Good morning. My name is Corinne, and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Danaher Corporation third quarter 2010 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the star key followed by the digit two. Thank you. I would now like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may now begin your conference.
Good morning, everyone, and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer, and Dan Comas, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, a slide presentation supplementing today's call, our third quarter Form 10-Q, and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the investor section on our website, www.danaher.com, under the heading Earnings, and will remain available following the call. The audio portion of the call will be archived on the investor section of the website later today under the heading Investor Events, and will remain archived until our next quarterly call. A replay of the call will be available until October 26. The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally.
The confirmation code is 4297828. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the accompanying slide presentation, our earnings release, our third quarter Form 10-Q, and other related presentation materials supplementing today's call for additional factors that impacted year-over-year performance. I'd also like to note that we'll be making some forward-looking statements during the call, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. It's 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.
We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events and developments, or otherwise. With that, I'd like to turn the call over to Larry.
Matt, thanks. Good morning, everyone. We are pleased to report this morning an outstanding third quarter for Danaher. We grew 12.5% organically in the third quarter as the positive trends of July and August continued through September. Our core growth was broad-based across all the segments, with Professional Instrumentation up 15.5%, Industrial Tech up 16.5%, and Med Tech up 7.5%. Our continuing commitment to drive organic growth using DBS in the form of tools and processes to improve new product development and sales and marketing execution, as well as increased investments in those same areas, is evident in this strong core growth performance. We are quite pleased with this momentum and are optimistic about our potential to outperform for the remainder of 2010 and beyond.
We are winning in the marketplace and serving our customers well as we continue to capture market share in many of our businesses, including Leica, Radiometer, Hach-Lange, ChemTreat, Kollmorgen, Fluke, and Tektronix Communications. Geographically, emerging markets were our best performer, up more than 20% in the quarter. Despite difficult comparisons to last year, China grew at a 25% rate in the quarter, with our Test and Measurement, Environmental, and Leica businesses leading the way. We also saw strong growth in Eastern Europe, Latin America, and India. Emerging markets now represent 20% of our total sales, up from 12% five years ago, representing a greater than 20% compounded annual growth rate. The U.S. grew low double digits, and Europe was up 10%.
The quality of our core growth was evident in the outstanding margin performance in the quarter, with our core operating margin improving 310 basis points year-over-year, with each of our operating segments achieving at least 200 basis points of core improvement. A first for Danaher. In addition, we generated over $500 million in free cash flow in the quarter. During the quarter, we completed the strategic joint venture with Cooper Industries to combine our tools businesses to form Apex Tool Group. Beginning this quarter, we deconsolidated the financial results of the businesses contributed to Apex and recorded our share of the combined joint venture results based on the equity method of accounting. We also recorded a $232 million after-tax gain in the quarter related to the formation of the joint venture. With that as a backdrop, let me move to the details of the quarter.
Today, we reported third quarter GAAP earnings per diluted share of $0.95, up 79% year-over-year. Adjusted net earnings per diluted share, which among other items excludes the 34% gain related to the formation of the Apex JV, was $0.60, up 33% year-over-year. Revenues for the quarter increased 16% to $3.2 billion, with core revenues up 12.5%. The impact of currency translation decreased revenues by 1.5%, while acquisitions contributed 5% to sales growth. Year-over-year gross margin for the third quarter increased 370 basis points to 51.7%, marking the first time in Danaher's history that we have achieved gross margins in excess of 50%. The year-over-year margin improvement is largely due to higher sales volumes and the benefit of our 2009 restructuring initiative. Approximately 150 basis points of improvement in the quarter is attributable to the deconsolidation of our lower gross margin Tools businesses.
Operating margin in the third quarter increased year-over-year to 18%, resulting from higher sales volume and the benefit of our prior year's restructuring initiatives. Included in the operating results was $10.5 million in equity earnings contributed by Apex, which added approximately 35 basis points to our operating margin in the quarter. Absent the Apex contribution, our operating margin was 17.7%. Year-to-date operating cash flow was $1.5 billion, a 16% increase year-over-year. Free cash flow year-to-date was $1.37 billion, and our free cash to net income conversion ratio was 104%. More meaningfully, excluding the after-tax $232 million non-cash Apex gain, our free cash flow to net income conversion ratio was a robust 126%. During the quarter, we closed or signed two bolt-on acquisitions with aggregate annual revenues of approximately $200 million, which are expected to strengthen our Test and Measurement platform.
The M&A environment remains very active, very attractive, and given our strong balance sheet, we believe we currently have more than $4 billion of M&A capacity over the next four to six quarters to expand and strengthen our portfolio with particular focus on our five growth platforms. Now, turning to our operating segments. Professional Instrumentation revenues increased 20.5% for the quarter, with core revenues up 15.5%. Operating margin for the third quarter increased 560 basis points to 21.2%, primarily due to higher sales volumes and the benefit of the prior year's restructuring initiatives. Our core operating margin was up 340 basis points in the quarter. Our environmental platform revenues increased 13% in the quarter, with core revenues up 10.5%. Water quality core revenues increased at a low double-digit rate in the quarter.
At Hach-Lange, core revenues grew at a mid-teens rate with solid demand across all geographies in our core lab and process instrumentation markets. During the quarter, Hach launched the sc200 universal controller, which provides maximum flexibility for water analytics by eliminating the need for multiple dedicated controllers and offering plug-and-play capabilities with all of Hach's digital sensors, currently covering 15 different testing parameters such as ammonia, chlorine, and nitrates. Trojan core revenues declined at a mid-single-digit rate in the quarter as a difficult year-over-year comparison resulting from the New York City drinking water installation more than offset solid growth in industrial, residential, and other municipal applications. However, year-on-year bookings were up double digits in the quarter. Earlier this month, Trojan unveiled its most advanced open-channel wastewater UV disinfection system to date, the TrojanUVSigna.
The Signa is specifically designed for large-scale disinfection applications, making the conversion to UV disinfection easier by reducing the total footprint required, simplifying maintenance, and lowering the total cost of ownership. A Signa is 3x more energy efficient than similar offerings. At ChemTreat, third quarter core revenues were up high single digits with broad-based growth across all major verticals. Since acquiring the business in mid-2007, we've increased sales force headcount by approximately 20% as we continue to dynamically allocate resources to fund their successful sales growth model. Gilbarco Veeder-Root's third quarter core revenues increased at a low double-digit rate year-over-year, with robust demand for outdoor payment solutions and dispensers globally.
Earlier this month, Veeder-Root introduced a key product for biofuels called the Phase-Two Water Detector, the first and only solution to continuously monitor underground storage tanks and detect ethanol-blended fuel phase separation, which can occur when water finds its way into tanks, often leading to infrastructure corrosion at the service station and costly damage to vehicle engines if undetected. Moving to Test and Measurement. Revenues increased 32.5% in the quarter, with core revenues up 22.5%. Fluke core revenues increased at a high teens rate in the quarter, with solid demand in all major geographies for thermography and our industrial products. We unveiled a series of new products in the quarter, including the Fluke 381 Remote Display Clamp Meter, the first clamp meter with a detachable remote display and flexible current probe for easier, faster, and safer measurements.
The wireless display featured on the 381 is similar to that on the 233 Digital Multimeter, which we introduced last year and displayed at our year-end conference. This product advancement has been very well received in the field, with the 233 Digital Multimeter receiving 12 industry awards since introduction 10 months ago. Tektronix core revenues grew more than 30% in the quarter, led by demand for oscilloscopes, bench instruments, and video test products. All major geographies were up double digits, led by China and Japan, which were both up over 40% year-on-year. Subsequent to quarter end, we entered into an agreement to acquire Keithley Instruments. Keithley designs and develops electronic instruments and systems geared towards the specialized needs of engineers and electronics manufacturers and academic institutions for research, product development, high-performance production testing, and process monitoring.
Keithley's instruments are expected to complement Tektronix efforts in distribution channels alongside Fluke and strengthen our general purpose test product offering, a key strategic initiative of the business. This acquisition, expected to be completed during the fourth quarter, is subject to customary closing conditions, including the receipt of regulatory approvals and adoption of the merger agreement by Keithley's shareholders. Core revenues from our Fluke Networks and Tek Communications businesses collectively grew at a mid-teens rate in the quarter, with solid demand for both our core enterprise tools at Fluke Networks and our network management solutions at Tek Communications, including our new GeoProbe G10 platform, designed to optimize service for high-bandwidth broadband telecom networks. During the quarter, we acquired Arbor Networks, which develops and markets network security and management solutions for cyberattack detection and mitigation for wireless carrier networks and next-generation data centers.
Network security is an attractive and important market adjacency for Tek Communications. It's helping secure the communications networks we monitor to strengthen our value proposition. Moving to Medical Technologies, revenues for the quarter increased 31% compared to the prior year period, with core revenues up 7.5%. Med Tech core operating margin for the third quarter increased 330 basis points on a year-over-year basis as a result of higher sales volumes and the benefit of restructuring initiatives implemented last year. Our overall operating margin of 12.6% was up 450 basis points sequentially from the second quarter. Our dental platform revenues increased 10% in the quarter, with core revenues up 6%. KaVo revenues increased at a low double-digit rate in the quarter, with particularly healthy demand for our imaging products, including both 3D and intraoral sensors, as well as our treatment units and handpiece instruments.
Sales expanded in most major geographies, led by the U.S. and Asia. In addition to the strong organic growth, core operating margins were up meaningfully in the quarter, and we feel very good about our ability to continue to drive growth and margin expansion for the remainder of 2010 and beyond. Sybron core sales grew at a low single-digit rate in the quarter, with strong sales in orthodontia solutions and infection prevention products offset by lower sales of general dental consumables due to inventory destocking in our U.S. distribution channels. The inventory destocking issue is now behind us, and we expect to return to historical growth rates in the fourth quarter. Moving to Life Sciences and Diagnostics, revenues increased 54.5% in the quarter, with core revenues up 10%.
Leica Biosystems core revenues increased at a mid-teens rate in the quarter, with robust demand for both our advanced staining and core histology systems and consumables. We saw double-digit growth across all major geographies, led by China and Japan. We believe we are growing faster than the market in both histology and advanced staining. Leica Microsystems core revenues grew at a mid-single-digit rate in the quarter, driven by sales of compound and stereo microscopes in the U.S. and China. We continue to be very pleased with the customer response to our SCN400 slide scanner, which enables Leica to offer its customers a complete digital scanning solution designed to store, manage, and analyze digital images addressing customer requirements and offering a compelling value proposition.
At Radiometer, core revenues grew at a high single-digit rate for the quarter, driven by solid demand for our blood gas instruments and consumables in North America, Eastern Europe, and Asia. The early customer feedback to the new ABL90 FLEX has been very favorable, and in August, we received regulatory approval in the U.S., opening up obviously a significant market for future growth. The ABL80 FLEX, which is targeted more for the emerging markets, also continues to do well in the market. We continue to be pleased with the results from AB SCIEX and Molecular Devices. The commercial and technical integration of the businesses are coming together, and in particular, the AB SCIEX team is very energized by the success of their new TripleTOF 5600 mass spectrometer.
Customer adoption of the 5600 has been progressing well, with one of our first wins at the Australian Proteome Analysis Facility, a leading proteomics research institution. In July, AB SCIEX announced a collaboration with the U.S. Centers for Disease Control and Prevention to improve hormone testing. This collaboration is intended to support the CDC's hormone standardization project for improving the reliability of lab results used to help assess disease risk and monitor treatment. At Molecular Devices, growth in the core plate reader business has been solid, complemented in the quarter by the launch of the FilterMax and SpectraMax plate reader technology acquired earlier this year. Moving to Industrial Technologies, revenues increased 19.5% for the quarter, with core revenues up 16.5%.
Operating margin for the third quarter was 21.1%, a 410-basis point increase compared to the same period last year, due to the benefit of restructuring and cost initiatives implemented in 2009, as well as the higher sales volume in the segment. Our core operating margin increased 270 basis points in the quarter. Product Identification revenues were up 20% in the quarter, with core revenues increasing 16%, with strength in both instruments and consumables, and across all major product categories. Growth in the emerging markets and Europe was particularly strong. Videojet's product innovation, coupled with their global go-to-market investments, are driving this strong growth performance. Motion revenues were up 22% in the quarter, with core revenues increasing 26.5%. We experienced significant growth in all major geographies and markets, with particularly good results in industrial automation led by electronic assembly and mobile off-highway.
Sales of Kollmorgen's AKM and AKD motors and drives have been robust throughout North America, Europe, and Asia. We believe we are capturing market share and ended the third quarter with record bookings for the platform. Finally, moving to Tools and Components, revenues for the quarter decreased 53% due to the impact of the Apex Tool joint venture. Core revenues for the remaining businesses were up 5%. Operating margin for the quarter was 27.2%, an increase of 1,160 basis points compared to the same period last year, primarily due to including the equity contribution from Apex in the segment results. To wrap up, we're very pleased with our execution in the quarter.
With DBS's ability to drive organic growth and margin expansion and our increasing exposure to the higher growth emerging markets, we believe we are well positioned to continue to outperform for the remainder of this year and beyond. Given the continued strength across our businesses, we will be taking the opportunity in the fourth quarter to accelerate some of our planned 2011 restructuring activities. We are initiating fourth quarter 2010 adjusted earnings per share guidance of $0.61-$0.66, which at the midpoint represents a 13.5% increase year over year. For the full year 2010, we are increasing our adjusted earnings per share guidance from the prior range of $2.16-$2.23 to a new range of $2.25-$2.30.
Thanks, Larry. That concludes the formal comments. Corinne, we are now ready for questions.
Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We also ask that you please limit yourself to one question and to one follow-up. Once again, that is star one to ask a question. I will take our first question from Scott Davis with Morgan Stanley.
Hi, good morning, guys.
Good morning, Scott.
This +50% gross margin number is pretty exceptional as you said, but can you give us a sense of when you think about and knowing we have a little ways out to get to 2011, what is the sustainability? I know some of this is Apex, but I am thinking the non-Apex part of it, the sustainability of that type of a gross margin at this revenue level. Is there cost to come back to the system when you think about 2011 or any other pricing issues that may impact that number?
Scott, I think that we would view 50% with this portfolio as is something that would be sustainable over time. Obviously, we'll bring different businesses in above and below that number. I suspect that we'll alter the mix. But if you look at the core underlying drivers here, the deconsolidation of Apex is probably worth what, 115 basis points. So we would've been north of 50% even without that dynamic. I just think you look at so much of Professional Instrumentation, so much of what we do in Med Tech, and even the margin improvement we've seen in Industrial Technologies all contributing to that high gross margin.
I think that as you've seen in the third quarter, as we're alluding to here in the fourth quarter, we can sustain that while and in part because of the acceleration in both the cost restructuring activities as well as some of the growth investments. So I don't think this is a high water mark number to be seen again. I think it's something this portfolio and this team is very capable of delivering.
Okay. That's what I was trying to get at. Now, can we move to AB SCIEX? Because it's obviously a very important business when you think as far as forward earnings are concerned. You didn't mention much on it in the conference call. Can you give us an update on the integration and how things are going there?
Sure. I think we're very pleased with where we are here through three quarters at AB SCIEX. I think we're going to continue to see this business deal with the important but unexciting work of getting the two halves of the business stitched together. It's important for us in a lot of ways, certainly for investors, as we do that. We pull costs out of the business, both one-time costs and unnecessary costs. I think you see that in the improved Med Tech margins here. Clearly, with the introduction and now the shipment of the 5600, we're out aggressively in the marketplace with technology reinforcing that technology leadership position that AB SCIEX enjoys.
I think we're looking here at a second half, Scott, where I think the team is well positioned to deliver a high single-digit growth and get back to those double-digit operating margins that we knew this team was capable of. So I think all in all, while, again, it's still early and a lot goes into the first year with any new Danaher acquisition, particularly an undertaking as significant as this, we feel very good about where that business is and where that business is headed, more importantly, going forward.
Okay. Just real quick, KaVo, it looks like we've turned the corner here. Can you just give us a sense of the profit profile? Are we
Are you making a, I guess, A, are you making money in KaVo, but B, with this mid-single-digit organic volumes and the restructuring that you've done, how does this match up to the rest of the segment?
It's still below the rest of the segment, but as you know, this business was break-even last year.
Yeah.
We'll do mid-single digits this year and exit even higher than that. I think right now we are targeting, with mid-single-digit growth, a high single-digit rate or OP rate, maybe even 10% next year. That is including some additional restructuring next year as well to then position us again for 2012 for another lift in those margins. We are very pleased with the progress. Taking longer than we should have, but very pleased about where we are right now with KaVo.
We'll move on to our next question from Bob Cornell with Barclays Capital.
Yeah, thanks. A lot of questions. Larry, you mentioned the market share gains, and you zipped by those pretty quickly. Maybe just go back over them and then talk broadly about what we might expect in some of the other businesses.
Sure. Well, I think that there are a number of places, Bob, where we are doing particularly well. We have had the opportunity here in the last 90 days to be out with everybody as part of our strategic reviews, as you know. I think, just go across the portfolio. Hach-Lange is doing very well, broadly speaking. Clearly, the step-up in investment in emerging markets, in China and beyond China, I think is serving them very well. Clearly, at Leica, particularly at Leica Biosystems, with what they do in the pathology lab, particularly the investments we have made around the advanced staining system, that continues to drive very good growth for us. Very pleased with Radiometer. We talked in the prepared remarks about the ABL90 and the ABL80, our two point-of-care core blood gas instruments that have been introduced and doing well.
AQT, our cardiac platform, had a very strong step-up sequentially in the third quarter as well. Gosh, clearly DEXIS and the rest of the imaging platform, I think is doing very well on a relative basis. ChemTreat, we've talked about. They continue to move right along. I highlighted Kollmorgen in the prepared remarks. We don't often talk about Kollmorgen, but what they've done with their new motor and drive platforms, the AKM and the AKD, we think they're doing very well in certain industrial verticals where they focus. I could go on and on. I'll stop rambling. But I think, again, this is really the culmination of a lot of work the team's done to improve our execution capability and over-fund those opportunities we think warrant that sort of support.
Yeah. A lot of questions, but I guess the thing that caught my attention is your comment, again, you said the $4 billion of potential strategic money to be deployed, and you gave a very explicit four to six quarter. What should we glean from that with regard to acquisition activity?
Well, I don't think that we're saying anything more, Bob, than what we've said, I think, through the course of the year. We're well-positioned to continue to be an active strategic acquirer of businesses that we think strengthen our portfolio, particularly with our growth platforms in mind, investments that we think not only strengthen and build out Danaher, but will generate strong returns for shareholders. Clearly, we see this current environment as one where there is plenty of opportunity. We continue to be quite busy. I don't think anyone should be surprised to see us put some serious capital work in the short to medium term. That's not a forecast, but just a look into the pipeline and a look to the balance sheet, and obviously a strong vote of confidence in our bandwidth to tackle capital deployments on that scale.
A final question from me. What's a comment on the Apex contribution to 2011 in terms of accretion dilution at this point? Do you have any better view of the synergies and the outlook there now?
Bob, it will probably still be mildly dilutive next year. The venture is spending a fair amount of money right now to go after some cost and also some growth investment. That will probably continue through the first half of 2011. But maybe when we get to the back half, it is probably neutral, and then we would expect that in 2012, the venture would be accretive for us.
Thanks.
Thank you, Bob.
We will move on to Deane Dray with Citi Investment Research.
Thank you. Good morning, everyone.
Good morning, Deane.
I was hoping we could go through some color regarding the fourth quarter guidance, especially if you could frame expectations regarding core revenue growth. You are up against still some easier comps, but the idea here is there is upside this quarter, and how much does that carry through in the fourth? Then if I caught it correctly, it sounded like you are moving some restructuring actions that would have been done in 2011 into the fourth quarter. Just frame for us where you expect to do restructuring and what type of payback at this stage you would be expecting.
Sure. Deane, let me talk to some of those points. First, I would just say that the comp does get more challenging here in the fourth quarter. We really saw the tide come back by this point last year. We obviously had a better fourth quarter compared to the other quarters last year come year's end. That said, I think that as we look out toward the rest of the year I think on a core basis, we should be up high single digits. I wouldn't rule out 10%, given the strength of the markets, and I think our performance in them. Certainly, Test and Measurement and Motion are likely to continue to lead the way. Again, I like a lot of what we are seeing at Leica Biosystems right now. I think they are poised to do well in the quarter. Product ID as well is positioned to do well.
I think high single digits, possibly $10 million, would be where I would call the top. We are going to step up in the fourth quarter our, if you will, quiet restructuring and related activity. We tend to put $10 million-$15 million a quarter into improving our cost structure and obviously accelerating growth investments as well. I suspect we could be up two, maybe three times that amount in the fourth quarter, given the room I think we will have to make those sorts of investments, both in improving our cost structure to get a jump on 2011. But also, frankly, there are some things we can pull forward that will be good growth investments, getting us ready for 2011 as well. So a combination. I guess what I am really flagging there for you, Deane, is we obviously had great fall-through in the third quarter, close to 45%.
I think we're going to be down, what, 35%-40% on the back of those investments in the fourth quarter. But still, I think a very good outlook for us as we get ready for next year.
Just maybe stating the obvious here, this is very different from the proactive restructuring that we saw you all take in the early stages of 2008. This is all done from what I would characterize as a position of strength, just being opportunistic here?
I think that's a good, accurate description, Deane. Given the strength we saw in the middle of the third quarter, the way it continued, we really went out to the businesses and said, "I think we're going to have an opportunity here in Q4 to pull forward some of the stuff that the business is contemplating to do in 2011." As Larry mentioned, we've green-lighted a fair amount of that. Depending on the quarter plays out, we might do a little bit more than that. It is pretty broad-based across the segments, and I think it'll give us a head start getting into 2011.
Thank you. Just last one from me. Any comment on how pricing contributed in the quarter?
It was pretty consistent with what we've seen in the first two quarters, about three-quarters of a percentage of price. Working in some areas to get that up maybe a little bit higher going into 2011, but not a lot of changes.
That's all on the back of new products?
New products and typically what we get with consumables.
Great. Thank you.
Thanks, Deane.
Our next question will come from Steve Tusa with JP Morgan.
Hi, good morning.
Good morning.
Just a question on some of the dynamics that happened this year, and maybe I'll look forward a bit. Is there anything unusual that you think about in driving this year that's going to lead to a tougher comp? I know there's big projects that come through in Water sometimes. Anything that we need to be aware about on a go-forward basis? Second of all, there's been a lot of chatter in the medical community around hospitals seeing weaker patient volumes, and it just seems like there's a little bit of risk around the hospital CapEx front in Medical, and maybe you could just address those concerns as well.
In terms of any macro items for the businesses in 2011, Steve, nothing jumps to life. We've had two very strong years at Gilbarco Veeder-Root. Some of the things were regulatory driven over the last couple of years, so that could be our toughest comp going into next year. The other items that companies are talking about vis-à-vis pension, we don't have a lot there, but it'll probably be a little bit of an incremental headwind given the lower discount rate that I think everyone's going to have to use going into 2011. Some of the noise and some of the changes on the tax law changes will be a modest incremental headwind going into 2011.
Steve, with respect to some of the hospital-based pressures, I think it's important to keep in mind that what we call Med Tech, obviously now our largest segment, half of that is dental, not really a hospital-based business, largely a private pay market in most parts of the world. The other side, what we call Life Sciences and Diagnostics, has, I think, pretty good balance between both its clinical exposure research and obviously in the applied space like Food and Water. In the clinical space specifically, I think the growth that you're seeing us deliver both at Radiometer, where we're very focused on critical care, which is a tough thing to cut back on. When you need to go to the emergency room, you need to go. As well as what we're doing in pathology, particularly around oncology with Leica Biosystems.
They're our two leading growth engines right now, and I think they are performing well against a current backdrop of some of those hospital pressures that you've talked about. So I don't think that anyone is necessarily immune, but we're very well positioned to, I think, work our way through that.
One last question. I do not recall you guys mentioning acquisitions in your press release before on a quarter, which is usually a pretty succinct statement in a press release. Are you guys having trouble finding acquisitions of size? Is Keithley indicative, despite it being a nice high return bolt on. Is the size of Keithley indicative of what you guys are seeing, or is there just a lack of opportunity on the bigger size deals? Is that why we are not seeing those recently?
Steve, I would characterize the pipeline, much as I have in the past, chock-full of opportunity, both larger and smaller than Keithley. I think in a typical year or so, you are going to see us do a number of deals in and around that $100+ million range, à la Keithley. 10 to a dozen that will be smaller, and then one or two that will be materially bigger. That is, again, not a forecast for calendar 2010, but that tends to be what happens in a typical 12-month period. So we continue to be optimistic about our ability to deploy capital. Not that the balance sitting there basically generating no income is an issue for us, but we just see a lot of good opportunities to strengthen the quality of this portfolio over the cycle, and we intend to do that.
Okay. Thank you.
Our next question will come from Steven Winoker with the Sanford Bernstein.
Good morning.
Morning, Steve.
Just first, on the core growth exit rates, you had talked about up at the tech conference that was going on in July and August, and we see the final results here. Are you seeing a continued acceleration through September? In which businesses are you seeing the fastest growth over the last month?
Steve, we talked in September that July and August were very strong. We did not see any change in September. I am not saying it got faster, but the very healthy pace of orders continued pretty evenly throughout the quarter. It is broad-based. If you think about where we were in July, probably arguably the biggest lift really came in Med Tech. In Med Tech, we were kind of looking at a 5% quarter in July. We came out at 7.5%. Both Radiometer and Leica Bios, which Larry alluded to, we thought they would be very good quarters, and they were even better than that. I think the double-digit growth we saw at KaVo was a little better than we thought was going to occur in the quarter. Sybron sort of bouncing back to positive growth also helped that segment.
Internally, when you start talking about what is driving that growth to give you confidence going forward, how much are you thinking is due to the new product introductions that you are talking about on every call as opposed to other factors, sales force initiatives, et cetera? Do you think about how to think about each of those?
Well, Steve, I think it is hard to give you a macro answer because the contribution or the breakdown varies business by business. Certainly, new products are an important part of our story, both on an absolute and a relevant basis. I think clearly new products help gain drive market share. But the investments we have been making on the margin have been weighted toward emerging markets. That gives us that mix benefit, if you will. And again, I think there is just a lot of energy the last several years behind our DBS growth investments around new product development and sales and marketing execution.
Even if we are just out selling something that may be three or four or five years old, having more people out, being more effective in terms of how we generate leads, how we prepare those salespeople to get in front of customers and help them solve their problems is really all part of the mix. So I wish I had a better top-side answer for you, but it is really, again, kind of a mix of a whole host of different efforts, business by business, that come together to drive this performance.
Okay. Last time you talked about the supply chain challenges and those being the biggest operating challenges out there. What are you seeing there in terms of constraints, electronics elsewhere? And also maybe comment on what you are seeing in terms of material and wage dynamics.
Steve, as a matter of fact, Larry and I were just talking about supply chain yesterday, and it was noteworthy as we did our reviews across the businesses for the third quarter and their monthly president's letters, the lack of discussion about supply chain issues. So it feels like it's gotten better across a number of our businesses. In other words, the supply chain, particularly in the electronics area, I wouldn't say it's totally caught up to date, but the issues we were having in the first half have really died down. We don't have a lot of exposure to materials, to commodities. It's really more in the joint venture today where they have some of that exposure. In terms of wage inflation, clearly we're seeing that in the emerging markets. And that is a challenge both from a cost perspective, but also from a retention perspective.
And then just one last technical question. In the goodwill walk in the 10-Q, had $174 million of write-down, and it was associated with dispositions in JV formation. Am I correct in assuming that was all or almost all the JV, or was it other parts of the business where you were writing things down?
It was the JV.
Okay. Thanks.
Thanks, Steve.
Ladies and gentlemen, to make sure we are able to take all the questions, we please ask that you limit yourself to one question and one follow-up. We'll move on to John Inch with Merrill Lynch.
Thanks. Good morning, guys.
Hey, John. Good morning.
Hey, good morning. So maybe a question for Dan. I was wondering, Dan, can we get a little more color around the run rate through the second half of the incremental investment spending you guys had articulated in the first half that you were going to make. I am assuming the extra restructuring you are doing in the fourth quarter, about $0.06 is discrete, right? There was no extra restructuring, if you will, in the third quarter.
There wasn't.
Where do we stand? I see your R and D was 6.4%, but some of that, I think you called out associated with the JV. Can you just help walk us through those two buckets and how to think about that heading into next year?
Sure. Maybe first on the restructuring side and the incremental growth side. We have been going through a normal, quiet restructuring, which Larry alluded to, kind of the $10 million+ a quarter. We are going to be stepping up that here in the fourth quarter. On the growth investment side, we could be falling through, particularly when you have 12%, 13% organic growth. We could be falling through at 55%, given the contribution margins in a number of our businesses, particularly in places like Med Tech. And I think that the scale down of a 40%, 45% fall through gives you a sense of the step-up of the investment. R and D is clearly keeping pace with our growth rate. So we are growing R and D at a double-digit rate in almost all of our businesses. We are also seeing the step-up in the sales and marketing, particularly in the feet-on-the-street investment.
Both kind of core ads, particularly in the emerging markets, as well as in a number of cases, converting distribution in emerging markets to direct. I'm not sure I can roll it all up for you, John, and give you a number, but we've had a substantial step-up in the investment both in the R and D and the go-to-market here through the first nine months of the year.
Well, are you actually accelerating that then, Dan, as you roll into next year? Or are we going to be at a steady state by the fourth quarter as you roll into 2011?
Well, some of the step-up investment in the fourth quarter will be on the growth side. That's going to, again, be converting some distribution to direct. We're also stepping up some kind of a web-based marketing, go-to-market activities. We're probably pretty close to kind of a run rate. But again, there'll be some incremental step-up here in Q4.
I understand. Then just philosophically, Larry, when you first embarked upon building your medical businesses, the market had valued healthcare significantly higher. Debatably, your stock may have lagged a little bit because of your healthcare exposures. As you obviously look to doing further deals, what does your appetite since this path started toward getting Danaher further down the medical path, or would you actually look a little bit more favorably toward industrial? I'm just thinking of strategically how you're sort of weighing these things philosophically.
John, I think when we got into med tech five years ago, we were very focused strategically on avoiding some of the risk factors that I think get a lot of coverage today.
Risk factors such as reimbursement, single payer dynamics, let alone certain situations where obviously competition is quite fierce. I think that's really why you see us with the Med Tech segment that we have today, dental having its own discrete dynamics, where obviously now we're very much a market leader in life sciences and diagnostics. We've gone into some niche areas, be it in critical care or in histopathology. On the diagnostic side, obviously with Leica and SCIEX, some targeted research applications with very good applied market exposure, like food and environmental. I don't think we have any regrets whatsoever. I think all these adds have represented over the last five years incremental positives for the Danaher portfolio and our potential to drive the top, the bottom, and the cash flow through cycles.
I think as we go forward here, and if we deploy that capital we alluded to earlier over the next year or so, please don't be surprised to see us continue to invest and hopefully invest smartly in med tech, not exclusively, because we still want to do things in T&M and Environmental product idea as well. But we have lost none of our courage or our conviction about those opportunities.
In other words, think of maybe a bit of a portfolio balance then, right?
I think that's what you see today.
Is that the way to think about it?
I think that's what you see today. If Med Tech was a company unto itself, again, because of that research, that clinical, that applied market balance, it would be a steady ship in any possible storm.
Thank you.
Thanks, John.
Thanks, John.
Moving on to Nigel Coe with Deutsche Bank.
Hi. Good morning.
Good morning, Nigel.
Just wanted to go back to restructuring. So it looks like you're taking about $0.04 of restructuring. Just want to clarify a few points. First of all, that's been absorbed within the guidance you've given this morning?
Nigel, that's correct.
Correct.
Okay. Secondly, you said pulling through some of the actions for 2011. Does that mean you're still going to do the $10 million - $12 million per quarter?
Correct. We have to obviously get into all the budgets, but the plan is to then pull forward stuff maybe later in 2011 to early in 2011.
Okay. No, that's fine. Just want to clarify that point. Then if we go back to last quarter, obviously the Med Tech margins were below 10%, and I think you gave guidance of 2 points improvement from 3Q into 4Q. You obviously got that 4 points in 3Q. Do you still think you can improve margins in Med Tech from 3Q to 4Q?
Operationally, we can, but that will be a segment that will receive some of the restructuring. So I expect margins in Med Tech that would be probably a little bit better than Q3. But on a, hopefully an exit rate better and part of it being the favorable Q4 seasonality, extra restructuring, you should see another nice step up in the restructuring, though, because of the restructuring, you won't actually see that in the reported number.
Okay. So it's fair to say that the bulk of the restructuring will go into Med Tech in Q4.
I know. We're talking $40 million+ of restructuring, that's over 100 basis points across a margin, across the business, and it'll be Med Tech, Professional Instrumentation, and Industrial Tech.
Okay. That's clear. Looking at Test and Measurement core growth, I mean, obviously, at very high levels. How does that decay? It looks like you've got weaker comps. Comps get a little bit tougher, but still fairly weak comps going into 2Q 2011. Do you do first of all, could you address that? Secondly, obviously, we've seen some weakening in semiconductor lead indicators, and you do have a consumer electronics exposure through these businesses. Do you view that as a negative to Test and Measurement?
Well, I think first, in terms of the comps, you're right. We should continue to have very good performance there, if for no other reason than the comps. I think what we're finally seeing at Tek kick in is the number of the R and D and go-to-market investments and Kaizen improvements that they have laid in, which helps us. I think frankly, despite some of those secular issues that you raised, Nigel, I think this business is just flat out executing better on a global basis, compared to where they were two years ago. So I think that that execution, obviously, we've got some portfolio moves here into sectors like video test. Obviously, we've made a significant move into service. I think bodes very well for Tek's ability to drive through some of those concerns.
But in terms of what we're seeing, it's really still quite buoyant at Tek and at Fluke right now.
Okay. Then as we get into the second half of next year, in a more normalized environment, what sort of growth rate do you expect from Test and Measurement?
I think if you look at that business all up, it should be mid-single digits plus.
Okay. Thanks, Larry.
Thank you, Nigel.
Taking our next question, that will come from Jeff Sprague with Vertical Research Partners.
Thank you. Good morning. Just a couple quick ones. Everything you just said on the quiet restructuring, pretty clear. I am just wondering, as you roll all that up, is there any significant then restructuring benefit carryover into 2011, or just the issue of the cadence of the spending that you already talked about?
Well, there will be some incremental positive from the step-up of what we are doing here, going into 2011. But that is maybe a couple pennies a share. If it is $20 million, $30 million of incremental spend here in Q4, should get that sort of almost a one-to-one return in 2011.
How about on thinking about deals, SCIEX in particular, but all the other smaller stuff you have rolled into the 2010 base. As it stands now, what kind of aggregated deal accretion do you look at in 2011 versus 2010?
I do not want to steal Larry's thunder in December. Clearly, the biggest driver there should be SCIEX. With all the transition expense, the acquisition accounting expenses, it is probably a mid-single digit pre-tax contributor here, and we would expect a sizable step-up there in 2011, as well as some of these recent Test and Measurement deals, both Arbor Networks and Keithley being contributors. I will let Larry roll that up in December.
Then just housekeeping in terms of along the lines of rolling up, what do we do with the Tools stub here? Do you collapse it into Industrial, or what is the game plan there?
Well, Jeff, given how small Tools and Components segment now is, we are in the process of evaluating the segments, and I think in the near term, we will be modifying how we present the segments.
Great. Thanks.
Thanks, Jeff.
Moving on to Terry Darling with Goldman Sachs.
Thanks. Just a couple of small cleanups here. First, Dan, on the Professional Instrumentation margins, revenue is up a little bit, margins down a little bit. Is that just mix that is essentially going on there in terms of the percent margin change there, or is there something else to talk about there?
I guess. They were both 21%+. I guess it is down sequentially very modestly. Q3 for Fluke tends to be a little bit lower margin seasonally, and we probably had some of that, but I could go back and look at that.
Okay.
If you'd like, but I don't know offhand.
That doesn't sound like there's anything
No
significantly there. Then, on this 400 basis points sequential improvement, you sort of talked around it. I'll just ask a little more directly. It sounded like the life sciences piece was up more than 400 basis points sequentially, and dental was obviously up strong, but maybe a little less than that. Is that the right picture there?
I think there were three or four contributing factors. One, the fact that the core growth came in at 7.5% for a guidance of 5%-6% and the very high fall-through we get in that segment. Two, KaVo being up over 400 basis points year-over-year, big contributor there. Leica was up over 200 basis points year-over-year, and then SCIEX, both the absence of some of the acquisition expenses as well as just core basis, a nice step up both in core growth but also our operating margin was the fourth factor that really helped drive the sequential improvements.
Okay. On the core growth, I may have missed it for dental in the fourth quarter. The comp gets, I think, a little tougher. Does that stay in the upper singles, or did you indicate that's back to the mid-singles?
We thought Sybron would accelerate from low singles to mid-singles, and KaVo, which was double, is probably going to be mid-single digit to high single digits, in part because of the comp issue you referenced.
Okay, great. Thanks very much.
We'll lead on to Richard Eastman with Robert W. Baird.
I guess I will take my two questions here. On the Med Tech side, just curious, when you are looking at the margins there, obviously, we have some work to do and plenty of work to do at KaVo. How are Leica's margins relative to the consolidated Med Tech margin? Are we still managing that with growth investments? Are they still below the Med Tech overall margin?
Rick, they are low double digits, and we are still working that. As you know, we bought it with about a 4% or 5% OP business, and we still believe ultimately that is a sort of a high teen contributor to the segment.
Okay.
Rick, just to be clear, though, we think we can drive that margin expansion and continue to invest there. We are with that team next week, in fact, in Wetzlar. It is a balance that it has thus far.
Okay. But there's still plenty of investment opportunities, and it's a matter of moving the cost directionally down, but investing in the right spots.
Exactly.
That's how we're basically managing the margin there?
Given the gross margin there, what we're seeing, if we can just control and keep flat the G&A and the manufacturing expense, we're just seeing 100 basis points + of margin improvement just from the fall through of the good organic growth we're getting there.
I see. Okay. Larry, just a question geographically. As we pushed into the fall here, when you look at the three major regions, U.S., Europe, and the emerging markets, including China, is there anything from a trend line perspective, any of those three markets that you're particularly watching closely at this point, either a slowdown or an acceleration?
I think we watch them all, Rick. It's hard, I think, to take the 20%+ emerging market growth for granted. But having been on calls earlier in the week with both our China and our India teams, they're still quite bullish about the near to medium term. I think that we were very pleased with the U.S. being up low doubles as it were, and Europe coming in at 10%. If I had to pick one of the three that I probably am most concerned about, though concerned might be an overstatement, I'd probably pick Europe, just for all the macro factors that everybody else has been talking about. No particular insight or a specific issue in mind there.
Okay. All right. Very good. Thank you.
Thank you, Rick.
Thank you. We'll move on to SunTrust with Wendy Caplan asking a question.
Thanks. Good morning.
Morning, Wendy.
Hi. You talked about sales increases in terms of feet on the street at ChemTreat and elsewhere. Can you talk about hiring for production workers, other categories like engineering at this point?
Certainly, part of the step-up in R and D that you see here, Wendy, is a function of hiring scientists, technologists, engineers, both for core technology development as well as new products. I do not have a specific number there for you, but obviously you see it in the P&L. I think that part of what you are seeing in the gross margins in the VCMs is frankly very good execution on the shop floor relative to the restructuring, coupled with the way we are tackling the step-up in volume this year. I know we do have an increase in our manufacturing headcount, but it has been quite modest, hence the productivity gains, and in turn, the variable margins.
Larry, are you hiring full-time workers, or are you hiring temp workers? How should we think about that strategically?
I think that it really is a business-by-business decision, depending on the nature of the demand curves. I don't think we necessarily have a bias in one direction or another. Obviously, for a lot of our businesses now, it's also a global call in terms of where volumes are rising, let alone being handled from a production perspective.
Okay. One last one. You talk a lot on these calls about new products and new opportunities from those products. Can you give us some size for us? Are there any that you would call a, quote, "breakthrough product" for the company?
Well, I think that at this point, in terms of a breakthrough product- Again, many of these introductions move the needle for the respective businesses. Certainly, the big product that SCIEX has launched is a game changer for them, the 5600, no doubt about that. I think what you're seeing really in terms of the suite of products that have come out here at Radiometer around the ABL90 FLEX, the 80 FLEX, as well as the AQT, very much a game changer for them and perhaps in turn for Danaher. I wouldn't want to leave out the bond introduction at Leica Biosystems because that's driving obviously good growth, part of the results here today.
But what we really haven't flagged yet, because we're building the install base, is the aftermarket consumable stream, much like Radiometer, that we are in the course of building as we build out that install base. That's a few years down the road still, Wendy, but I think the more we shift the revenue mix at Leica toward consumables, the stronger the contribution that business will be making, back in part to Rick's question. So again, I think all in all, it's a business-by-business approach, and we've got a lot of good folks executing quite well on the new product introductions this year.
Okay, thanks, Larry.
We do have time for one final question. That'll come from Jason Feldman with UBS.
Good morning.
Morning.
Hey, Jason.
Earlier in the call, you addressed the hospital budget situation, but when thinking about the other kind of traditional life science customers, academic, pharma, industrial, do you have any kind of view on how their budgets are going to look next year? Are they going to be the same similar type of headwinds or better or worse?
Well, I was pleased to read your note yesterday relative to the U.K. trends that look more encouraging today than they might have earlier in the week. We are really in the process of pulling all of that together. As Dan alluded to, we will present our 2011 views when we get together in December. I think by and large, when we talk about those non-clinical applications, be they research, be they applied, Jason, I think we are still of the view that both at Leica and at SCIEX particularly, we are positioned for growth.
Okay. Lastly, quickly on SCIEX, you have only had them for a couple of quarters. New product introductions seem to have been well received, but this is a business that had been losing share for quite some time. Have you noticed already a change in the trend from a market share perspective there?
Yeah, I think that-
Or is it too early?
Well, I think with the 5600, we're out, that business growing at a high single-digit rate here in the second half. Frankly, that's a rate that they have not enjoyed for some time. I'm not convinced the market is growing at that rate. So that has to translate, at least mathematically, into some share gain. More importantly, frankly, than their share gain in any one quarter, that team is back on its toes. It's out in the market. It's a story that's going to take a while to write, but I really like where we are here as we get close to the year one anniversary.
Great. Thank you very much.
You bet, Jason.
That concludes the question and answer session. Mr. McGrew, I turn the conference over to you for any additional or closing remarks.
Thanks, Corinne. Just as a reminder, the replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally, and the confirmation code is 4297828. Dan and I are going to be around all day today for any follow-up calls for the folks still left in the queue. Thank you everybody for joining us.
Ladies and gentlemen, that does conclude today's conference. We thank you for your participation, and have a great day.