Danaher Corp (DHR) 2010 Q4 法說會逐字稿

Good morning.

My name is Erin, and I will be your Conference Facilitator today.

At this time I would like to welcome everyone to the Danaher Corporation fourth-quarter 2010 earnings results conference call.

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

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

(Operator Instructions)

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

Matt McGrew, Vice President of Investor Relations.

Mr.

McGrew, you may begin your conference.

Thank, Erin.

Good morning, everyone, and thanks for joining us.

On the call today are Larry Culp, our President, Chief Executive Officer, whose joining us from London instead of snowy Washington, and Dan Comas, our Executive Vice President and Chief Financial Officer, whose joining me here in D.C.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, and the reconciling and other information required by SEC Regulation G relating to any nonGAAP financial measures provided during the call, are all available in the investor section of our website www.danaher.com under the heading earnings and will remain available following the call.

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

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

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.

The replay of this call will also be available until February 1.

The replay number is 888-203-1112 in the US and 719-457-0820 internationally and the confirmation code is 4535370.

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, the other related presentation materials supplementing today's call and our annual report on Form 10-K when it is filed for additional factors that impacted year-over-year performance.

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

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

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

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

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

Matt, thanks.

Good morning, everyone.

2010 was an outstanding year for Danaher.

We grew 13% organically in the fourth quarter, wrapping up an exceptionally strong year for all of our businesses.

Core growth in the fourth quarter was broad-based across the segments, lead by Test and Measurement up 24%, Industrial Technologies up 15.5% and Life Sciences and Diagnostics up 10%.

The double-digit core growth seen throughout the year was certainly helped by the economic recovery, but also by all of the work we've been doing the last several years reshaping the portfolio, expanding margins, which in turn has allowed us to accelerator organic investments while obviously executing well with the Danaher business system.

We re-weighted many of our investments with a focus on the emerging markets which positions us well in the fastest growing parts of the world.

Those investments are paying off as the emerging markets were our best performer in the quarter, up more than 25%.

China grew in excess of 30% despite challenging year-over-year comps with our Life Sciences and Diagnostics and Environmental businesses leading the way.

We were pleased to report that four brands reached the $100 million revenue mark in China in 2010, Fluke, Hach, Tektronix and Leica.

A great achievement for those businesses and an example of how solid execution and the best team wins.

The growth model we've developed in China is being aggressively exported around the world, most notably to India, which we believe will be a significant contributor to our long-term growth.

We were also encouraged by the continued strength in the developed economies, as both the US and Europe grew about 10%.

The quality of our core growth was evident in the outstanding margin performance in the quarter with our core operating margin improving 230 basis points year over year with each of our segments achieving at least 150 basis points of core margin improvement.

So with that as a back drop let me move to the details of the quarter.

Today, we reported fourth quarter GAAP diluted net earnings per share of $0.69, up 72.5% from last year.

Adjusted diluted net earnings per diluted share was $0.67, up 19.5% year over year.

Included in our fourth quarter results was over $60 million of accelerated restructuring and incremental growth spending which will benefit us in 2011 and beyond.

For the full year, GAAP diluted net earnings per share was $2.64, a 52.5% increase compared to 2009.

Adjusted diluted net earnings per diluted share was $2.31, up 30.5%.

Revenues for the quarter increased 15% year over year to $3.6 billion with core revenues up 13%.

The impact of currency translation decreased revenues by 1.5% and acquisitions contributed 3.5% to sales growth.

Our full-year 2010 revenues were up 18% year over year to $13.2 billion with core revenues up 11.5%.

Year-over-year gross margin for the fourth quarter increased 510 basis points to 51%, largely due to higher sales volumes and the benefit of our prior years' restructuring initiatives.

Operating margin in the fourth quarter increased 480 basis points year over year to 17.4% resulting from higher sales volumes, lower restructuring expenses compared to the prior year and the benefit of those prior years' restructuring initiatives.

Included in the operating results was $12.2 million in equity earnings contributed by Apex, which accounted for approximately 40 basis points of operating margin in the fourth quarter.

Absent the Apex contribution, our operating margin was 17%.

For the full year, our operating margin was 16.4% compared to 13.8% in 2009.

2010 operating cash flow was $2.1 billion, a 16% increase year over year.

Free cash flow was a record $1.87 billion, a 12% increase over our previous all-time high generated in 2008.

Our free cash flow to net income conversion ratio was 104% representing the nineteenth year in a row where we delivered free cash flow in excess of our net income.

More meaningfully, excluding the after-tax $232 million non-cash Apex gain, our free cash flow to net income conversion ratio was [120%].

During the fourth quarter we completed four acquisitions with aggregate annual revenues of approximately $200 million to strengthen our Environmental, Test and Measurement, Product ID and Dental businesses.

Excluding the AB SCIEX and Molecular Devices transactions, which we announced in 2009 and closed early in 2010, we completed 17 transactions in 2010 and deployed $1.1 billion of capital.

And as you've seen from some of our recently announced news, the M&A environment remains very attractive.

Now turning to our five operating segments.

Test and Measurement revenues increased 34% for the quarter with core revenues up 24%.

For 2010, revenues increased 27.5% with core revenues up 17%.

Our core operating margin was up 155 basis points in the fourth quarter primarily due to higher sales volumes and the benefit of the prior years' restructuring initiatives.

Reported operating margin increased 120 basis points to 19.8% due to the core margin expansion as well as lower restructuring expenses compared to the prior year.

Fluke core revenues increased more than 20% in the quarter with solid demand in all major geographies for thermography and Industrial Products.

Growth in the emerging markets lead by the BRIC countries was especially strong.

During the quarter we launched the 190 Series II, our first four channel scope meter.

This new product is designed for plant maintenance engineers and technicians who use these (inaudible) meters to go into harsh industrial conditions to test everything from micro electronics to power electronics applications.

At Tektronix, core revenues were up more than 30% in the quarter lead by sales of oscilloscopes in all major geographies.

During the quarter we introduced our new mid-range line of oscilloscopes, the MSO/DPO5000 series, which we featured at the year-end investor meeting last month and have been very pleased with the early results.

During the quarter we completed the previously announced acquisition of Keithley Instruments.

Keithley is a leader in advanced bench top electrical test instruments and systems used by scientists and engineers for research, product development and high-performance production testing.

Core revenues from our Tektronix Communications business grew at a double-digit rate in the quarter with healthy demand for both our core enterprise tools and our network management solutions.

Arbor Network, which is we acquired in the third quarter, is off to a running start.

Arbor's revenues in the fourth quarter grew at a mid-teens rate compared to a year ago when it was a standalone business as service providers, data centers and large enterprise customers look to fortify their networks against malicious website intrusions known as DDoS attacks.

Environmental revenues increased 7.5% in the quarter with core revenues up 8.5%.

For 2010, revenues increased 13% year over year with core revenues up 10.5%.

Core operating margin was up 165 basis points in the fourth quarter primarily due to higher sales volumes and the benefit of the prior years' restructuring initiatives.

Reported operating margin increased 390 basis points to 22.1% due to the core margin expansion as well as lower restructuring expenses compared to the prior year.

Water quality core revenues increased at a low double-digit rate with Hach-Lange, Trojan and ChemTreat all up 10% or more in the quarter.

At Hach-Lange the demand remained strong across all geographies in our core lab and process instrumentation markets.

In fact Hach-Lange surpassed $1 billion in annual revenue for the first time in 2010 with China alone exceeding $100 million.

Trojan core revenues increased at a low double-digit rate in the quarter driven by robust growth in industrial, residential and municipal applications despite challenging year-over-year comps.

In the second half of 2010, Trojan launched four major new products lead by the Solo Lamp and [Signab] disinfection system.

We anticipate these new products will further strengthen our market share position as we head into 2011.

During quarter we completed the acquisition of Satlantic, based in Halifax, Nova Scotia.

Satlantic's product portfolio of optical sensors and systems for aquatic research and water quality monitoring compliments and expands our growing oceanographic instrumentation product group.

Also in the quarter, Hach increased its investment in DKK-TOA Corporation based in Tokyo, Japan.

Hach now owns 33.4% of DKK-TOA which is a strategic partner offering a broad range of water lab instruments and process analyzers such as drinking the wastewater analyzers, environmental water quality analyzers and other lab and portable instrumentation.

Gilbarco Veeder-Root's fourth-quarter core revenues increased at a mid single-digit rate year over year with robust shipments of dispensers around the world.

Veeder-Root's Phase-Two water detector through this last quarter has been very positively received by operators looking to monitor and protect underground storage tanks from ethanol blended fuel phase separation.

Also in the quarter of note, GVR was awarded three major payment system integration projects in the Asia-Pac region.

Moving to Life Sciences and Diagnostics, revenues for the quarter increased 58% compared to the prior year with core revenues up 10%.

For 2010, core revenues (sic - see Presentation Slides) increased 55% with core revenues up 9%.

Core operating margin was up 530 basis points in the fourth quarter primarily due to higher sales volumes and the benefit of the prior years' restructuring initiatives.

Reported operating margin was up 50 basis points from the prior period to 13.1% due to the core margin expansion and lower restructuring expenses compared to the prior year, partially offset by the impact of recent acquisitions, namely AB SCIEX and Molecular Devices.

Leica Biosystems core revenues increased at a low double-digit rate in the quarter with strong demand for both our advanced staining and core histology products in Asia and North America.

Over the last several quarters we've accelerated the placement of our BOND-III advanced standing system with sales growing at a double-digit rate in the quarter and for the full year.

The growing installed base positions us well to take advantage of the profitable consumable streams heading into 2011 and beyond.

Leica Microsystems core revenues grew at a high single-digit rate in the quarter driven by sales of Confocal microscopes in Europe and China.

We continue to see good order growth in the quarter particularly in China, Brazil and other emerging markets.

At Radiometer core revenues grew at a low double-digit rate in the quarter.

This performance has been driven by healthy demand in Europe and China for the ABL90 and ABL80 blood gas analyzers, which bodes well for future consumable sales.

AQT continues to build on its early success as we doubled instrument placements in 2010 versus 2009.

We are pleased with the year-one results from SCIEX and Molecular Devices.

The integration of the two halves of the JV, a complex operational task, has gone very well and we couldn't be happier with where the team and the business are here as we celebrate, or are close to celebrating, our first year anniversary.

Our customers have responded well particularly in the second half of 2010 as we began shipping the 5600 TripleTOF mass spectrometer.

AB SCIEX's revenues in the second half of the year were up double digit as compared to a year ago when it was a standalone business unit.

Molecular Devices also performed well in the quarter with revenues up high-single digits lead by solid demand for plate readers and imaging products.

The recently introduced IonWorks products helped researchers analyze ion channels of cellular membranes for genetic disorders and chemicals in order to facilitate the discovery of drugs related to cardiovascular, metabolic, central nervous and immune systems.

Those products continue to do well in the marketplace.

Turning to Dental, segment revenues increased 6.5% in the fourth quarter with core revenues up 7.5%.

For the full year dental revenues increased 10% with core revenues up 4.5%.

Core operating margin was up 255 basis points in the fourth quarter primarily due to higher sales volumes and the benefit of the prior year restructuring initiatives.

Reported operating margin was up 730 basis points from the prior year period to 12.1% due to the core margin expansion as well as lower restructuring expenses compared to the prior year.

KaVo revenues increased at a low double-digit rate in the quarter while we enjoyed solid demand for our imaging products including 3D and intraoral sensors.

We also saw good growth in both our treatment units and instruments.

Throughout 2010, dental practitioners returned to investing in their practices.

In addition to the good organic growth, core operating margins were up meaningfully again in the quarter and we feel confident in our ability to continue to drive growth and margin expansion at KaVo in 2011.

Sybron core revenues grew at a mid single-digit rate in the quarter with improved sales in general dentistry consumables and orthodonture products.

In the quarter we launched the OptiBond XTR, a new light cure adhesive designed to minimize postoperative sensitivity and maximize patient comfort.

Sybron and KaVo continue to work together to capitalize on synergies between the two platforms, this past quarter hosting their first joint dealer conference in China allowing customers to see our consumables offering alongside our hand pieces, treatment units, imaging products and the rest of the KaVo portfolio.

Similar events are planned for other geographies later this year.

During the quarter we acquired Implant Direct, giving us a leadership position in the high-growth value segment in the dental implant market.

We're excited about the opportunity to leverage our global distribution network to drive penetration and expand the geographic reach in this attractive growth segment.

Moving to Industrial Technologies, revenues increased 14% for the quarter with core revenues up 15.5%.

For 2010, revenues increased 14% with core revenues up 13.5%.

Core operating margin increased 255 basis points in the fourth quarter resulting from the benefit of restructuring and cost initiatives implemented in 2009 as well as the higher sales volumes in the segment.

Reported operating margin was 18.9%, a 700 basis point increase compared to the same period last year due to the core margin expansion as well as lower restructuring expenses compared to the prior year.

Product identification core revenues were up mid-teens in the quarter with strength in both equipment and consumables and across all major product categories, both in the emerging markets and Europe was particularly robust.

We introduced the VJ 3010 fire laser in October, a low cost laser targeting consumer products and pharma applications in China, Central and Latin America.

In the quarter, Videojet acquired a Mexican distributer, allowing us to commence direct operations in that country.

This is the fourth distributer acquisition Videojet has made in the past 5 years.

Directly serving our customers in this important emerging market will allow us to accelerate the growth of our full range of products in the region and further improve our reputation for providing up time piece of mind to our customers.

Subsequent to quarter end we announced the pending acquisition of EskoArtwork, a leading full service solutions provider for the digital packaging design and production market.

Headquartered in Gent, Belgium, EskoArtwork's suite of software and hardware solutions helps its customers reduce digital design cycle time and insure integrity throughout the packaging material supply chain.

This transaction is subject to customary closing conditions, including regulatory approvals and is expected to close in the first half of 2011.

This acquisition is expected to be accretive to EPS by approximately $0.02 in 2011 and $0.04 in 2012.

Our Motion business' core revenues were up more than 20% in the quarter.

We experienced significant growth in all major geographies and markets.

In the quarter, Kollmorgan was awarded a multi-million dollar contract to supply AKM and AKD motors and drives to one of Europe's leading packaging OEMs.

This program has opened up potential additional opportunities with that customer and demonstrates the power of the solutions generated by our new global platforms.

Subsequent to quarter end, we announced an agreement to sell our Pacific Scientific Aerospace business to Meggitt PLC for $685 million.

In 2010, PACSI had revenues of approximately $378 million and contributed $0.07 to diluted earnings per share.

The transaction remains subject to customary closing conditions, including regulatory approvals.

Beginning in the first quarter of 2011, the business will be treated as a discontinued operation for financial reporting purposes.

So to wrap up 2010 again was an outstanding year for Danaher.

We continue to evolve the portfolio to higher growth, higher technology, more global businesses where our brands are clear market leaders.

The investments we're making in innovation and emerging markets are driving growth and share gains.

We continue to generate excellent free cash flow and deploy that cash back into the business through acquisitions.

We expect the global economy to continue to improve in 2011, lead by the emerging markets with the developed markets also growing, albeit at a slower rate.

We believe we are well positioned heading into 2011 with DBS driving our focus on our performance.

We're pleased with the momentum at which we exited the fourth quarter and moved into January.

At this time, we are reaffirming our full year and first-quarter 2011 GAAP earnings per share guidance of $2.55 to $2.70 and $0.52 to $0.57 respectively.

This excludes the net impact of the pending sale of our Pacific Scientific Aerospace business and the pending acquisition of EskoArtwork.

We will update our guidance after these transactions have closed.

Thanks, Larry.

That concludes the formal comments.

We are now ready for questions.

(Operator Instructions)And we'll go first to Steve Tusa with JPMorgan.

Hi.

Good morning.

Good morning, Steve.

Can you hear me okay?

We can.

So I just wanted to ask about you're obviously exiting the year at a really good run rate.

There's been a lot of-- a little bit of talk about some budget flush towards year end.

Obviously the end of December ended pretty well.

I mean how good was the end of December and are you seeing kind of normal seasonality here in January?

Steve, I don't think we saw anything that we would describe as abnormal at years' end.

We just had a December that started well and ended well.

It's hard to dismiss completely some sort of budget flush as you say, but I think we had genuine robust demand holdup virtually across the businesses and across the key geographies.

I don't think you registered 13% core as we did without that.

And I think while it's very early obviously here in the new year, I think by and large, the businesses and the teams are feeling good about the prospects for 2011.

And so what's your first quarter organic growth guidance again?

Well, I think we've talked about full year guidance, Steve, in the 6% to 8% band.

That's what we put out for the full year back in December if you'll recall.

I think that if you use that band for purposes of looking at the first quarter, I expect the quarter to be at the high end of that range.

Keep in mind, we've got 1 less selling day in the quarter which will slightly impact our consumables business, but I think by and large, I think we're optimistic about the first quarter here.

And then 1 just I guess obligatory question on acquisitions.

I like the move into Nova Scotia, that seems like an interesting acquisition, but anything out there that's kind of bigger on the horizon for you guys?

Obviously this Artworks deal was pretty interesting, it's strategically right down the middle.

But how are the big properties moving around these days?

Is the pipeline anymore robust than it was a year or 2 years ago?

Well, Steve as you know, Nova Scotia has great tuna fishing and that is no small part of the consideration there.

(Inaudible).

Seriously, I think we're excited about the deal pipeline.

It certainly has been a longstanding priority for us to add more quality businesses to product identification.

That's been 1 platform of 5 where we have not been as active as we would have liked so bringing on Esko, a high-quality business I think is a wonderful addition to that platform.

I think we're excited about their growth trajectory and frankly their margin expansion potential as we introduce them to some of our customers and relationships around the world.

I think with respect to the deal pipeline, I would characterize it perhaps very much as I did in mid-December.

It is very full.

We are exceptionally busy.

The nature of the situations that we're looking at really span the entire priority list of platforms here, the 5 core areas that we've often talked about.

Is it better than it was a year or 2 ago?

Certainly 2 years ago, things were in some chaotic state.

I would say it's better and it's probably better than it was a year ago given that many people were still kind of trying to figure out which end was up.

So again, I think as Dan and I have tried to be consistent of late, we obviously were with you out in San Francisco a few weeks ago, we think this is going to be an active year for Danaher deploying capital as we strengthen our portfolio.

Great.

Thanks a lot.

You bet, Steve, thank you.

Our next question comes from Scott Davis with Morgan Stanley.

Okay, good morning, guys.

I hope you can hear me, too.

I'm remote and I'm guessing Steve is too.

We've got about a foot of fresh snow here.

You're loud and clear, Scott.

Okay, great.

A couple big things in the quarter.

I mean, 1 obviously Test and Measurement just had a blowout but just to back up a little bit and take a look at gross margins.

You've had pretty amazing improvement year over year.

I mean 510 basis points, I don't think I've ever seen that at another company.

I mean what-- can you give us a sense of how much of that is mix of new acquisitions that are coming in at higher margin versus actual structural changes or restructuring that you've made and obviously some macro impact at retail and factories, but do you have a sense at all at least to how that breaks down?

Scott, in terms of year-over-year basis, there's very little impact from acquisitions.

It is a little bit overstated because of some of the restructuring spending which was more Q4 last year than it was this year.

But we took out 37 rooftops and I think that's been a big driver of that gross margin improvement as well as double-digit core growth and leveraging that cost base.

And as we talked about in December, our-- ended up core revenues being up 11%, our G&A manufacturing headcount was only up 2% and that was-- of all the things that was the biggest driver of accelerating the gross margin year on year.

Okay, amazing.

Al right, Test and Measurement and I don't want to duplicate the question on kind of budget flush, but you've had such an amazing ramp in that business and maybe a different way to ask the question is just how sustainable is, I know you had tougher comps, but how sustainable?

I mean is this a new replacement cycle, and new products that's occurring for example, at Tektronix, or was there just so much pent-up demand in 2010 that it was kind of a once and done?

Well, Steve or Scott, I would submit that it's a number of different things.

Obviously working against the easy comps in 2009 certainly helped with the print but I think you see an innovation cycle across the served markets for Tek which is significant.

I think particularly at Tek, we are more effective competing in the marketplace.

We have a number of quality competitors, but as you'll recall when we were going through the initial integration and restructuring, the first couple years were probably more internally focused than externally focused, that balance has really shifted.

I think at Fluke, what you're seeing is Fluke continuing to do what it does in a good global market, innovating aggressively, investing in the emerging markets.

I was with the team in China a few weeks ago celebrating the $100 million Club.

Just so many good vectors for them to plug into as China grows.

I think Fluke has done it, they're continuing to do it.

And don't forget what we're doing at Tek Communications particularly with network management as the mobile carriers expand their networks particularly around data management, what we do to help them tackle those bandwidth challenges, quality of service challenges, is not insignificant and that's been a real important part of the T&M growth story, so it's just no real one thing.

A whole host of things that I think come together here to obviously put a very strong year together in 2010 and give us I think a high level of confidence about their ability to continue to be a strong performer for us.

Thanks, guys.

You bet, Scott.

Moving on we'll go to Barclays Capital, Bob Cornell.

Yes, thanks.

I walk to work, come on Scott, you can make it.

The-- on the guide, you guys, it sounds like you're balancing a lot of pluses and negatives, right, positives and negatives.

I mean clearly the organic growth is accelerated better than you thought in the fourth quarter way above the early guide and yet in the first quarter you're saying 6% to 8%.

So it looks like the underlying momentum in the businesses maybe better than the guide and yet than with the combination of the Aero and the acquisition you're looking at some dilution, so maybe you could help us balance what you're thinking there with maintaining the guide ex the capital allocation decisions.

Well, Bob, I think I'd say this.

The-- we're certainly encouraged by the strong finish.

I mean I think that's where that-- the conversation starts and obviously again, while it's early, the good start here in 2011.

I think our habit has been not to try to update guidance moments after we announce a transaction let alone 2, 1 inbound, 1 outbound.

They're clearly going to have some impact here.

We tried to provide that in isolation.

Just think it's prudent for us to wait a little bit here until we get at least closer to getting those deals on board let alone getting further into the year before we update guidance that we put out that basically a month ago.

Obviously the net effect of the divestiture and Esko coming in will be dilutive, but I think there's some other tail winds out there, not the least of which is the strong finish and the good start here.

Obviously the euro is going to help us a little bit.

And obviously on taxes, like some other folks, we're talking about a slightly lower provision versus the 26% figure that we put out there in December.

So I think all up, again we'll come back here when we have a little bit more clarity around the timing to update the guidance again, but all in all, I think we're looking at a good year.

Well if it's fair to say too, in answer to 1 of the earlier questions, you are looking at active capital allocation here.

I mean just looking at the math based on what you've got proposed in these deals, I mean are we looking at accretion on potential deals, balancing the divested dilution potentially?

Well, again, Bob, I think that we've tried never to project forward unnamed inbound deal flow and the positive effects from that.

So I think I'd want to just stand by what I said relative to PACSI and Esko, but again reiterate, that we think we're going to be very active this year.

And we talked about $4 billion plus of capital at the ready here, a very full pipeline, and I would be disappointed if we didn't put that capital to work this year.

Okay, thanks very much.

We'll be watching.

Next we'll go to John Inch with Merrill Lynch.

Thank you.

Good morning.

Good morning, John.

Hello, John.

Good morning guys.

I want to ask you, 15.5% organic growth in the Industrial business but the margins declined sequentially, is there some reason, was it raw material costs or some other reasons why you didn't get more of an uplift?

John, the biggest driver sequentially was the amount of restructuring we did in the segment, which was the restructuring and the incremental growth spend was over $10 million in the segment.

So if you adjusted for that we would have been north of 20% in the segment.

Having said that, that is the 1 segment and it's particularly Motion where we are seeing some real pockets of inflation.

Just in the last 90 days, deal and kind of related products up double digits, some copper related products are up 20%.

Fortunately for us it's isolated, but if there's 1 segment that has seen some impact and will probably continue to see some impact is Industrial and specifically the Motion business.

So sequentially most of the explanation is really the restructuring, but we are definitely watching some of these commodity issues.

So Dan, does that trend with respect to margins in Industrial carry forward for the next quarter or two or are you doing something to kind of redress this now as we sort of think about modeling out or just fine tuning the model for 2011?

I think it's going to have a little bit of pressure.

It's part of the reason we put more restructuring there than anywhere.

I'd also say that Motion did the best job across the Company on price.

They got between 2% and 2.5% price in the quarter, so they're getting some offset but when you're looking at double-digit increases in some commodities, it's impacting Motion.

Now we're not seeing that at PID, giving you more kind of a printed circuit board base as most of our other businesses where we aren't seeing inflation.

But there's going to be a little pressure there.

We're going after the cost, we're getting a little bit more on price, but I wouldn't be surprised if that's a segment where kind of the core margin increases is probably towards the lower end versus what we see at the other segments.

Dan, would you be able to take, I think you did about $15 million of restructuring.

Could you pars that out amongst the other segments, so you did about $10 million in Industrial, what about the other segments?

The largest, which was a little bit bigger than that, was Dental and the other 3 were kind of in the $5 million to $10 million range.

Okay, and then maybe 1 more.

Your investment in Align, I think there's some sort of a stand still agreement that ends of February 16.

Could you-- it looks like it's worth $155 million, could you talk about the implications of that and sort of what your thoughts are with respect to your share ownership?

John, I would simply say that Align continues to be an important partner for us as we look at opportunities to parlay that equity position into innovative orthodonture products that combine the best of both Companies, so we continue to have a lot of optimism there.

But beyond that, I think that's where we are.

So would it be fair to say, Larry, you're going to be opportunistic perspectively with the investment or is the investment sort of an important part of continuing the partnership?

I think its been a terrific investment for the Danaher shareholder and I think it's an important part of our relationship with Align.

Great.

Thank you.

Thanks, John.

Thank you, John.

And next we'll go to Shannon O'Callaghan with Nomura.

Mr.

O'Callaghan, your line is open.

Sir, you may have us on mute?

Perhaps should move along and get Shannon back in the queue a little later on.

Moving on we'll go to Jeff Sprague, Vertical Research.

Thank you, good morning, everyone.

Good morning, Jeff.

Guys, realizing that you're 1 of AB SCIEX is more about integration and kind of tying it all together, not necessarily growth per se, but can you give us a sense of what kind of the pro forma organic growth profile of the business was in 2010 and kind of what's embedded in your thoughts in 2011 now as it anniversaries into the base?

Jeff, I think the important period to look at for SCIEX is really the second half.

I mean that's what I've keyed on, and we were up double digit at AB SCIEX.

I don't think that that's necessarily going to be a double-digit grower through a cycle, but I think SCIEX can be a mid-to-high core business for us.

And as we look forward here, we obviously have tremendous momentum with the 5600.

We won't comp that until late in 2011.

On my trip around the emerging markets this month, just saw a lot of enthusiasm really for the full offering across both the research, the clinical and the applied spaces where we operate in China, India, and even the Middle East.

So I think all in, we got a good start.

I would submit given the work that we were doing, it was probably more internally focused than externally focused but that really began to change hard and fast when we-- in the third quarter.

So from that perspective, I think we come into the new year really right where we want to be with AB SCIEX.

And I think Dan said, but I may have missed, was there a comment on the exit rate of margins at AB SCIEX, and if not could you give us that?

Sure, Jeff, and we'll probably look at SCIEX and Molecular Devices together, we think combined next year, they are low teens and probably exiting, hopefully exiting 2011 at a mid-teens rate.

And again as a reminder SCIEX came in low double digit and Molecular Device was breakeven.

And just maybe to follow up on the gross margin strength, the G&A headcount only up 2% and that sort of thing.

Are we kind of at the max sweet spot of revenue recovery but costs not coming back?

Obviously you worked hard to get costs out, you're going to work hard to make sure they don't come back.

But is there some just natural operational headwind on margins relative to what maybe just a naive incremental margin type analysis would lead you to expect?

Well, we posted over 200 basis points of core margin improvement across the Company in 2010.

I don't think we're expecting anything in that range going into 2011, but our historical level of 75 basis points of core margin expansion or maybe a little bit more particularly in some of the newer businesses, I think we're well positioned for.

And a little bit of growth on that 50%, now 51% gross margin does naturally get very good fall through.

That's why 1 of the reasons we upped our kind of historical fall through from 30% to 35%.

And in the fourth quarter we were up

And then just finally, Larry, on the M&A front, it would appear that perhaps certainly the opportunity to do larger things is out there, larger things could be hitting the radar screen.

I just wonder if you could kind of comment on that?Is there a different threshold for something large, the state of the competition and larger things maybe both strategically?

And the story yesterday about Carlyle and KKR bringing back covenant light deals, I mean is private equity getting out of hand yet.

Just a little bit more granularity on how to think about that.

Yes, well Jeff, as you know, and there are going to be times in the deal cycle where whether it be PE or maybe with certain strategics around certain spaces where pricing is going to get out of hand, I think we've tended to take to the sidelines when that happens, but still be active given the array of opportunities and spaces that we play in.

I think for us, whether it's a small deal or a large transaction, however you want to define that, our methodology is typically the same.

We first try to sort through the strategic questions relative to the attractiveness of the space, the industry of the market.

I think secondly, we try to assess the strength of the particular company that we might have an interest in in that context.

Obviously we then sort through what's our value add, how does Danaher, how does DBS make a difference in that situation.

And then obviously getting back to valuation, the deal math has to work.

Clearly, with a smaller transaction, we can take a little bit more risk, if you will, for a larger situation we need to have tremendous conviction around the answers to all of those questions.

I think that really is simple and straightforward as I can describe it to you.

Fair enough.

Thank you very much.

Thanks, Jeff.

Thanks, Jeff.

(Operator Instructions)And we'll try back to Mr.

O'Callaghan with Nomura.

Good morning guys.

Good morning, Shannon.

Sorry about that.

No worries.

So just on the first quarter, I mean you mentioned the 1 less selling day.

I mean other than the tougher comp, I mean is there anything that-- any dynamics that you're thinking about in terms of what would you expect to kind of moderate sequentially versus what you saw in 4Q?

Well, I think the way it's likely to play out Shannon is I think T&M once again should lead the pack.

I would suspect they're going to be in the low-- they'll be up low-double digits with that being pretty well broad based.

I think Industrial will be up double digit as well, probably right around 10% with Motion up a little bit more than Product ID.

I think the rest of the group will follow.

I think we talked about in New York, Gilbarco's got some tough comps given the payment upgrade cycle that they benefited from in 2009.

Certainly at Leica particularly, we saw some positive stimulus out of China and Japan early last year that I don't think is going to be there.

But by the same token given the way things ended and the way things started, those are some businesses where we probably have a little bit more upside than we were anticipating a month ago.

So I think all in all again, we're going to start off well here.

I suspect if we're looking at 6% to 8% for the year, we'd probably use that range and talking about being at the high end of that range here at quarters end.

Okay, great.

And then just on Product ID, I mean the Esko deal is pretty interesting, kind of get you branching out a little bit from what you-- the core of what you've kind of done in Product ID, I mean can you talk about how you're thinking about that platform and the directions you might take them?

Does it got the potential to be-- get much bigger as a part of Danaher or is it still sort of the same plans you've had before?

Well, I would respond, Shannon by saying that our intent there has always been on par with the other 4 growth platforms.

Admittedly, we've been more successful building out some of the others both around the core position and in some adjacent spaces but it's not for the lack of trying.

And I think what you see the team doing here with Esko is bringing in a nice size business with upgrades, our portfolio clearly gives us some exposure in a business that is clearly adjacent to VJ, but plugs into a number of the macro drivers around creative and secure packaging, more sophisticated supply chains and the like let alone the analog/digital conversion that's happening in packaging design, that we try to play obviously at Videojet and Linx, and would like to play or plug into-- in some other businesses.

So it would be a space that I would continue to watch.

We want this team to get Esko on board, get that integration off to a good start.

But I'd like to see us put some of that capital we've talked about deploying this year into Product ID for sure.

Okay, great.

Thanks a lot guys.

Thanks, Shannon.

Thank you, Shannon.

Next we'll go to Steve Winoker with Sanford Bernstein.

Good morning.

Good morning, Steve.

Good morning, Steve.

Good morning.

Just 1 follow-up question on the portfolio side.

I mean what's your willingness given all of the discussion on M&A to deploy equity?

How high a level of conviction is this something that investors should take seriously or not for some of the larger deals that are being discussed out there?

Steve, as-- I mean as you know through our history, our very strong bias has been to use our free cash flow in and a modest amount of leverage to fund our acquisitions.

It's hard to think of a compelling situation where the lions share of the purchase price would be funded with equity, but if it's a situation like Tektronix at that time where maybe we funded 10% or 15% of the purchase price after the fact with some equity in part to keep our kind of Tier 1 commercial paper rating, I think we'd be willing to do that, and wouldn't rule out something bigger but it'd be a really high bar to think of a deal where we're putting 50% of the price in terms of equity.

I mean at that point it would almost be kind of a merger of equals anyway, but-- and I don't think we have a lot of those we're working on.

So on the margin, could we issue equity, a slice-- a small slice of a deal?

Yes, but I'd be surprised [to see] much more than that.

Okay, and a little bit more on the quarter.

I know you've discussed the first quarter sales guidance at the high end of the 6% to 8% range, but as I look at comps across the year and think about the fact that you're starting at you're-- after the first quarter-- first quarter you're comping 6% I think core and then 13% to 14% for the next 3 quarters, so you're really-- I would have thought that you hit that 6% to 8% for the full year, you would have had to have a much stronger first quarter.

So am I missing something on this?

Is it-- do you just see much acceleration it's going to overwhelm the comps?

Steve, I think that --

Steve.

Yes.

I mean one way to, I mean as you suggested we think it'd be at the high end of the range based on what we're seeing right now.

If you compare the fourth quarter where we were plus 13%, the previous year we were down 8%.

So now we're going to be-- we're talking about being plus 8% but we're comparing versus 5.5% a year ago, so that alone is showing some-- so we have a much tougher comp in Q1 than we did in Q4 by 13 points and we're only talking about a decel, if you will, of going from plus 13% to about a plus 8%.

It's early.

We're off to a good start and we just see a lot of momentum.

Okay, and then last on R&D, I notice just a slight sequential down tick and I'm assuming sales investment was up for the quarter given your G&A comments, was 6.2 from 6.4.

Where do you see those 2 line items go particularly as you continue to hold down G&A in the year?

Well I think what we talk about holding down G&A, Steve, we're really talking about holding down G&A, not necessarily R&D.

So I think as we look into the budgets for this year we're clearly continuing to invest in innovation.

I think the sequential change that you're referring to does show a down tick with the ratio but mine note shows up about $20 million sequentially in the spend in the fourth quarter.

And I would expect we'll continue to sequentially put incremental funds in to drive growth if not in 2011, obviously from an R&D perspective, more in 2012 and 2013.

For us given nature of the projects, you're going to-- that number is going to move around a little bit quarter to quarter.

Project ends, maybe some third party consulting slides off, but I think over time, you'll continue to see that ratio as a percentage.

Year in, year out I think continue to move gradually northward given the nature of the businesses that dominate the portfolio now and the way we're trying to put as much as we can into innovation.

And is that true also on the sales investment side?

For sure.

Obviously, the bulk of the sales and marketing investments are going into emerging markets more so than the developed markets where the incremental sales person and the incremental service person, while getting more expensive each year, is still a relative bargain compared to the US and Europe.

Okay, thanks.

Thanks, Steve.

Thanks, Steve.

We'll go next to Jon Wood with Jefferies & Company.

Okay, hello, thanks a lot.

Good morning, Jon.

Good morning.

So Larry, on the Dental equipment franchise, you did quite a bit better than I think you had communicated as soon as a month ago.

Was there a material tax incentive kind of flush in that business in the fourth quarter?

And then just comment vis-a-vis next year, I mean do you expect that kind of momentum to continue in 2011?

Jon, I think at years' end, there were a number of things that came together for us, but I don't think it was anything out of the ordinary.

The dental business for a whole host of reasons tends to, particularly on the equipment side, tends to finish strong in normal times.

And to us both in the US and Europe, things just became more normal almost with each passing month.

Obviously given our position in imaging in virtually every modality, we were well placed to benefit from that increased investment in practices that the Docs were making.

I think as we look at 2011, certainly I don't think we're talking about equipment being up low doubles all year long.

I think it's going to be more of a mid possibly a mid plus type grower for us, but again because of how we're positioned, I think we're looking forward to a good year.

I think we'll be more active internationally.

We flagged that for you back in December obviously with the IDS show coming up in Europe, it will be a flurry of new product launches there.

And I think to the extent, as I referenced on the call, Sybron gets back to-- back to a more normal run rate and the 2 of those businesses do more together and do it effectively, we should have a good year in 2011 in Dental on both sides of the house.

Okay, great.

Thanks a lot.

Thank you.

Great and we'll take our final question from Deane Dray with Citi Investment Research.

Thank you, good morning, everyone.

Good morning, Deane.

Good morning, Deane.

I know we touched on the capital at the ready a couple times on the call today and I was hoping we could true that up.

I know in December you talked about a $4 billion number, but we had some puts and takes with divestiture PAC side it looks like 550 and after-tax you had the investment in Esko Art.

So if we look at the debt capacity and free cash flow, it looks by our calculation still to be significantly above that $4 billion number that got discussed earlier, so I was hoping we could true that up.

Well, Deane, I mean obviously we're not-- we don't forecast acquisitions.

We put out kind of a proxy number that is somewhat with the primary constraints of being credit rating, the net after-tax proceeds we expect from [PACSI] is probably $100 million, $125 million more than we expect to pay for Esko.

We did end up the year with stronger free cash flow, we had been talking about kind of the $1.7 billion plus.

We ended up with almost $1.9 billion of free cash flow, so we ended up with more cash in the bank at the end of the year.

So net/net, I mean if you had to give a number today would be slightly higher than the $4 billion but directionally, I still think it's a reasonable framework for us to be communicating.

Is-- where's the pressure point in terms of maximum debt?

I mean, we're in a low interest rate environment but is it the A1 P1 on the commercial paper or is it the A2 rating?

Where is the pressure point for you?

Well Deane, it's not a definitive pressure point but we've been an A1 P1 CP issuer for a dozen years.

We like being in that zone particularly if things ever turned ugly and at some point they will, hopefully not any time soon.

That's kind of the model that we would like to work under.

That's fair.

And then in potential divestitures, is there anything within the next year being contemplated?

I know there's a standard, there's no business as a permanent home at Danaher, but in terms of potential on the table divestitures, post the PAC side move is there anything that you can share?

Deane, it sounds like you'll be disappointed after I give you my normal answer.

I (inaudible) that.

Well you did, but I will stand by our tradition of not commenting on perspective acquisitions or divestitures.

I think what we've done here with PACSI is a good move for the business.

I think Meggitt will be a great partner and parent for them.

I think it's a good move for Danaher as we, if you will, kind of bid those guys the best and bring in Esko which beefs up a strategic growth platform for us, brings in I think a stronger, higher growth, higher gross margin business with plenty of international opportunities.

So, stay tuned.

Great.

Thank you.

Thanks, Deane.

Thanks, Dean.

Okay, well that's going to wrap up the Q&A for us, so Dan and I are around all day for anybody who wants to have any follow-up calls.

Thanks, everyone.

Once again, ladies and gentlemen, that concludes our conference.

Thank you all for your participation.