Danaher Corporation (DHR) Q3 2010 Earnings Report, Transcript and Summary

Good morning. At this time, I'd like to welcome everyone to the Danaher Corporation Third Quarter 2010 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Matt McGrew, vice president of investor relations. Mr. McGrew, you may now begin your conference.

Good morning everyone, and thanks for joining us. On the call today are Larry Culp, our president and chief executive officer; and Dan Comas, our executive vice president and chief financial officer. I'd like to point out that our earnings release, a slide presentation supplementing today's call, our third quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investors section of our website, www.danaher.com, under the heading Earnings and will remain available following the call. The audio portion of this call will be archived on the Investors section of the website later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until October 26. The replay number is (888) 203-1112 in the U.S, and (719) 457-0820 internationally. The confirmation code is 4297828. 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, our third quarter Form 10-Q and other related presentation materials supplementing today's call 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 that actual results might differ materially from any forward-looking statements that we might make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements whether as a result of new information, future events and developments, or otherwise. With that, I would like to turn the call over to Larry.

Matt, thanks. Good morning everyone. We're pleased to report this morning an outstanding third quarter for Danaher. We grew 12.5% organically in the third quarter as the positive trends of July and August continued through September. Our core growth was broad-based across all the segments with professional instrumentation up 15.5%, industrial tech up 16.5%, and med tech up 7.5%. Our continuing commitment to drive our organic growth using VBS in the form of tools and processes to improve new product development and sales and marketing execution, as well as increased investments in those same areas, is evident in this strong core growth performance. We are quite pleased with this momentum and are optimistic about our potential to outperform for the remainder of 2010 and beyond. We're winning in the marketplace and serving our customers well as we continue to capture market share in many of our businesses, including Leica, Radiometer, Hach Lange, Chem Treat, Kollmorgen, Fluke, and TEK Communications. Geographically, emerging markets were our best performer, up more than 20% in the quarter. Despite difficult comparisons to last year, China grew at a 25% rate in the quarter with our test and measurement, environmental, and Leica businesses leading the way. We also saw strong growth in Eastern Europe, Latin America, and India. Emerging markets now represent 20% of our total sales, up from 12% five years ago, representing a greater than 20% compounded annual growth rate. The U.S. grew low double digits and Europe was up 10%. The quality of our core growth was evident in the outstanding margin performance in the quarter, with our core operating margin improving 310 basis points year-over-year with each of our operating segments achieving at least 200 basis points of core improvement, a first for Danaher. In addition, we generated over $500 million in free cash flow in the quarter. During the quarter we completed the strategic joint venture with Cooper Industries to combine our tools businesses to form Apex Tool Group. Beginning this quarter we deconsolidated the financial results of the businesses contributing to Apex and recorded our share of the combined joint venture results based on the equity method of accounting. We also recorded a $232 million after-tax gain in the quarter related to the formation of the joint venture. So with that as a backdrop, let me move to the details of the quarter. Today we recorded third quarter GAAP earnings per diluted share of $0.95, up 79% year-over-year. Adjusted net earnings per diluted share, which among other items excludes the $0.34 gain related to the formation of the Apex JB, was $0.60, up 33% year-over-year. Revenues for the quarter increased 16% to $3.2 billion, with core revenues up 12.5%. The impact of currency translation decreased revenues by 1.5% while acquisitions contributed 5% to sales growth. Year-over-year gross margin for the third quarter increased 370 basis points to 51.7%, marking the first time in Danaher's history that we have achieved gross margins in excess of 50%. The year-over-year margin improvement is largely due to higher sales volumes and the benefit of our 2009 restructuring initiatives. Approximately 150 basis points of improvement in the quarter is attributable to the deconsolidation of our lower gross margin tools businesses. Operating margin in the third quarter increased year-over-year to 18%, resulting from higher sales volume and the benefit of our prior year's restructuring initiatives. Included in the operating results was $10.5 million in equity earnings contributed by Apex, which added approximately 35 basis points to our operating margin in the quarter. Absent the Apex contribution, our operating margin was 17.7%. Year-to-date, operating cash flow was $1.5 billion, a 16% increase year-over-year. Free cash flow year-to-date was $1.37 billion, and our free cash to net income conversion ratio was 104%. More meaningfully, excluding the after tax $232 million non-cash Apex gain, our free cash flow to net income conversion ratio was a robust 126%. During the quarter we closed or signed two bolt on acquisitions with aggregate annual revenues of approximately $200 million, which are expected to strengthen our test and measurement platform. The M&A environment remains very active, very attractive, and given our strong balance sheet we believe we currently have more than $4 billion of M&A capacity over the next four to six quarters to expand and strengthen our portfolio with particular focus on our five growth platforms. Now turning to our operating segments, professional instrumentation revenues increased 20.5% for the quarter, with core revenues up 15.5%. Operating margin for the third quarter increased 560 basis points to 21.2%, primarily due to higher sales volume and the benefit of the prior year's restructuring initiatives. Our core operating margin was up 340 basis points in the quarter. Our environmental platform revenues increased 13% in the quarter, with core revenues up 10.5% Water quality core revenues increased at a low double-digit rate in the quarter and Hach Lange core revenues grew at a mid-teens rate with solid demand across all geographies in our core lab and process instrumentation markets. During the quarter, Hach launched the SC 200 universal controller, which provides maximum flexibility for water analytics by eliminating the need for multiple dedicated controllers and offering plug and play capabilities with all of Hach's digital sensors currently covering 15 different testing parameters, such as ammonia, chlorine, and nitrate. Trojan core revenues declined at a mid-single-digit rate in the quarter, as a difficult year-over-year comparison resulting from the New York City drinking water installation more than offset solid growth in industrial, residential, and other municipal applications. However, year-on-year bookings were up double digits in the quarter. Earlier this month, Trojan unveiled its most advanced open channel wastewater UV disinfection system to date, the Trojan UV Signa. The Signa is specifically designed for large scale disinfection applications, making the conversion to UV disinfection easier by reducing the total footprint required, simplifying maintenance, and lowering the total cost of ownership. And Signa is three times more energy efficient than similar offerings. At Chem Treat, third quarter core revenues were up high single digits, with broad based growth across all major verticals. Since acquiring the business in mid-2007, we have increased sales force headcount by approximately 20%, as we continue to dynamically allocate resources to fund their successful sales growth model. Gilbarco [Veeder Root's] third quarter core revenues increased at a low double-digit rate year-over-year, with robust demand for outdoor payment solutions and dispensers globally. Earlier this month, Veeder Root introduced a key product for biofuels called the Phase-Two Water Detector, the first and only solution to continuously monitor underground storage tanks and detect ethanol-blended fuel phase separation, which can occur when water finds its way into tanks, often leading to infrastructure corrosion at the service station and costly damage to vehicle engines if undetected. Moving to test and measurement, revenues increased 32.5% in the quarter, with core revenues up 22.5%. Fluke core revenues increased at a high teens rate in the quarter, with solid demand in all major geographies for thermography and our industrial products. We unveiled a series of new products in the quarter, including the 381 Remote Display Clamp Meter, the first clamp meter with a detachable remote display and flexible current probe for easier, faster, and safer measurements. The wireless display featured on the 381 is similar to that on the 233 digital multimeter, which we introduced last year and displayed at our year end conference. This product advancement has been very well received in the field, with the 233 digital multimeter receiving 12 industry awards since introduction 10 months ago. Tektronix core revenues grew more than 30% in the quarter, led by demand for our oscilloscopes, bench instruments, and video test products. All major geographies were up double digits, led by China and Japan, which are both up over 40% year-on-year. Subsequent to quarter end we entered into an agreement to acquire Keithley Instruments. Keithley designs and develops electronic instruments and systems geared toward specialized needs of engineers and electronics manufacturers and academic institutions for research, product development, high performance production testing, and process monitoring. Keithley's instruments are expected to complement Techtronix efforts in distribution channels alongside Fluke and strengthen our general purpose test product offering, a key strategic initiative of the business. This acquisition, expected to be completed during the fourth quarter, is subject to customary closing conditions, including the receipt of regulatory approvals and adoption of the merger agreement by Keithley's shareholders. Core revenues from our Fluke Networks and TEK Communications businesses collectively grew at a mid-teens rate in the quarter, with solid demand for both our core enterprise tools at Fluke Networks and our network management solutions at TEK Communications, including our new GeoProbe G10 platform, designed to optimize service for high bandwidth broadband telecom networks. During the quarter we acquired Arbor Networks, which develops a market network security and management solution for cyber-attack detection and mitigation for wireless carrier networks and next-generation data centers. Network security is an attractive and important market adjacency for TEK Communications. It's helping secure the communications networks we monitor, strengthening our value proposition. Moving to medical technologies, revenues for the quarter increased 31% compared to the prior year period, with core revenues up 7.5%. Med Tech core operating margin for the third quarter increased 330 basis points on a year-over-year basis as a result of higher sales volumes and the benefit of restructuring initiatives implemented last year. Our overall operating margin of 12.6% was up 450 basis points sequentially from the second quarter. Our dental platform revenues increased 10% in the quarter, with core revenues up 6%. Cable revenues increased at a low double-digit rate in the quarter, with particularly healthy demand for our imaging products including both 3D and intraoral sensors as well as our treatment unit and hand piece instruments. Sales expanded in most major geographies, led by the U.S. and Asia. In addition to the strong organic growth, core operating margins were up meaningfully in the quarter, and we feel very good about our ability to continue to drive growth and margin expansion for the remainder of 2010 and beyond. [Sybron] core sales grew at a low single-digit rate in the quarter, with strong sales in orthodontia solutions and infection prevention products offset by lower sales of general dental consumables due to inventory destocking in our U.S. distribution channels. The inventory destocking issue is now behind us, and we expect to return to historical growth rates in the fourth quarter. Moving to life sciences and diagnostics, revenues increased 54.5% in the quarter, with core revenues up 10%. Leica Biosystems core revenues increased at a mid-teens rate in the quarter, with robust demand for both our advanced staining core histology systems and consumables. We saw double-digit growth across all major geographies, led by China and Japan, and we believe we are growing faster than the market in both histology and advanced staining. Leica Microsystems core revenues grew at a mid-single-digit rate in the quarter, driven by sales of compounding stereo microscopes in the U.S. and China. We continue to be very pleased with the customer response to our SCN400 slide scanner, which enables Leica to offer its customers a complete digital scanning solution designed to store, manage, and analyze digital images addressing customer requirements and offering a compelling value proposition. At Radiometer, core revenues grew at a high single-digit rate for the quarter, driven by solid demand for our blood gas instruments and consumables in North America, Eastern Europe, and Asia. The early customer feedback to the new ABL90 FLEX has been very favorable, and in August we received regulatory approval in the U.S., opening up, obviously, a significant market for future growth. The ABL80 FLEX which is targeted more for the emerging markets, also continues to do well in the market. We continue to be pleased with the results from AB SCIEX in molecular devices. The commercial and technical integration of the businesses is coming together, and in particular the AB SCIEX team is very energized by the success of their new Triple TOF 5600 mass spectrometer. Customer adoption of the 5600 has been progressing well, with one of our first wins at the Australian Proteome Analysis Facility, a leading proteomics research institution. In July, AB SCIEX announced a collaboration with the U.S. Centers for Disease Control and Prevention to improve hormone testing. This collaboration is intended to support the CDC's hormone standardization project, for improving the reliability of lab results used to help assess disease risk and monitor treatment. At Molecular Devices, growth in the core plate reader business has been solid, complemented in the quarter by the launch of the FilterMax and SpectraMax plate reader technology acquired earlier this year. Moving to industrial technologies, revenues increased 19.5% for the quarter, with core revenues up 16.5%. Operating margin for the third quarter was 21.1%, a 410 basis point increase compared to the same period last year, due to the benefit of restructuring and cost initiatives implemented in 2009 as well as the higher sales volume in the segment. Our core operating margin increased 270 basis points in the quarter. Product identification revenues were up 20% in the quarter, with core revenues increasing 16%, with strength in both instruments and consumables, and across all major product categories. Growth in the emerging markets and Europe was particularly strong. Videojet's product innovation, coupled with their global go to market investments, are driving this strong growth performance. Motion revenues were up 22% in the quarter, with core revenues increasing 26.5%. We experienced significant growth in all major geographies and markets, with particularly good results in industrial automation, led by electronic assembly and mobile off highway. Sales of Kollmorgen's AKM and AKD motors and drives have been robust throughout North America, Europe, and Asia. We believe we are capturing market share and ended the third quarter with record bookings for the platform. Finally, moving to tools and components, revenues for the quarter decreased 53% due to the impact of the Apex Tool joint venture. Core revenues for the remaining businesses were up 5%. Operating margin for the quarter was 27.2%, an increase of 1160 basis points compared to the same period last year, primarily due to including the equity contribution from Apex in the segment results. So to wrap up, we were very pleased with our execution in the quarter. With DBS's ability to drive organic growth and margin expansion, and our increasing exposure to the higher growth emerging markets, we believe we are well-positioned to continue to outperform for the remainder of this year and beyond. Given the continued strength across our businesses, we will be taking the opportunity in the fourth quarter to accelerate some of our planned 2011 restructuring activities. We are initiating fourth quarter 2010 adjusted earnings per share guidance of $0.61 to $0.66, which at the midpoint represents the 13.5% increase year-over-year. For the full year 2010 we are increasing our adjusted earnings per share guidance from the prior range of $2.16 to $2.23 to a new range of $2.25 to $2.30.

Thanks Larry. That concludes the formal comments. Operator, we are now ready for questions.

[Operator Instructions.] And we'll take our first question from Scott Davis with Morgan Stanley.

This plus 50% gross margin is pretty exceptional as you said, but can you give us a sense of, and knowing we've got a little ways out to get to 2011, what's the sustainability? I know some of this is Apex, but I'm thinking kind of the non-Apex part of it, the sustainability of that type of a gross margin at this revenue level. Is there cost to come back to the system when you think about 2011 or any other pricing issues that may impact that number?

I think that we would view 50% with this portfolio as something that it would be sustainable over time. Obviously we'll bring different businesses in above and below that number. I suspect that we'll alter the mix, but if you look at the core underlying drivers here, the deconsolidation of Apex is probably worth, what, 115 basis points. So we would have been north of 50% even without that dynamic. I just think you look at so much of professional instrumentation, so much of what we do in med tech and even the margin improvement we've seen in industrial technologies all contributing to that high gross margin, and I think that as you've seen in the third quarter and as we're alluding to in the fourth quarter, we can sustain that while, and in part because of, the acceleration in both the cost restructuring activities as well as some of the growth investments. So I don't think this is a high water mark never to be seen again. I think it's something this portfolio and this team is very capable of delivering.

Okay, that's kind of what I was trying to get at. Now can we move to AB SCIEX, because it's obviously a very important business when you think as far as forward earnings are concerned. You didn't mention much on it in the conference call. Can you give us an update on the integration and how things are going there.

Sure. We're very pleased with where we are here through three quarters at AB SCIEX. I think we're going to continue to see this business deal with the important but unexciting work of getting the two halves of the business stitched together. It's important for us in a lot of ways, certainly for investors, as we do that we pull costs out of the business, both one-time costs and unnecessary costs. I think you see that in the improved med tech margins. Clearly with the introduction and now the shipment of the 5600 we're out aggressively in the marketplace with technology reinforcing that technology leadership position that AB SCIEX enjoys. I think we're looking here at a second half where the team is well-positioned to deliver high single-digit growth and get back to those double-digit operating margins that we knew this team was capable of. So I think all and all while it's still early, and a lot goes into the first year with any new Danaher acquisition, particularly an undertaking as significant as this, we feel very good about where that business is and where that business is headed, more importantly going forward.

Just real quick, KaVo, it looks like we've turned the corner her. Can you just give us a sense of the profit profile? A) Are you making money in KaVo, and B) with this mid-single-digit organic volumes and the restructuring that you've done how does this kind of match up to the rest of the segment?

Scott, it's still below the rest of the segment, but as you know this business was break-even last year. We'll do mid-single-digits this year and exit even higher than that. I think right now we are targeting with sort of mid-single-digit growth a high single-digit rate, OP rate maybe even 10% next year, and that's including some additional restructuring next year as well to then position us again for 2012 for another lift in those margins. So we're very pleased with the progress. We've taken longer than we should have, but very pleased about where we are right now with KaVo.

We'll move on to our next question from Bob Cornell with Barclays Capital.

A lot of questions. Larry, you mentioned the market share gains, and you zipped by those pretty quickly. Maybe just go back over them and then talk broadly about what we might expect in some of the other businesses.

Sure. I think that there are a number of places, Bob, where we're doing particularly well. We've had the opportunity in the last 90 days to be out with everybody as part of our strategic reviews. Just go across the portfolio, Hach Lange is doing very well broadly speaking. Clearly the step up in investment in emerging markets in China and beyond China I think is serving them very well. Particularly at Leica Biosystems, with what they do in the histopathology lab, particularly the investments we've made around the advanced staining system. That continues to drive very good growth for us. Very pleased at Radiometer. We talked in the prepared remarks about the ABL90 and the ABL80 are two point of care [inaudible] blood gas instruments that have been introduced and doing well. AQT, our cardiac platform, had a very strong step up sequentially in the third quarter as well. Clearly DEXIS and the rest of the imaging platform is doing very well on a relative basis. Chem Treat we've talked about. They continue to move right along. I highlighted Kollmorgen in the prepared remarks. We don't often talk about Kollmorgen, but what they've done with their new motor and drive platforms, the AKM and the AKD, we think they're doing very well in certain industrial verticals where they focus. So I could go on and on. I'll stop rambling, but I think this is really the culmination of a lot of work the team's done to improve our execution capability and overfund those opportunities we think warrant that sort of support.

A lot of questions. But I guess the thing that caught my attention is your comment, again you said the $4 billion of potential strategic money to be deployed and you gave a pretty explicit four to six quarter. What we glean from that with regard to acquisition activity?

I don't think that we're saying anything more, Bob, than what we've said through the course of the year. We're well-positioned to continue to be an active strategic acquirer of businesses that we think strengthen our portfolio, particularly with our growth platforms in mind, investments that we think not only strengthen and built out Danaher, but will generate strong returns for shareholders. Clearly we see this current environment as one where there is plenty of opportunity. We continue to be quite busy. I don't think anyone should be surprised to see us put some serious capital to work in the short to medium term. That's not a forecast, but just a look into the pipeline and a look to the balance sheet and obviously a strong vote of confidence in our bandwidth to tackle capital deployments on that scale.

Final question from me. What's a comment on the Apex contribution to '11 in terms of accretion and dilution at this point? Do you have any better view of the synergies and the outlook there now?

Bob, it will probably still be mildly diluted next year. The venture is spending a fair amount of money right now to go after some costs and also some growth investment. That will probably continue through the first half of '11. So maybe when we get to the back half it's probably neutral and then we would expect that in 2012 the venture would be accretive for us.

We'll move on to Deane Dray with Citi Investment Research.

I was hoping we could go through some color regarding the fourth quarter guidance, especially if you could frame expectations regarding poor revenue growth. You're up against still some easier comps, but the idea here is there's upside this quarter and how much does that carry through in the fourth. And then if I caught it correctly it sounded like you're moving some restructuring actions that would have been done in 2011 into the fourth quarter and just frame for us where you expect to do restructuring and what type of payback at this stage you'd be expecting.

Sure. Let me talk to some of those points. First, I would just say that the comp does get more challenging in the fourth quarter. We really saw the tide come back by this point last year. We obviously had a better fourth quarter compared to the other quarters last year come year's end. But that said, I think that as we look out toward the rest of the year, on a core basis we should be up high single digits. I wouldn't rule out 10% given the strength of the markets and I think our performance in them, certainly test and measurement and motion are likely to continue to lead the way. I like a lot of what we're seeing. I like Biosystems right now. I think they're poised to do well in the quarter. Product ID as well is positioned to do well. So I think high single digits, possibly 10 would be where I'd call the top. We are going to step up in the fourth quarter our quiet restructuring and related activity. We intend to put $10 million to $15 million a quarter into improving our cost structure and obviously accelerating growth and investments as well. I suspect we could be up two, maybe three times that amount in the fourth quarter given the room I think we will have to make those sorts of investments both in improving our cost structure, to get a jump on 2011, but also frankly there are some things we can pull forward that will be good growth investments, getting us ready for 2011 as well. So a combination. And I guess what I'm really flagging there for you Deane is we obviously had great follow-through in the third quarter on close to 45%. I think we're going to be down with 35% to 40% on the back of those investments in the fourth quarter, but still I think a very good outlook for us as we get ready for next year.

Do just maybe stating the obvious, this is very different from the proactive restructuring that we saw you all take in the early stages of 2008. This is all done from what I would characterize as a position of strength, just being opportunistic here?

I think that's a good, accurate description. Given the strength we saw in the middle of the third quarter, the way it continued, we really went out to the businesses and said we think we're going to have an opportunity here in Q4 to pull forward some of the stuff that the businesses were contemplating to do in 2011. And as Larry mentioned, we've green-lighted a fair amount of that. Depending on how the quarter plays out we might do a little bit more than that. It is pretty broad-based across the segments, and I think it will give us a head start getting into '11.

And just last one from me. Any comment on how pricing contributed in the quarter?

It was pretty consistent with what we've seen in the first two quarters, about 0.75% of price. Working on some areas to get that up maybe a little bit higher going into '11, but not a lot of changes.

And that's all on the back of new products?

New products and typically what we get with consumables.

Our next question will come from Steve Tusa with JP Morgan. C. Stephen Tusa - JP Morgan Chase & Co: Just a question on some of the dynamics that happened this year and maybe a look forward a bit. Is there anything unusual that you think about in driving this year that's going to lead to a tougher comp? I know there's big projects that come through on water sometimes. Anything that we need to be aware about on a go-forward basis? And then second of all, there's been a lot of chatter in the medical community around hospitals seeing weaker patient volumes and it just seems like there's a little bit of risk around the hospital cap ex front in medical, and maybe you could just address those concerns as well.

In terms of any macro items to the businesses in 2011, nothing jumps to light. We've had two very strong years at Gilbarco Veeder Root. Some of the things were regulatory driven over the last couple of years. So that could be our toughest comp going into next year. And then the other items that companies are talking about vis-a-vis pension, we don't have a lot there, but it will probably be a little bit of an incremental headwind given the lower discount rate that I think everyone's going to have to use going into '11. And then some of the noise and some of the changes on the tax law will be a modest incremental headwind going into '11.

Steve, with respect to some of the hospital-based pressures I think it's important to keep in mind that what we call med tech - obviously now our largest segment - half of that is dental, not really a hospital-based business, largely a private pay market in most parts of the world. And the other side, what we call life sciences has I think pretty good balance between both its clinical exposure, research, and in the applied space like food and water. In the clinical space specifically, I think the growth that you're seeing that's delivered both at Radiometer, where we've very focused on critical care, which is a tough thing to cut back on - when you need to go to the emergency room, you need to go - as well as what we're doing in pathology, particularly around oncology, with Leica Biosystems. They're our two leading growth engines right now and I think they are performing well against a current backdrop of some of those hospital pressures that you've talked about. So I don't think that anyone is necessarily immune, but we're very well-positioned to work our way through that.

And then one last question. I don't recall you guys mentioning acquisitions in your press release before on a quarter, which is usually a pretty succinct statement in a press release. Are you guys having trouble finding acquisitions of size? Despite it being a nice, high return bolt on, is the size of Keithley indicative of what you guys are seeing, or is there just a lack of opportunity on the bigger sized deals? Is that why we're not seeing those recently?

I would characterize the pipeline much as I have in the past, chock full of opportunity, both larger and smaller than Keithley. I think in a typical year or so you're going to see us do a number of deals in and around that [$100 million plus] range, a la Keithley. Ten to a dozen it will be smaller, and then one or two that will be materially bigger. That's, again, not a forecast for calendar 2010, but that tends to be what happens in a typical 12-month period. So we continue to be optimistic about our ability to deploy capital, not that the balance sitting there basically generating no income is an issue for us, but we just see a lot of good opportunities to strengthen the quality of this portfolio over the cycle, and we intend to do that.

Our next question will come from Steven Winoker with Sanford Bernstein.

Just first, on core growth exit rates, you had talked about up at the tech conference that was going on in July and August and we see the final results here. But are you seeing a continued acceleration through September, and which businesses are you seeing the fastest growth over the last month?

We talked in September that July and August were very strong. We did not see any change in September. I'm not saying it got faster, but the very healthy pace of orders continued pretty evenly throughout the quarter. It's broad-based. If you think about where we were in July, arguably the biggest lift came in med tech. In med tech we were looking at a 5% quarter in July, and we came out at 7.5%. Both Radiometer and Leica Bio, which Larry alluded to, we thought they would be very good quarters and they were even better than that. I think the double-digit growth we saw at KaVo was a little better than we thought was going to occur in the quarter, and Cybron sort of bouncing back to positive growth also helped that segment.

And internally, when you start talking about what's driving that growth to give you confidence going forward, how much are you thinking is due to the new product introductions that you're talking about in every call as opposed to other factors, sales force initiatives, etc.? Do you think about how to think about each of those?

I think it's hard to give you a macro answer, because the contribution, or the breakdown, various business by business. Certainly new products were an important part of our story, both on an absolute and a relative basis. I think clearly new products help drive market share, but the investments we've been making on the margin have been weighted toward emerging markets. That gives us that mix benefit if you will. And again, I think there's just a lot of energy the last several years behind our DBS growth investments around new product development and sales and marketing execution. Even if we're just out selling something that may be three or four or five years old, having more people out being more effective in terms of how we generate leads, how we prepare those sales people to get in front of customers and help them solve their problems is really all part of the mix. So I wish I had a better topside answer for you, but it's really, again, a mix of a whole host of different efforts, business by business, that come together to drive this performance.

Last time you talked about the supply chain challenges and those being the biggest operating challenges out there. What are you seeing there in terms of constraints, electronics, elsewhere? And also maybe comment on what you're seeing in terms of material and wage dynamics?

Larry and I were just talking about supply chain yesterday, and it was noteworthy as we did our reviews across the businesses for the third quarter and their monthly president's letters, the lack of discussion about supply chain issues. So it feels like it's gotten better across a number of our businesses. In other words, the supply chain, particularly in the electronics area. I wouldn't say it's totally caught up to date, but the issues we were having in the first half have really died down. We don't have a lot of exposure to materials, to commodities. It's really more really in the joint ventures today where they have some of that exposure. In terms of wage inflation, clearly we're seeing that in the emerging markets, and that is a challenge, both from a cost perspective but also from a retention perspective.

And then just one last technical question. In the goodwill walk in the 10Q, had $174 million of write down, and it was associated with dispositions in JV formation. Am I correct in assuming that was all, or almost all, the JV? Or was it other parts of the business where you were writing things down?

It was in JV.

[Operator Instructions.] We'll move on to John Inch with Merrill Lynch.

So maybe a question for Dan. I was wondering, could we get a little more color around the run rate through the second half - the incremental investment spending you guys had articulated in the first half that you were going to make? I'm assuming that the extra restructuring you're doing in the fourth quarter - it's about $0.06 - is discrete, right? There was no extra restructuring, if you will, in the third quarter. Where do we stand? I see your R&D was 6.4% but some of that I think you called out associated with the JV. Can you just walk us through those two buckets and how to think about that heading into next year?

Maybe first on the restructuring side and the incremental growth side. We've been going through our normal quiet restructuring, which Larry alluded to - the $10+ million a quarter. We're going to be stepping up that in the fourth quarter. On the growth investing side, particularly when you have 12%-13% organic growth, we could be [fall through] at 5% given the contribution margins and number of our businesses, particularly in places like Med Tech. And I think that scaled down, a kind of 40%-45% [fall through] gives you a sense of the step up for the investment. R&D is clearly keeping pace with our growth rate, so we're growing R&D at a double-digit rate in almost all of our businesses. You're also seeing the step up in the sales and marketing, particularly in the feet on the street investment. Both [inaudible], particularly in the emerging markets as well as in a number of cases, converting distribution in emerging markets to direct. So I'm not sure I can roll it all up for you and give you a number, but we've had a substantial step up in the investment, both in the R&D and the go to market through the first nine months of the year.

Are you actually accelerating that then, Dan, as you roll into next year, or are we going to be at a steady state by the fourth quarter as you roll into 2011?

Some of this step up in investment in the fourth quarter will be on the growth side. That's going to be converting some distribution to direct. We're also stepping up some kind of a web-based marketing, go-to-market activities. We're probably pretty close to a run rate but again, there'll be some incremental step up here in Q4.

Philosophically, Larry, when you first embarked upon building your medical businesses the market had valued healthcare significantly higher. Debatably your stock may have lagged a little bit because of your healthcare exposure, but you obviously looked to doing further deals. What is your appetite since getting further down the medical path? Would you look a little bit more favorably toward industrial? I'm just thinking of strategically how you're weighing these things philosophically.

I think when we got into med tech five years ago we were very focused strategically on avoiding some of the risk factors that get a lot of coverage today. Risk factors such as reimbursement, single payer dynamics, let alone certain situations where competition is quite fierce. And I think that's really why you see us with the med tech segment that we have today, dental having its own discrete dynamics. We're now very much a market leader in life sciences and diagnostics. We've gone into some niche areas, be it in critical care or in histopathology on the diagnostic side with Leica and SCIEX, some targeted research applications with very good applied market exposure, like food and environmental. So I don't think we have any regrets whatsoever. I think all these adds have represented over the last five years incremental positives for the Danaher portfolio, and our potential to drive the top, the bottom, and the cash flow through cycles. And I think as we go forward if we deploy that capital we alluded to earlier over the next year or so please don't be surprised to see us continue to invest and hopefully invest smartly in med tech. Not exclusively, because we still want to do things in T&M and environmental, product I.D. as well, but we have lost none of our courage or our conviction about those opportunities.

In other words, think of a bit of a portfolio balance, then, right? Is that the way to think about it?

I think that's what you see today. If med tech was a company unto itself, again because of that research, that clinical, that applied market balance, it would be a steady ship in any possible storm.

Moving on to Nigel Coe with Deutsche Bank.

Just wanted to go back to restructuring. So it looks like you're talking about $0.04 of restructuring. Just want to clarify a few points. First of all, that's been absorbed within the guidance you've given this morning?

Correct.

That's correct.

And then secondly, you said pulling through some of the actions for 2011, does that mean you're still going to do the $10 million to $12 million for the quarter?

Correct. We'll have to obviously get into all the budgets, but the plan is to then pull forward stuff maybe later in '11 to early in '11.

Just wanted to clarify that point. And then if we go back to last quarter, obviously the med tech margins were below [inaudible] and you gave guidance of two points of improvement from 3Q to 4Q. You obviously got that four points in 3Q. Do you think you can improve margins in med tech from 3Q to 4Q?

Operationally, we can, but that will be a segment that will receive some of the restructuring, so I expect margins in med tech that would be probably a little bit better than Q3. But on, hopefully, an exit rate, better, and part of it being the favorable Q4 seasonality. [Ex to] restructuring you should see another nice step up in the restructuring, though, because of the restructuring but you won't actually see that in the reported number.

So it's fair to say that the bulk of the restructuring will go into med tech?

If we're talking $40 million plus of restructuring, that's over a 100 basis point margin across the business, and that will be med tech, professional instrumentation, and industrial tech.

And then looking at test and measurement core growth, obviously they're at very high levels. How does that decay? It looks like you've got weaker comps - comps get a little bit tougher but still fairly week comps going into 2Q '11. First of all could you address that and secondly, you've seen some weakening in semiconductor lead indicators, and you do have a [inaudible] exposure through these businesses. So you do view that as a negative for test and measurement?

I think first in terms of the comps you're right, we should continue to have very good performance there if for no other reason than the comps. I think what we're finally seeing at Tek kick in is the R&D and go to market investments and [inaudible] improvements that they have laid in, which helps us. And I think frankly, despite some of the secular issues that you raised, I think this business is just flat out executing better on a global basis compared to where they were two years ago. We've got some portfolio moves here into sectors like video test. We've made a significant move into service. I think it bodes very well for Tek's ability to drive through some of those concerns. But in terms of what we're seeing it's really still quite buoyant at Tek and at Fluke right now.

And as we get into the second half of next year, in a more normalized environment, what sort of growth rate would you expect from test and measurements?

I think if you look at that business all up it should be mid-single-digits plus.

Taking our next question that will come from

Just a couple quick ones. Everything you just said on the quiet restructuring is pretty clear. I'm just wondering as you roll all that up is there any significant, then, restructuring benefit carryover into 2011 or just the issue of the cadence of the spending that you already talked about?

There will be some incremental positive from the step up of what we're doing here going into '11, but that's maybe a couple of pennies a share, $20 million to $30 million of incremental spend here in Q4 should get almost a one-to-one return in 2011

And how about on thinking about deals, SCIEX in particular, but all the other smaller stuff you've rolled into the '10 base? As it stands now what kind of aggregated deal accretion do you look at in '11 versus '10?

I don't want to steal Larry's thunder in December. But clearly the biggest driver there should be SCIEX. With all the transition expense, the acquisition and accounting expense, it's probably a mid-single-digit pre-tax contributor here and we would expect a sizable step up there in 2011 as well as some of the recent test and measurement deals both [inaudible] network and Keithley being contributors, but again, I'll let Larry roll that up in December.

And then just housekeeping, along the lines of rolling up, what do we do with the tools stub? Do you collapse it into industrial, or what's the game plan there?

Given how small the tools and components segment now is, we're in the process of evaluating the segments and I think in the near term will be modifying how we present the segments.

Moving on to Terry Darling with Goldman Sachs.

Just a couple of small cleanups. First, Dan, on the professional instrumentation margins revenue is up a little bit. Margin's down a little bit. Is that just mix essentially going on there in terms of the percent margin change there or is there something else to talk about there?

They were both 21% plus, I guess it's down sequentially very modestly. Q3 for Fluke tends to be a little bit lower margin seasonally, and we probably had some of that, but I could go back and look at that if you like, but I don't know off hand.

It doesn't sound like there's anything significant there. And then on this 400 base point sequential improvement, you talked around it. I'll just ask a little bit more directly. It sounded like the life sciences piece was up more than 400 basis points sequentially, and dental was obviously up strong, but maybe a little less than that. Is that the right picture there?

I think there were three or four contributing factors. One, the fact that the core growth came in at 7.5% for our guidance of 5% to 6% and the very high fall through we get in that segment. Two, KaVo being up over 400 basis points year-on-year, big contributor there. Leica was up over 200 basis points year-over-year, and then SCIEX, both the absence of some of the acquisition expenses as well as just core basis, a nice step up both in core growth but also our operating margin was the fourth factor that really helped drive the sequential improvement.

And then on the core growth, I may have missed it for dental in the fourth quarter. The comp gets a little tougher. Does that stay in the upper singles, or did you indicate that's back to the mid singles?

We thought Cybron would accelerate from low singles to mid singles and KaVo, which was double, is probably going to be mid-single-digit to high-single-digit, in part because of the comp issue you referenced.

Moving on to Richard Eastman with Robert W. Baird.

I guess I'll take my two questions here. On the med tech side, just curious, when you're looking at the margins there, obviously we have some work to do and plenty of work to do at KaVo. How are Leica's margins relative to the consolidated med tech margin? Are we still managing that with growth investments? Are they still below the med tech overall margin?

They're low double-digit and we're still working that. As you know, when we bought it it was about a 4% or 5% OP business and we still believe ultimately that's high-teen contributor to the segment.

Just to be clear, though, we think we can drive that margin expansion and continue to invest there. We're with that team next week in fact, in [inaudible]. [It's a balance that has thus far.]

Okay, but there's still plenty of investment opportunities and it's a matter of moving the cost directionally down but investing in the right spots. That's how we're basically managing the margin there?

Well, given the gross margin there, if we can just control and keep flat the G&A and the manufacturing expense we could see 100 basis points plus of margin improvement just from the fall through of the good organic growth we're getting there.

I see. Okay. And then Larry, just a question. Geographically as we pushed into the fall here when you look at the three major regions: U.S., Europe, and emerging markets including China, is there anything from a trend line perspective? Any of those three markets that you're particularly watching closely at this point, either a slow down or an acceleration?

I think we watch them all. It's hard to take the 20%+ emerging market growth for granted, but having been on calls earlier in the week with both our China and our India teams they're still quite bullish about the near to medium term. We were very pleased with the U.S. being up low doubles as it were, and Europe coming in at 10%. If I had to pick one of the three that I'm probably most concerned about - though concern might be an overstatement - I'd probably pick Europe, just for all the macro factors that everybody else has been talking about. No particular insight or specific issue in mind there.

We'll move on to SunTrust, with Wendy Caplan asking a question.

You talked about sales increases in terms of feet on the street at Chem Treat and elsewhere. Can you talk about hiring for production workers, other categories like engineering, at this point?

Certainly part of the step up in R&D that you see here is a function of hiring scientists, technologists, engineers, both for core technology development as well as new products. I don't have a specific number there for you, but obviously you see it in the P&L. I think that part of what you're seeing in the gross margins, in the BCMs is frankly very good execution on the shop floor relative to the restructuring coupled with the way we're tackling the step up in volume this year. So I know we do have an increase in our manufacturing headcount but it has been quite modest hence the productivity gains and in turn the variable margins.

And Larry, are you hiring full time workers, or are you hiring temp workers? How should we think about that strategically?

I think that it really is a business by business decision depending on the nature of the demand curves. I don't think we necessarily have a bias in one direction or another. For a lot of our businesses now it's also a global call in terms of where volumes are rising, let alone being handled from a production perspective.

And one last one. You talk a lot in these calls about new products and new opportunities from those products. Size these for us. Are there any that you would call a "breakthrough" product for the company?

I think that at this point in terms of a breakthrough product, many of these introductions move the needle for the respective businesses. Certainly the big product that AB SCIEX has launched is a game-changer for them - the 5600. No doubt about that. I think what you're seeing really in terms of the suite of products that have come out at Radiometer around the ABL90 FLEX, the ABL80 FLEX as well as AQT, pretty much a game-changer for them, and perhaps in turn for Danaher. I wouldn't want to leave out bond introduction at Leica Biosystems because that's driving good growth, part of the results here today, but what we really haven't flagged yet, because we're building the install base, is the aftermarket consumables stream, much like Radiometer, that we are in the course of building as we build out that install base. That's a few years down the road still, but I think the more we shift the revenue mix at Leica toward consumables, the stronger the contribution that business will be making back in part to Rick's question. So again, I think all and all it's a business by business approach, and we've got a lot of good folks executing quite well on the new product introductions this year.

We do have time for one final question that will come from Jason

Earlier in the call you addressed the hospital budget situation, but when thinking about the other traditional life science customers, academic, pharma, industrial, do you have any view on how their budgets are going to look next year? Are they going to be the same, similar type of headwinds, or better, worse?

I was pleased to read your note yesterday relative to the U.K. trends that looked more encouraging today than they might have earlier in the week. We're really in the process of pulling all of that together as Dan alluded to. We'll present our '11 views when we get together in December, but I think by and large when we talk about those non-clinical applications, be they research, be they applied, I think we're still of the view that both at Leica and at AB SCIEX particularly we're positioned for growth.

And then lastly, quickly on AB SCIEX, you've only had them for a couple of quarters. New product introductions seem to have been well received, but this is a business that had been losing share for quite some time. Have you noticed already a change in the trend from a market share perspective there? Or is it too early?

I think with the 5600, that business growing at a high single-digit rate in the second half, frankly that's a rate that they had not enjoyed for some time and I'm not convinced the market is growing at that rate. So that has to translate at least mathematically into some share gain. And more importantly, frankly, than their share gain in any one quarter, that team is back on its toes. It's out in the market. It's a story that's going to take a while to write, but I really like where we are here as we get close to the year-one anniversary.

And that concludes the question and answer session. Mr. McGrew, I'll turn the conference over to you for any additional closing remarks.