Danaher Corporation (DHR) Q4 2010 Earnings Report, Transcript and Summary

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. [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.

Thanks, Erin. Good morning, everyone, and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer, who's joining us from London instead of snowy Washington; and Dan Comas, our Executive Vice President and Chief Financial Officer, who's 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 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. As our year-end Form 10-K is 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 in the Investors section of our website later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until February 1. The replay number is (888) 203-1112 in the U.S. 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 that actual results might differ materially from any forward-looking statements that we might make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'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 led by Test & Measurement, up 24%; Industrial Technology is up 15.5%; and Life Sciences & Diagnostics, up 10%. The double-digit core growth seen throughout the year was certainly helped by the economic recovery but also by all the work we've been doing the last several years reshaping the portfolio, expanding margins, which in turn has allowed us to accelerate organic investment, while obviously executing well with the Danaher Business System. We've 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 & Diagnostics and Environmental businesses leading the way. We are 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 U.S. and Europe grew about 10%. The quality of our core growth was evidenced 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 backdrop, 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 is 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 year's 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 year's 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 19th 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 110% [ph] (1:08:53). During the fourth quarter, we completed four acquisitions with aggregate annual revenues of approximately $200 million to strengthen our Environmental, Test & 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 & 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 year's 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, led by the BRIC countries, was especially strong. During the quarter we launched the 190 Series II, our first four-channel ScopeMeter. This new product is designed for plant maintenance engineers and technicians who use the scope meters to go into harsh industrial conditions to test everything from microelectronics to power electronics applications. At Tektronix, core revenues were up more than 30% in the quarter, led by sales of oscilloscopes in all major geographies. During the quarter we introduced our new midrange 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 Networks, which 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 stand-alone business, as service providers, data centers and large enterprise customers look to fortify their networks against malicious website intrusions known as DDoS [distributed denial of service] 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 year's 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. Warner 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, demand remains 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 led by the Solo Lamp and Signet disinfection system. We anticipate these new products will further strengthen our market share position as we head into 2011. During the 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 complements 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 and wastewater analyzers, environmental water quality analyzers and other lab and portable instrumentation. Gilbarco Veeder-Root's fourth quarter of core revenues increased at a mid-single-digit rate year-over-year with robust shipments of dispensers around the world. Veeder-Roots' Phase-Two Water Detector introduced 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 & Diagnostics. Revenues for the quarter increased 58% compared to the prior year with core revenues up 10%. For 2010, core revenues 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 year's 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 advance 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 staining system with sales growing at a double-digit rate in the quarter and for the full year. The growing install 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 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 revenues in the second half of the year were up double-digit as compared to a year ago when it was a stand-alone business unit. Molecular Devices also performed well in the quarter with revenues up high single digits, led by solid demand for plate readers and imaging products. The recently introduced IonWorks products help 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 a good growth in both our treatment unit 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 mid single-digit rate in the quarter with improved sales in general dentistry consumables and orthodontia 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 of 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. Growth in the emerging markets and Europe was particularly robust. We introduced the Videojet 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 distributor allowing us to commence direct operations in that country. This is the fourth distributor acquisition Videojet has made in the past five 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 uptime piece of mind to our customers. Subsequent 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 ensure 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, Kollmorgen was awarded a multimillion 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, Pac Sci had revenues of approximately $378 million and contributed $0.07 to diluted earnings per share. This 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 and innovation in 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, led 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. C. Stephen Tusa - JP Morgan Chase & Co: 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 year's end. We just had a December that started well and ended well. It's hard to dismiss completely some sort of budget flushes, as you say. But I think we had genuine robust demand hold up virtually across the businesses and across the key geographies. I don't think you register 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. C. Stephen Tusa - JP Morgan Chase & Co: 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 get to the high end of that range. Keep in mind, we've got one 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. C. Stephen Tusa - JP Morgan Chase & Co: On acquisitions, I like the move in to 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 Artwork's deal looks pretty interesting it's the key to be right down the middle, but how are the big properties moving around these days? Is the pipeline any more robust than it was a year, two years ago?

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 one platform of five where we have not been as active as we would have liked. So bringing on Esko [EskoArtwork], a high-quality business, I think, is a wonderful addition to that platform. We're excited about their growth trajectory, and frankly, their margin expansion potential as we introduced 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 five core areas that we've often talked about. Is it better than it was a year or two ago? Certainly, two 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 that Dan and I have tried to be consistent. Of late, we obviously -- we 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.

Our next question comes from Scott Davis with Morgan Stanley.

A couple of big things in the quarter, I mean, one, obviously, Test & 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, can you give us a sense of how much of that is mix of new acquisitions that come in at margin versus actual structural changes or restructuring that you've made? And obviously, some macro impact of retail and factories, but do you have a sense at all, at least to how that breaks down?

Scott, in terms of a 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 -- it was 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.

Test & Measurement, and I don't want to duplicate in the questioning 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 hit tougher comps, but how sustainable? I mean, is this a new replacement cycle, a new product that's occurring, for example at Tektronix? Were there just so much pent-up demand in 2010 that it was kind of a once and done?

Scott, I would submit that it's a number of different things. Obviously, working against the easy comps in '09 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 recall, when we were going through the initial integration and restructuring, the first couple of years are 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 put into as China grows. Fluke's 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 really important part of the T&M growth story. So just no 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.

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

On the guide, you guys, it sounds like you're balancing a lot of pluses and negatives, right? And positives and negatives, I mean, clearly the organic growth has accelerated a bit, as you thought in the fourth quarter way above the early guide, and the first quarter you're saying 6% to 8%. So it looks like the underlying momentum in the businesses may be better than the guide, and yet, then 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 x the capital allocation decisions?

Well, Bob, I think I'd say this, we're certainly encouraged by the strong finish. I mean, I think that's where the conversation starts, and obviously, again while it's early, the good start here in '11. I think our habit has been not to try to update guidance moments after we announced a transaction, let alone two, one inbound, one outbound. They're clearly going to have some impact here. We tried to provide that in isolation. I 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, 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 tailwinds out there, not the least of which is the strong finish and the good start here. Obviously, Europe 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 guidance again. But all in all, I think we're looking at a good year.

Well, is it fair to say too, and asked in one of your earlier questions -- you are looking at an active capital allocation year. 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 we've tried never to project forward unnamed inbound deal flow and the positive effects from that. So I think, I want to just stand by what I've said, relative to Pac Sci and Esko, but again to reiterate, we think we're going to be very active this year. And we've talked about $4-plus billion of capital at the ready here, a very full pipeline. And I would be -- I'd be disappointed if we didn't put that capital to work this year.

We'll go to John Inch with Merrill Lynch.

I want to ask you, 15.5% organic growth in the Industrial business, but the margin's 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 one segment and it's particularly Motion, where we are seeing some real pockets of inflation. Just in the last 90 days, steel 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 one 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, that does 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 had also said 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, given a more kind of printed circuit board base as most of our other businesses where we're not 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 the segment where kind of the core margin increases is probably towards the lower end versus what we see at the other segments.

Again, would you be able to take, I think, you did about $15 million of restructuring? Could you parse 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 three were kind of in the $5 million to $10 million range.

Your investment in Align, I think there is some sort of a standstill agreement that ends on February 16. 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 orthodontia 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 it's been a terrific investment for the Danaher shareholder, and I think it's an important part of our relationship with Align.

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

Guys, realizing that you're one 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 '10 and kind of what's embedded in your thoughts in '11, 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. We were up double digits 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. 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 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 March inside AB SCIEX, if not, could you give us that?

Jeff, if you probably look at SCIEX and Molecular Devices together, we think combined next year, they are low teens and probably exiting -- hopefully exiting '11 you got a mid-teens rate. Again as a reminder, SCIEX came in kind of low double-digits, and Molecular Devices 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 may be 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 '10. I don't think we're expecting anything in that range going into '11. 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 one of the reasons we upped our kind of historical fall-through from 30% to 35%. And in the fourth quarter, we were not at the 50% we were at the first three quarters, but we were still running -- if you strip out some of the incremental restructuring, we're still about 40% in the fourth quarter, so kind of mid-30% still feels right going to '11.

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 hit in 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 in larger things, maybe both strategically? And a story yesterday about Carlyle and KKR bringing back covenant light deals, I mean, 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, there are going to be times in the deal cycle 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, 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 DBS make a difference in that situation? And then obviously, getting back to valuation, how the deal might have to work. Clearly, with a smaller transaction, we can take a little bit more risk, if you will. For a larger situation, we'd have tremendous conviction around the answers to all of those questions. I think that's really as simple and as straightforward as I can describe it to you.

[Operator Instructions] And we'll try back to Mr. O'Callaghan with Nomura.

So just on the first quarter, I mean, you mentioned the one less selling day. I mean other than the tougher comp, I mean is there anything, any dynamics that you're thinking about in terms of what you would 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'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, we're talking about being at the high end of that range here at quarter's end.

On Product ID, I mean, the Esko deal is pretty interesting, kind of get's you branching out a little bit from 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 it? I mean, does it got the potential to 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 core 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. I think what you see the team doing here with Esko is bringing in a nice-sized business with upgrades. Our portfolio clearly gives us some exposure in a business that is clearly adjacent to Videojet, but plugs in to a number of the macro drivers around creative and secure packaging, more sophisticated supply chains and the like, let alone the analog-to-digital conversion that's happening in packaging design that we try to play, obviously at Videojet and Links, 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 onboard, 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.

Next, we'll go to Steven Winoker with Sanford Bernstein.

Just one follow-up question on the portfolio side. I mean, what's your willingness, given all 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, I mean, as you know through our history, our very strong bias has been to use our free cash flow and a modest amount of leverage to fund our acquisitions. It's hard to think of a compelling situation where the lion's share, the purchase price, would be funded with equity. But if it's a situation like a 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. At that point, it would almost be a kind of merger of equals anyway. And I don't think -- we have a lot of those we're working on. On the margin, could we issue equity, a small slice of the deal? Yes. But I'd be surprised if it's much more than that.

And 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 -- after the first quarter, first quarter, your comping 6% I think, core, then 13% to 14% for the next three quarters. I would've thought that to hit that 6% to 8% for the full year, you would've had to have a much stronger first quarter. So am I missing something on this? Do you just see such acceleration that's going to overwhelm the comp?

Steve, I think that...

Steve, 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 were seeing right now. If you compared the fourth quarter, where we were plus 13%, the previous year, we were down 8%. So now were talking about being plus 8% but we're comparing versus 5.5% a year ago. So that alone is showing some sequential -- we have a much tougher comp in Q1 than we did in Q4 by 13 points. And we're only talking about it, a decel [deceleration], 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.

And last on R&D, I noticed just a slight sequential downtick, and I'm assuming sales investment was up for the quarter, given your G&A comments, with 6.2%, from I guess 6.4%. Where do you see those two line items go, particularly as you continue to hold down G&A in the year?

I think when we talk about holding down G&A, Steve, we're really talking about holding down G&A, not necessarily R&D. But 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 downtick with the ratio, but my notes show us 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 '11, obviously from an R&D perspective, more in '12 and '13. For us, given the nature of the projects, you're going to -- that number's going to be moving 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, the incremental service person, while getting more expensive each year, is still a relative bargain compared to the U.S. and Europe.

We'll go next to Jon Wood with Jefferson Company. Jon Wood - Jefferies & Company, Inc.: 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-�-vis next year, I mean, do you expect that kind of momentum to continue in '11?

Jon, I think at year's end, there were a number of things of 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 U.S. and in Europe, things just became more normal almost with each passing month. Obviously, given our position in imaging and 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 '11, 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 IDX show coming up in Europe, it will be a flurry of new product launches there. I think, to the extent, as I referenced on the call, Sybron gets to back to a more normal run rate, and the two of those businesses do more together and do it effectively, we should have a good year in '11 in Dental on both sides of the house.

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

I know we touched on the capital already a couple of times on the call today. 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 of Pac Sci that was like $550 million, and after tax, you had the investment in EskoArt. 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 don't forecast acquisitions. We put out a kind of a proxy number that's somewhat -- with a primary constraint sort of being credit rating, the net after tax proceeds we expect from PSX 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've been talking about, I don't know $1.7-plus billion, we ended up with almost $1.9 billion in 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 we had to give a number today, it would be slightly higher than the $4 billion. But directionally, I still think it's a reasonable framework for us to be communicating.

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's 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 turn ugly, and at some point they will. Hopefully, not anytime soon. That's kind of the model that we have liked to work under.

And 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 Sci move, is there anything that you can share?

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

I've preempted that.

Well, you did, but I will stand by our tradition of not commenting on prospective acquisitions or divestitures. I think what we've done here with Pac Sci 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 in bringing 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.

That's going to wrap up the Q&A for us. So Dan and I are around all day, 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.