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Danaher Corp. (NYSE:DHR)

Q1 2010 Earnings Call

April 22, 2010 08:00 am ET

Executives

Matt McGrew - VP of IR

Larry Culp - President and CEO

Dan Comas - EVP, CFO

Analysts

Scott Davis - Morgan Stanley

Steven Winoker - Sanford Bernstein

Bob Cornell - Barclays Capital

Jeff Sprague - Vertical Research Partners

John Inch - Merrill Lynch

Nigel Coe - Deutsche Bank

Steve Tusa - JPMorgan

Ajit Pai - Thomas Weisel Partners

Richard Eastman - Robert W. Baird

Terry Darling - Goldman Sachs

Operator

Good morning. My name is April and I will be your conference facilitator today. At this time I would like to welcome everyone to the Danaher Corporation’s first quarter 2010 earnings results conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.

Matt McGrew

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 first quarter Form 10-Q and the reconciling and other information required by the SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the investor 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 investor section of our website later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until April 26. The replay number is 888-203-1112 in the US and 719-457-0820 internationally and the confirmation code is 3704331.

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 first quarter Form 10-Q and other related presentation materials supplementing today’s call for additional factors that impacted year-over-year performance.

I would also like to note that we will be making some forward-looking statements during the call including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filings. It is possible that actual results might differ materially from any forward-looking statements that we might make today. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statement, whether as a result of new information, future events, developments or otherwise.

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

Larry Culp

Thanks, good morning everyone. Let me start this morning with a brief overview what we are seeing across our businesses and end markets to provide you some context to our first quarter results and our outlook for the balance of the year. We continue to see encouraging signs that the global economy is stabilizing and in many places returning to growth. We grew 5.5% in the first quarter on a core basis, our core growth was broad based with all of our segments reporting mid-single digit growth. This represents our first quarter of core growth, hence the third quarter of 2008 clearly and positive heading in the remainder of 2010.

We believe this increased demand is largely end user driven. While there has been some modest restocking going on in certain businesses, distributor destocking has run its course. We saw mid-teens growth from the emerging markets, the US grew slightly less than the overall company results and Western Europe was modestly positive. We are quite pleased with the way our business has executed during the first quarter, core operating margin expanded 285 basis points year-over-year with each of our segments achieving over 100 basis points of core improvement; our first with Danaher.

Throughout the last several years, we focused on making growth investments in innovation and sales and marketing to ensure that we are well positioned to both the near and long term. As a result of that focus we’ve developed a very compelling product line-up across the portfolio that should continue to drive core growth and margin expansion.

2010 will also see a number of exciting new product launches and our timing couldn’t be better given the improving economy. We continue to capture market share through new product introductions and the impact of our DBS growth tools. Leica, DEXIS, Gilbarco Veeder-Root, ChemTreat and Radiometer are among the businesses where we believe we have taken market share from competition.

With that as backdrop let me move to the details of the quarter. Today we reported first quarter GAAP earnings per diluted share of $0.89 representing a record first quarter for Danaher and a 24% increase over last year. Adjusted net earnings per diluted share was $0.96, up 33% year-over-year. Revenues for the quarter increased 17.5% to a record $3.1 billion with core revenues up 5.5%. The effect of currency translation increased revenues by 3.5% and acquisitions contributed 8.5%.

Year-over-year gross margin for the first quarter increased 50 basis points to 48.4% largely due to higher sales volumes and the benefit of our 2009 restructuring initiatives. Operating margin in the first quarter increased 110 basis points year-over-year to 14% resulting from higher sales volume and the benefit of our prior year's restructuring initiatives.

As I mentioned a moment ago our core operating margin increased 285 basis points on a year-over-year basis. First quarter operating cash flow was record $394 million, a 24% increase year-over-year. Free cash flow was $355 million, and our free cash flow to net income conversion ratio was 118%. We are optimistic about our ability to deliver free cash and excessive net income for what would be our 19th year in a row.

During the quarter, we completed the acquisition of eight companies with aggregate annual revenues of approximately $750 million including the previously announced AB SCIEX and Molecular Devices transactions. With the addition of these outstanding life science companies, our medical technology segment is now $4 billion in size. So beginning this quarter, we will break our reporting within the segment into two growth platforms. Dental and life sciences and diagnostics. We continue to believe the M&A environment is very attractive and we currently have more than 2 billion of additional M&A spending capacity to expand and strengthen our portfolio with particular focus on these growth platforms.

Now turning to our operating segments, professional instrumentation revenues increased 14.5% for the quarter with core revenues up 6%. Operating margin for the first quarter increased 50 basis points to 18.2%, primarily due to higher sales volumes and the benefit of the prior year’s restructuring initiatives and notwithstanding a 75 basis point delusion from recent acquisitions. Our environmental platform revenues increased 15% in the quarter with core revenues up 8.5%. While our quality core revenues increased at a high single digit rate in the quarter. At Hach-Lange core revenues grew a high single digit rate with solid demand for both our lab and process instrumentation, consumables and services across most major geographies.

Trojan continued to perform well, achieving double digit core revenue growth in the quarter due in part to the New York City drinking water project. We also experienced solid new orders from our industrial and commercial customers in North America and China specifically in the food and beverage and pharmaceutical verticals.

At ChemTreat, first quarter core revenues were up low single digits driven by our sales of our cooling water applications primarily to commercial and industrial customers. We continue to capture market share over the past years, we accelerate investments in ChemTreat’s go-to-market model and we have been pleased with the early efforts to expand Chemtreat’s business into Canada and Latin-America

During the quarter we acquired Western Environmental Technology Laboratories based in Oregon.

WET labs makes optical instrumentation used by scientists in academic and government agencies for measuring bio geo chemical parameters. These instruments are highly complimentary to our Sea-Bird oceanographic products. Gilbarco Veeder-Root’s first quarter core revenues increased at a high single digit rate year-over-year with sales of Gilbarco up double digits across most product categories partially offsetting a decline T Veeder-Root due to the difficult year-over-year comparisons from our California labor recovery sales last year. We experienced solid demand for our passport point of sales systems and outdoor payment solutions in North America as well for our core dispenser line in North America, China and Latin America. During the quarter, we acquired Fafnir a manufacturer of sensors and systems for monitoring and measuring liquid levels and vapor flows.

Based in Hamburg, Germany Fafnir’s leading technology and brand broadened GBR’s inventory management and inventory management and environmental monitoring offering for our retail and commercial customers. Also in the quarter, we completed the acquisition of the assets of Larsen & Toubro’s petroleum dispensing pumps and systems business, located in both Mumbai and Coimbatore, India. PDP is a leader in retail petroleum equipment technology for the Indian and other emerging markets.

This is Danaher’s first acquisition in India and underlines our commitment to accelerating our growth in emerging markets.

Moving over to test and measurements, revenues increased 17.5% in the quarter with core revenues up 4.5%. Fluke core revenues increased at a high single digit rate in the quarter, highlighted by growth in our core industrial thermography and automation products. Demand for our temperature monitoring solutions was particularly strong in the quarter as companies increased industrial production and capacity. Fluke continued to set a high bar on innovation.

During the quarter we launched the A10 Vibration Tester our first product design for the mechanical testing market space. The A10 identifies and locates the most common mechanical faults such as worn bearings, misaligned, unbalanced and loose parts essentially focusing maintenance efforts on root causes to reduce unplanned downtime. Our Fluke Biomedical business was awarded the prestigious Medical Device Excellence Award by Medical Device and Diagnostic Industry Magazine for its TNT 12000 x-ray test tool earning the highest marks in design, technology and innovation in the field of diagnostic imaging quality assurance.

Tektronix core revenues grew at a low single digit rate led by robust global sales of oscilloscopes with particular strength in China. We are very pleased with Tek’s broad strengthening which we believe is a result of both end user demand as well as our innovation and go-to-market market investments and that should drive double digit revenue growth beginning in the second quarter.

Test and measurement world magazine named Tektronix MSO 70,000 mixed signal oscilloscopes Best In Test 2010 in the scope category beating out five other notable contenders. The MSO 70,000 launch in the fourth quarter last year it is the first mixed signal high-end oscilloscope with industry leading bandwidth. Core revenues from our Fluke networks and Tek communication’s businesses collectively declined at a low single digit rate in the quarter with mid teens growth of our core enterprise solutions at Fluke Networks more than offset by the timing of large projects at Tek Communications compared to the prior year. Orders collectively grew at a double digit rate in the quarter.

Moving to Medical Technologies, revenues for the quarter increased 32.5% compared to the prior year with core revenues up 4.5%. Med tech operating margin for the first quarter was down 310 basis points from the prior year, 7.7% due primarily to the adverse impact of AB SCIEX acquisition-related costs. Our core operating margin increased 150 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 dental platform revenues increased 14.5% in the quarter with core revenues up 2%. Cable revenues increased at a mid single digit rate in the quarter with particularly healthy demand for our imaging line including New DEXIS Platinum Oral sensor as well as our new E70 treatment unit.

Sales in Asia grew at a mid-teens rate largely as a result of solid demand across most product categories. Sales at KaVo grew at a low double digit rate as dentists began to invest again in their practices. As a result of the restructuring initiatives, we implemented in 2009, Cable’s core operating margin increased more than 300 basis points year over year. The PaloDEx integration is progressing well. The team is quite strong with tremendous industry experience and domain expertise.

DBS implementation of PaloDEx is gathering steam. We are driving growth already for their products by putting some of our distribution channels after disposal. And we are getting good early traction on lean conversion in purchasing initiatives. The Sybron core sales were essentially flat in the quarter with strong sales of our orthodontia solutions and dental and medical disinfection product lines offset by soft sales of orthodontic products in general dentistry consumables. Sales of our Damon brand of orthodontia products were at mid single digits driven by a strong response to both our new Damon Q products and the introduction of Damon Clear.

Moving to life sciences and diagnostics, revenues increased 52% in the quarter with core revenues up 8%. Leica Microsystems core revenues grew at a high single-digit rate in the quarter driven by a substantial compound microscopic sales due in part to stimulus programs most notably in Japan.

During the quarter, Leica launched the new DBM line of digital microscopes for industrial R&D and quality control applications. The DBM microscopes are designed to reach difficult to access surfaces or non-destructive inspection and feature high-quality optics enabling both 2D and advanced 3D surface measurements.

In the quarter, we closed the previously announced acquisition of Genetix, a UK based provider of imaging and intelligent image analysis solutions used by scientists and clinicians to facilitate clinical diagnostics, mainstream research and the development of biotherapeutics and pharmaceuticals.

We’re excited about the potential synergies between Genetix and both Leica as well as Molecular Devices.

Leica Biosystems core revenues increased at a low double-digit rate in the quarter with robust demand for both our core histology and advanced staining system and consumables. We continue to see excellent customer response to the BOND-III advanced staining system that was introduced in the fourth quarter of last year. Compared to a year ago, advanced staining instruments placements were up 45%.

Radiometer core revenues grew at mid single-digit rate for the quarter driven by consumable sales across all major geographies with particular strength in China and the US. Our transcutaneous monitoring business grew to mid teens rate driven by exceptional performance in Latin-America.

They rollout of AQT in Europe, continues the sales of approximately 50 instruments, a 150% increase from a year ago. During the quarter we have launched the ABL90 FLEX blood gas analyzer which targets mid-volume point of care testing in clinical applications and surely after the launch, the ABL90 was awarded the Medical Design Excellence Award for In Vitro Diagnostics. So along with Fluke Biomed we are very pleased to have two of our businesses recognized with this prestigious award.

As we mentioned at the outset during the quarter we closed previously announced acquisitions of AB SCIEX and Molecular Devices. We are still in the very early days of integration, we have been very pleased with the customer and associate feedback we have received to date. Our initial operating reviews have been very positive and we look forward to sharing future successes with you in the coming months.

Surely after closing AB SCIEX completed its first bolt-on acquisition. Eksigent Analytical based in California is a leading supplier of nano and micro liquid chromatography systems for proteomics and other analytical applications. AB SCIEX’S successful entry into this high priority adjacency, just 14 days after joining Danaher certainly set the new benchmark for our M&A and strategic efforts.

Moving to our Industrial Technology segment, revenues increased 10.5% for the quarter with core revenues up 5%. Operating margin for the first quarter was 18.9%, a 520 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 higher sales volumes in the segment.

Product identification revenues were up 22% in the quarter with core revenues increasing 11% driven by both equipment and consumables demand across all major geographies. Our suite of CIJ printers continues to be well received in the market and that is by a large order from a Turkish customer for 40, 16/10 high performance printers, 1/3rd which will replace competitive offerings.

Motion core revenues were 11.5% in the quarter driven by a significant pick up in semiconductor electronics assembly and industrial automation end markets, primarily in North America and China. At Kollmorgen sales of our AKM motors and drives reached record level in the quarter as these products continue to be well received in the market. During the quarter, our sensors and controls business acquired Neoptix, a manufacturer of fiber optic temperature monitoring solutions for offline and online measurements based in Canada.

Finally moving to tools and components, revenues for the quarter increased 7% with core revenues up 8%. Operating margin for the quarter was 14%, an increase of 740 basis points from the prior year due to the benefit our 2009 restructuring as well as higher sales volume. In addition, the impact of higher commodity costs and a settlement of litigation matters during the first quarter of 2009 had a positive impact on year-over-year comparisons.

Mechanic hand tool cores revenues grew 4% in the first quarter, led by sales to the retail channel across all major geographies due in part to a number of new product launches. Sales of our domestic China tool brands Sata grew at a double digit rate. Our niche tools businesses also performed well during the first quarter.

As many of you know, in the quarter we announced our intention to form a strategic joint venture with Cooper Industries, to combine certain operations of our tools businesses in order to create a premiere global business with leading brands, greater scale and a more diversified product portfolio. We expect the combination to generate significant cost and revenue synergies over the next three to five years resulting from increased purchasing leverage, geographical and channel footprint expansion, crossbranding initiatives and other consolidation opportunities.

Since the public announcement we have been quite pleased with the industry and customer reactions and continue to find additional opportunities between the businesses. The transaction remains subject to regulatory approvals and other customary closing conditions and we anticipate that it will close in the second quarter.

On closing we will deconsolidate the financial results of our tools businesses and record them based on the equity method of accounting. So to ramp up were very pleased with DBS execution in the quarter which led to solid core growth supported by our continuing commitment to organic growth investments and our very good cash flow performance.

With DBS driving our focus we believe we are well positioned in 2010 will continue our performance. This morning we are initiating second quarter 2010 adjusted earnings per share guidance of $1 to $1.05, which is mid-point representing 29% increase year-over-year. For the full year 2010, we are increasing our adjusted earnings per share guidance from the prior range of $3.86 to $4.16 to a new range of $4.25 to $4.40.

Matt McGrew

Thanks Larry that concludes our formal comments, we are now ready for questions.

Question-and-Answer-Session

Operator

(Operator Instructions). We will first hear from Scott Davis of Morgan Stanley.

Scott Davis - Morgan Stanley

These industrial tech margins are just are great and your operating leverage there was fantastic, can you speak to the sustainability? I understand the restructuring there, some are permanent. But where there any mix issues in the quarter or anything that would impact this margins going forward?

Larry Culp

Well I think, the underlying performance that you see there Scott is strong, obviously part of what works here is the comparisons, both in industrial and tools. They are easy here in the first quarter. They get tougher as the year plays out, but I think the underlying performance that you see coming from the restructuring, the cost out for most programs, the read through and turn from the incremental volume is what it is. So we are very pleased with that execution, but again we would anticipate that fall through that you see in industrial and tools and tools are like nearly a 100%, that will certainly fade as the year goes forward.

Dan Comas

If you look at industrial pack about 19%, I don’t think we are going to get higher than that during the year in part because of some of the investments that we are accelerating but you know something in the high teens is something we believe we can sustain in that segment.

Scott Davis - Morgan Stanley

Your typical 1Q is about 20% of your full year which would imply a bit higher than what you are guiding, is there again any timing issues and I guess the real heart of my question is I know a quarter ago we asked about price and there was still some uncertainty, year-over-year your price was going to be more flattish and obviously commodity costs have gone up, does that cost some conservatives for the rest of the year or is there something out there?

Larry Culp

No, I think as we look forward, Scott, we were felling very good about the near-term outlook here in the second quarter. I think the second quarter core growth likely to be high single, could be double-digit based on the order book that we saw in the first quarter the way, we started out here certainly T&M has been [white] hot starting that in regard.

I think as we look forward through the rest of the year, particularly as we think about the second half, the comps do get tougher, you know that. China has been very strong, Dan and I were over last week, the government’s obviously trying to temper some of that growth, that’s something we need to keep in mind as we think about the rest of the year.

For being a tad conservative, so be it. But I think as we look out through the second half, I would expect all things being equal right now, for our core growth to be if you will in line with what we’ve seen here in the first quarter, I think we’ll get good follow through, but again because the comps get a little tougher, we end up with the range today that we’ve highlighted.

Operator

Next we’ll hear from Steven Winoker of Sanford Bernstein.

Steven Winoker - Sanford Bernstein

First question, just related a little bit more on the margin side. The implied incrementals across the whole business I’ve got on the core business close to 70%, it looks like a bunch of that from industrial as Scott mentioned, but as you look forward in terms of the progression of those margins throughout the business and given the organic growth as it continues to increase, how do you see cost coming back in the rest of the business and impacting those kind of seller incrementals outside of industrial tech?

Larry Culp

The way I think about the cost side Steve is again we think we will have positive price this year. It’s got alluded to, it will be less than it has been in the last couple of years, but I think the cost that comes back that’s frankly most material are the growth investments that we are going to make.

We have said that all along as the economy permits. We certainly got off to a much better start than we anticipated here in the first quarter. We were able to put some additional moneys to work particularly in med tech and professional instrumentation and just this week we have left with additional funding again both around sales and marketing investments that are going to help us this year and the R&D and innovation programs that will help us in the out years.

So that’s probably the most material incremental spend as we think about the rest of the years and how that may impact the margins in the business.

Steven Winoker - Sanford Bernstein

Okay and then secondly, on core growth, clearly this has been an area where I and others have been more critical and looking for evidence of improvement, 5.5 is a big number and you talked a lot about product launches. When you look across the portfolio in terms of vitality index and the many product launches from last year, a way to think about that 5.5 % in terms of how much is coming from new product development and what sort of changing on that front in aggregate?

Larry Culp

Well I think it’s hard, I mean we certainly look at vitality given where we are in the cycle right now. We’re going to be up in the 30-plus percent range in that regard continuing to I think show progress. I say it’s a leading misleading to focus on that exclusively given that many of those new products go to market hand-in-hand with not only the increased investment but also the increased intensity around our go-to-market DBS tools all of which are helping us right now, not only in the emerging markets where we saw exceptional double digit growth, but in the western markets where we were up more so in the US and in Europe but where we think we are taking market good share.

I think I'm very pleased Steve with the way we’re able to free money up from the re-structuring and obviously, a better topline environment right now to put more money to work in the areas where I think we are executing better than we have in sometime.

Steven Winoker - Sanford Bernstein

And what do you see is the biggest risk to that core growth as you look forward to the rest of the year?

Larry Culp

I think we are benefiting from a rising tide right now. We’re taking full advantage of the market opportunities. So I would say, in term of risks, it’s probably the biggest risk, is probably the one outside of our control and that’s the macro question. I mentioned China earlier. I tend not to bet against the Chinese government to the extent that they are looking to tamper our growth there. Again, we were thrilled with that we saw. It’s an incredible start to 2010 based on our reviews last week but to the extent that, that slows a bit it will still be great growth. It will be a little less than what we’re seeing right now.

Operator

Next, we’ll hear from Bob Cornell of Barclays Capital.

Bob Cornell - Barclays Capital

How about some comment about the acceleration through the quarter? Other companies have talked about a strong margin, I mean when you gave the arrear guidance you said a mid-March and obviously quarter came in better than pre-announced. How about a little color there?

Larry Culp

We’re an outlier in that regard Bob. We saw a very good progress through the quarter again, really without exceptions both in terms of the major businesses and geographies. I think you see that, you’ve seen that obviously as you look at how we’ve adjusted guidance several times over the last three or four months. I said that just to underscore the piece that isn’t in the printed core numbers here is the big backlog build that we had in T&M. The book-to-bill there was nearly 110%, both Fluke and Tech are performing very well right now. We’re pleased with that and again, talking about [C&M] in the double digit range here in the second quarter going forward, we’re thrilled to see that sort of bounce back particularly given the road traveled in the last five or six quarters.

Bob Cornell - Barclays Capital

Again, going back to this preview of the quarter you talked a lot about a focus on the growth and investment in organic growth and talked about the new product launches here in 2010, the market share gains. I want to take a minute and just sort of highlight some of the things that you noticed, maybe where you sort of gained market share that was incremental what you have previously expressed?

Larry Culp

Well, it’s hard to pinpoint share gains in the last 30 days, but we know we have been doing very well particularly with the new products in med tech and professional instrumentation. Why it got probably the highest vitality in the organization, the new digital microscope, the slide scanner that we talked about with folks in New York. Those products are going on very well, the Bond-III or the pathology customer and like the bio-systems had an exceptional first quarter. It’s a long list Bob, but I think again, what we’ve tried to do very systematically across the businesses and is make sure that we are putting in the funds to support this sort of investment level. We are up to what over 6% R&D as a percent of sales. It is higher you know lot of these med tech and instrumentation businesses. And those production is going to market both in the West and developed markets as well as an emerging markets with a full complimented DBS growth tools driving the sales in the marketing.

Bob Cornell - Barclays Capital

It pretends to me like Motion had a better quarter than maybe you indicated when you went through their preview talking about Kollmorgen and motors at record levels. Would you just flush out the Motion outlook and maybe what they did in the quarter in terms of profitability.

Larry Culp

Sure, well if you look at industrial which is obviously a combination of both motion and product ID. I think we saw in motion a very strong end user demand particularly in tech end markets and in some of the industrial automation markets and that just built through the quarter. For motion that was again a high single digit growth in the first quarter. They are going to be clearly one of our better growers as we look here in the second quarter because of the backlog bills and the capital investment progress that we see particularly in some of those end markets.

So we’re pleased with that and had a big hand in that strong margin expansion in the industrial segment where we saw fall through nearly at 60%. Again, that will fade a bit as we move forward and we take advantages to some of the growth and investment opportunities in motion, but all in all, their execution it was really quite strong in the start of the year.

Dan Comas

They had about mid teen margins, Bob and that was really encouraging because that’s where they got to right before the downturn, so to come out and get right back there was very encouraging. As Larry mentioned we will be accelerating some investments there but we think we can sort of sustain in the mid teens for the balance of the year.

Operator

Next, we’ll hear from Jeff Sprague with Vertical Research Partners.

Jeff Sprague - Vertical Research Partners

Maybe step back and given the kind of a little bit of the bigger picture discussion of M&A and the follow-on deal in AB SCIEX, 14 days after the deal closed, obviously kind of highlights the Danaher strategy of when you do a deal you know what the next two or three or four are going to be and you know, it does look like we’re moving into an environment where assets are starting to break free. We saw the Millipore go, obviously, that probably had to be on your Board, maybe it all happened too fast before you could react to it.

But I guess the heart of my question is, as you mentioned you have $2 billion of capacity, but in actuality, you probably have more than that if you think about the EBITDA of the acquired company and your willingness to use equity from time to time so I am just wondering if you could comment on your appetite to actually do something of that size, you know the $5 billion to $6 billion to $7 billion deal and what you might be willing to do with the balance sheet or stock issuance if you sold the right property in that size range?

Larry Culp

Jeff, I think the M&A environment in our view has been good. I think things have been available for sometime obviously with the 18 deals we closed or announced last year. We are spending like $200 million already here in the first quarter on another handful of new situations. I think our M&A approach through the cycle has been pretty consistent to the bulk of what we are going to do, we are going to be the bolt-ons that strengthen our competitive positions around existing businesses.

I think in a normal year, when we do a dozen deals, they are going represent half to three quarters of the deal flow. They are going to be the mid-sized transactions. Handful of those be it molecular devices, a couple of hundred million of revenue and then every year there is going to be in all likelihood a larger transaction be it AB SCIEX, be it Tektronix, be it a Sybron. I think every once in a while you could expect us to do something bigger but again I think that will be the exception as opposed to the number one priority. As you point out, if required if the opportunity presented itself, could spend more than 2 billion in a single shot. But I think if you look at our track record, while we look at a lot of things, our body work is the best indicator of the deal flow and we’re likely to present to you going forward.

Jeff Sprague - Vertical Research Partners

Certainly there would not be any strategic objection, no to stepping up that something that’s been in the Danaher wish list for a long period of time, kind of broke free and look like it was available.

Larry Culp

Yes, if something was strategically compelling, if we knew we at least had a view with conviction, if we could add value and the math work, we would take a very serious look at it. But again, I think that the way we think about our capital deployment, let alone strategy has played itself out in a very consistent way over time, I think that’s the best indicator as to what the next year or two or three is likely to look like.

Jeff Sprague - Vertical Research Partners

You said you saw a backlog of capital projects in automation in motion, are there any particular vertical markets that stand out there. Is it a thing to pick up an activity?

Larry Culp

I would say the pick in motion Jeff has been most pronounced in the tech end markets, particularly semi.

Operator

Next question from John Inch of Merrill Lynch.

John Inch - Merrill Lynch

We do expect tools to be doing deals soon after the deal with Cooper closes? How should we think about that and the opportunity there?

Larry Culp

I think that there is a potential in the new structure for the venture with its own balance sheet to look at things that the business is on, we thought apparent might not have done previously, but I think if we get this venture consummated, I think the organic growth potential, the cost out synergies are going to be the higher operating priorities for that team.

John Inch - Merrill Lynch

Is that because there aren’t a lot of deals or just because there is just a lot of internal stuff that should be done first?

Larry Culp

It’s an operating priority in many respects to the task ahead for the team is not unlike that of an acquisition, right? We have got two business coming together obviously under a different type of governance structure, but the work of putting these businesses together getting the cross branding, the cross selling underway, getting the consolidated purchasing activity underway, that clearly has to be the first order business and we have obviously talked about putting these businesses together with Cooper, this conversation that goes back nearly 10 years. I think we are really thrilled to be partnering with these guys, these are guys we know and trust. The primary motivation here is the organic agenda, both top-line and bottom-line and that’s clearly where the team need to be focused in the near term but I think there are opportunities that we could avail ourselves going forward, but that if you will John as a second step.

John Inch - Merrill Lynch

Dan, is there are way to frame out or quantify some of this growth spending that you had talked about and I am presuming that does has much to do with capacity, that has to do with R&D?

Larry Culp

This is R&D and then feed on the street. If you look at the cost fall through in the first quarter and you know we have obviously have the benefit, been able to strip it all that kind of acquisition. We are probably about 50% fall through and would expect that, that would sort of modulate down. We talked in December about 30, 35, my guess is the balance yield will be 35 to 40.

Part of that, a piece of that is the margins comps get a little tougher, but the bigger piece of that is acceleration in investment.

Dan Comas

And I am assuming this is also proportionately to the back half right versus the second quarter like I assume that this is going to take a little bit of time to implement.

Larry Culp

We have started to let some things go even in the middle of the first quarter. So we’ll see a full pretty full ramp of some of that in Q2, but that will be probably more, even more in the second half.

John Inch - Merrill Lynch

And then how are you guys managing these supply change issues that you’ve talked about before, obviously the rescuers to the upside, but as you’ve seen in other circumstances, not so much with Danaher, but just scenarios where the supply chain can’t manage the upside, you know the cost averages and that sort of thing. I mean maybe a little bit of an update in terms of your activities there and why that’s not a risk?

Larry Culp

Well I suspect, John as we’ve discussed I mean that is one of the key operating challenges on the platform in the supply chain as this rising tide courses through the business of ours and others. I think we are seeing isolated situations particularly in electronic components, where lead times are being extended which just creates a bit of a scramble. So I think being very close to certain suppliers making sure that we have our place in line if you will. It’s just a lot of hand to hand daily work which is the way we are managing through that.

In a number of cases we’ve get monthly or quarterly sessions with vendors to make sure that since the operating company or Danaher at large is having its needs met obviously we need to make sure we’re calibrating the forecast with them vis-à-vis capacity in the like, but I think it’s really just a lot of daily work to make sure we have what we need to keep pace with this increase in demand.

John Inch - Merrill Lynch

It’s not you are signing new suppliers and it sounds like you’re just working more closely with the existing chain?

Larry Culp

I think, by and large, but again we buy tens of thousands of components. In some cases and situations we will have to add or switch vendors. So I think by and large our preference and our practice is to work with the existing vendors, they’ve obviously been through rather rigorous qualifications with respect to quality and capacity, obviously price as well.

John Inch - Merrill Lynch

I think the tax rate guide in the Q said you are now expecting it at a 26.5, is that because of strength in higher tax jurisdictions or is there something else going on?

Larry Culp

It’s primarily because the Congress, the R&E tax credits has not been put back in and a lot of people think it will be sometime this year which would probably bring the rate back down a little bit, but that’s the biggest driver.

Operator

As a reminder, we ask you to please limit your questions to one question and one follow-up. We’ll now hear from Nigel Coe of Deutsche Bank.

Nigel Coe - Deutsche Bank

Any strong sense on you know, the extent to which you’re benefiting from, you mentioned stimulus and like of them, stimulus is not a big deal, but certainly inventory restocking could be, do you have any sense on that?

Larry Culp

I think we are getting a little bit of stimulus benefit. interestingly it is I think primarily out of Asia, China and Japan as opposed to the US right now and you are right it’s principally in med tech and Leica. The restocking I don’t think is driving a lot of this upside, I am sure there is some of it in particular distributors and in certain OEM situations, but by and large as we look at sell through and where we see demand on a direct basis, this is reporting very health conditions. So really again attribute, the vast majority of what we are seeing right now and certainly the basis score, the high double digit outlook for the second quarter to end user demand.

Nigel Coe - Deutsche Bank

I think now you mentioned the book-to-bill in test and measurements to 1.1. I know you don’t generally give those metrics, but you have in the last couple of quarters I mean how does that look for the entire portfolio?

Larry Culp

For Danaher at large, it’s slightly less and I think you are going to appreciate, that’s not a number I think we try to get out there with regularity, but I think it’s important to understand what’s happening in T&M right now. We had significant backlog build, again very strong order books and we talk about double digit growth there starting in the second quarter, is largely on the back of this very robust order book of late, again broadly based in TNM. We are going to make sure people understand the first quarter and the outlook in that context.

Nigel Coe - Deutsche Bank

R&D, you’ve mentioned a couple of times about, put something to work there, where do you think that goes this year. I mean the 6.1% for the first quarter, AB SCIEX coming there where I am assuming the R&D intensity is a little bit higher. What is a good number for the full year?

Larry Culp

No, I don’t have a number handy, but even with a pretty high organic growth, we kept R&D constant with a percentage of sales versus last year, but we’re ramping that up and we would expect that to continue to ramp that up, but we’re probably north of 6% for the year. That’s with obviously good core revenue growth.

Nigel Coe - Deutsche Bank

FX for the full year?

Larry Culp

Well, given the news this morning, when you get double digit returns on Greek bonds with the Euro down, I think it’s 132, 133 this morning. FX is probably neutral to revenues in Q2 and probably negative two to 4% in the second half, but clearly some headwinds there, also we had enough other good things going on.

Operator

Next, we’ll hear from Steve Tusa of JPMorgan.

Steve Tusa - JPMorgan

How much was your China specifically, your China business up in the quarter?

Dan Comas

It was up north of 25%.

Steve Tusa - JPMorgan

Okay. What would you expect I guess just geographic core growth dynamics to the rest of year I would assume that slows and the US and Europe pick up a bit. I mean can you talk about those dynamics?

Larry Culp

I think if you look at the first quarter, we saw that obviously the emerging market led by China was up double digit. North America was up threeish percent. Europe was positive but very modestly so. As we look forward, I think the emerging markets are good here in the second quarter. We might see a bit of a tail given China, but that is definitely going to lead the way. I think US could stay in this range get a little bit better I think Europe’s a bit of wild card frankly, and we would like to hope Europe does better than slightly positive but as Dan just alluded in that last answer, number of dynamics going on over there right now.

I think Steve I think we feel good about the macro backdrop in the second quarter and don’t have major concerns about the second half.

Steve Tusa - JPMorgan

Right and then just an unrelated question what should we thinking about as the bar, is there a revenue number, is there a size of deal that you know where we would be stripping out and adjusting earnings. Is it a new platform you know because the EPS we are shipping out this quarter I guess it’s kind of a new platform but in med tech it’s not you know a $1 billion deal or from a revenue perspective, maybe you could just give us some sort of a bar so that we can you know when you guys announce these deals we can figure out if it’s going to be adjusted or not out of the EPS number.

Larry Culp

I mean the best way to be to look at some examples you know the only thing we are calling out this year is [indiscernible] transactions which are combined at the loss of a $1 billion. The other deals that we’ve done you know PaloDEx that were $200 million and some of the other deals in that size range you know we’ve not called out, no. So that would be as good a frame as that is we would have right now Steve.

Dan Comas

And we will give out the deals, Steve. I mean rest assured we will tell you what our intent in that regard is.

Operator

Next we hear from Ajit Pai of Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

Just going back to the commentary that you provided in terms of business conditions by geography, ignoring the headlines just looking at Western Europe you said that it sort of was you know modestly positive the growth over there. The trend, in Europe right now is either improving trend, is it deteriorating or is it just sort of you know chugging along.

Larry Culp

I say it’s kind of straddling steady and improving.

Ajit Pai - Thomas Weisel Partners

Okay and then looking at China you talked about the 25% growth in China and then for all of 2009 it was about 6.2% of revenue. You probably seen the fastest growth if your business is larger for the geographies out of China. Do you expect China over next you know 18 months to break into double digits of the percentage of your revenue?

Larry Culp

I think even if they maintain that cliff, I think they don’t get that high that quickly. Given the growth for seeing everywhere else, but we have to take out some of the math.

Ajit Pai - Thomas Weisel Partners

Okay and then to the same point when you are looking at the emerging markets and you talked about your first sort of real acquisition in India. So the Indian market how are you looking at it, are you looking at it like what are you know the manner in which you looked at your investment in China about 10 years ago. You planned to be much more active in that market over the next 3 to 5 years. Are you saying things will be progressing more slowly there in terms of building up your presence there?

Larry Culp

Well despite the greater than 25% growth in China that we saw in the first quarter, they didn’t win the growth challenge in the quarter. The Indian team did. They did better albeit of a smaller base. We were on the phone in fact just yesterday with that team. I think the play work we are trying to run there is, is very similar, largely organic opportunity. But one we are frankly across all of our growth platforms particularly in med tech environmental, certainly in TNM and product ID as well, just a wealth of opportunity and we are trying to make sure that we are investing as aggressively and as smartly as we can there.

We’d like to find the inorganic opportunities like the L&T situations, there are some, but anything much like we built this billion plus, billion dollars business in China, it will wisely be on the back of the organic play.

Interestingly, SCIEX comes in, given their strong position with the pharmaceutical companies and other life science researches in India. They represent our -- one of our bigger footprints in India straightaway. That’s going to be helpful, not only as we help them accelerate their own growth as we will the rest of SCIEX. But I think that will have still a benefit for the rest of the group particularly as we think about Leica, Molecular Devices and some of the other lines there.

Operator

Next, we’ll hear from Richard Eastman of Robert W. Baird.

Richard Eastman - Robert W. Baird

Just two quick questions. I wanted to circle back for a second or so to the fall through in margin and basically in med tech and professional instrumentations, instrumentation, when I kind of work them out here and I pull out the inventory charges, both look surprisingly low again, relative to the core growth in those businesses namely PI.

Again, it sounds like from your commentary that’s where the biggest growth investments took place? But if you look at the fall through without those incremental growth investments, are we looking at something that’s closer to 35% or 40% fall through at the EBIT line in those?

Dan Comas

I mean both of those segments had north of a 100 basis points of core margin improvement and both of their fall through, when you strip out the acquisition, but including the growth investments, they were both in the 35 to 40% range.

Richard Eastman - Robert W. Baird

With the growth investments?

Larry Culp

Yes.

Richard Eastman - Robert W. Baird

Larry, on the industrial tech side of the business. I am going to just assume the book-to-bill, was it as strong as it was on the PI side or electronic test side. Can we see revenue continue to retch it up from the first quarter base in industrial tech?

Larry Culp

If you look at industrial, we would certainly look to see both motion and [PID] in the high single digit range for the year. So I think they are off to a good start in building backlog.

Dan Comas

Most notably motion, we have given the order book the backlog despite the roughly 10% organic growth, that I wish you get better here in the next in Q2.

Larry Culp

Yes certainly easy comps and some momentum too.

Operator

Terry Darling of Goldman Sachs.

Terry Darling - Goldman Sachs

Just wanted to follow up on some of the color on the cadence on the organic. The 8 to 10% upper single digit, low double digits organic for 2Q, that’s essentially the pace you had in March and so you are expecting that to continue and then also to continue in the second half of the year roughly at that level. Is that the right color there?

Larry Culp

No, I think we are going to high single possible, double digit in the second quarter. I think that at this point we characterize the second half is likely to be in line with what we have seen here in the first quarter which is the 5.5%. Obviously if we continue to see the conditions that we have seen here recently even with the tougher comp in the second half, it could play out more favorably, but right now. I think that’s what we’re going to go with.

Terry Darling - Goldman Sachs

You had talked about the potential for a snap back on a couple of quarter basis because of the under investment last year. And so that’s the cadence you’ve laid out there is sort of more consistent with that idea. And as you said, who knows where the second half goes from an upside perspective with CapEx and then it kicks in more. But I'm wondering if I could follow up on the expectations within that second quarter core growth, color around med tech kind of breaking out life sciences and diagnostics versus dental. And any color on the kind of orders to support that outlook be helpful?

Larry Culp

Sure. I think at med tech as we look at the core and obviously excludes the new businesses which by the way you are doing nicely, the integration is proceeding very well. I think med tech is likely to be up mid singles in the second quarter. I suspect we’ll see life sciences and diagnostics do better than dental. The consumables business has been a little sluggish here domestically, but the equipment business globally, has started, has bounced back a little bit better than we would have anticipated. But nonetheless, when you compare the two, I think Leica and radiometer are going to outpace cable and Sybron, but all will be positive. And with the product launches we’ve got in Sybron forthcoming, we could do a little bit better perhaps than we have done here right now.

Terry Darling - Goldman Sachs

Okay and then, just following on your comments on integration of AB SCIEX, I think that we had all looked back at some of the margins that that business did couple a years ago. They got into the low 20s at the EBIT level I think back in ‘06 or ‘07 and said, hey, why can't we get back there with the implementation of DBS in some time by 2011 or so. I think you guys are a little more cautious than that, thinking upper teens, mid to upper teens. Can you calibrate us on that?

Larry Culp

Sure, I think some of those data points Terry maybe molecular devices as opposed to SCIEX, but nonetheless I think just the update on the transactions is again the integration is going very well. I think we are very pleased with the way the team has embraced the new structure and certainly DBS, I want to underscore that SCIEX and molecular devices are two different businesses. And part of that kind of needed molecular devices so far is that we have kind of gotten them back to their independent status, reminiscent of what we did back in ‘02 is with Videojet and Gilbarco, the molecular science back on the door, we put in a dedicated full time President that is quickly becoming a very focused team and they are jazzed about their opportunities as we are. Obviously at SCIEX we are excited about the new product pipeline, we will have some news in the next month at the ASMS show.

Eksigent, the bolt-on obviously very important force on the LT side. And keep in mind that there is another transaction the mix here that’s the Genetics deal that they would like a bid. Number of cross connections probably more than we even realized early on between Leica, Mole Dev and Genetics which we think will be interesting both on the academic and on the drug discovery side in time. In terms of margin expectations these are a 50% plus gross margin businesses Terry. So, I think as we do our normal drill 15% to 20% operating margins that’s the zone they are going to be in and obviously as you get towards the higher end of that we are going to look to make sure we are making the right decisions between margin expansion and growth investments. With those sorts of gross margins as you’ve seen it do elsewhere, the operating margins should be very healthy and the cash gen should be strong.

Terry Darling - Goldman Sachs

And 2010?

Larry Culp

That’s where we are heading. Next year’s is a push, but we will be making a lot of progress here, this year, next year going forward in that very direction.

Terry Darling - Goldman Sachs

So in 2010 you are closer to low end of 15 to 20 range.

Dan Comas

They are below that, when we announced that not much has changed, SCIEX was double digit, Mole Dev was actually loosing money as already seem to have turned, so we are starting to build sort of bases, but ramping up.

Operator

At this time there are no further questions, Mr. McGrew I’d like to turn the conference back over to you for any additional or closing comments.

Matt McGrew

Thanks April. I want to thank everybody for joining us today and Daniel and I are going to be around all day for any follow up calls for those who want it.

Operator

That does conclude today’s teleconference. Thank you all for your participation.

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Source: Danaher Corp. Q1 2010 Earnings Call Transcript
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