have that big of an impact?

Gilbarco did have that impact, and I would say, Rick, that the Gilbarco impact was driven by a combination of cost reductions, productivity sourcing, just the basic blocking and tackling that is so important in all of our businesses.

Product mix helped them as well.

The new Encore S dispenser is an excellent product, both with respect to the price we get, and the cost addition we enjoy with that product, and I think they were smarter, really throughout the year, but certainly in the second half in driving price.

I don't want to take anything away from what Fluke did.

They also had a very good year, but in many respects, that was just more of the same.

So Gilbarco and Fluke were the engines of that margin drive that you see.

And the Gilbarco improvements then I guess by definition would be pretty structural and sustainable, then?

Certainly as those new products continue to represent a larger share of what we're doing, yes, the sourcing, the other productivity initiatives certainly should continue to contribute there.

Even in that business, Rick, I think that--while I give the team a lot of credit for '06, still plenty of opportunity to do better.

Can I just taper that into a question?

Just in general on Asia and perhaps maybe your China strategy, could you just get us up to date there on the successes through '06 and maybe the growth potential there for '07?

Sure.

When we talk about China, we're talking about what is approximately a $600 million business up strong double digit in '06, nicely profitable at/above the corporate average.

All of our platform businesses are represented there.

Frankly, the Med Tech businesses are probably the most immature with respect to their investment and their drive in that market.

Motion made some headway there, but our efforts in China are really led not only by our production and sourcing activities, but the go to market investments, the share gains that we see across professional instrumentation and certainly with tools as well as Product ID.

Okay, well, very good, thank you.

You bet, Rick, and I should just mention, certainly as we look at '07, one of the things that was a focus of both the China trip and the recent India trip was how we use our incubation process, the process that helped us really grow the water business in China from scratch to help the Med Tech businesses both in China and in India.

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

I will now turn the conference back over to Mr. Wilson for any closing or additional remarks.

Thank you.

To reiterate, our replay number is 888-203-1112 with a confirmation code of 1672354.

If we missed you on this call, I apologize, but we will be available, Dan and I both, the rest of today to answer any follow-up questions you may have.

Thanks for joining us today.

And that does conclude our conference call.

Thank you for joining us today.