Danaher Corp. Presents at DbAccess Global Industrials and Basic Materials Conference: US Industrial Renaissance in Chicago, Jun-12-2013 12:45 PM

Seeking Alpha

Danaher Corporation (DHR)

June 12, 2013 1:45 pm ET


Daniel L. Comas - Chief Financial Officer and Executive Vice President


John G. Inch - Deutsche Bank AG, Research Division


John G. Inch - Deutsche Bank AG, Research Division

Good afternoon, everyone. Well, tell them to turn it on? Are we on? Good afternoon, everyone. Great start to our 2.5-day Global Industrials & Basic Materials Conference. As always, your feedback on these events is most appreciated. What would you do differently? What other sort of aspects of the program and platform would you like to see? We've got tomorrow some more analyst roundtable, panels in the morning, which was our best practice that we brought over from Merrill Lynch, which I think will -- should actually play relatively well. And as part of best practices and mixing up the format, we decided to opt for a keynote from Dan Comas of Danaher. Dan has been with Danaher over 20 years. He was made CFO in 2005. Danaher has to be one of the most unique success stories really amongst global industrial companies anywhere. This company has transformed itself from what was once a hand tool, once a wreath to a hand tools company to what is considered the absolute platinum standard for management and business success anywhere. There are many companies that have tried to replicate this company's success, and some have made advances there, others have not. But Danaher is still here and arguably with as much opportunity ahead of it, given its global scope and its continuous improvement in culture and best practices versus any other time in its history. I thought it would be really you need to hear Dan's retrospective in terms of his career with the company. We may have time for a couple of questions at the end. If we don't -- I realize not everyone is a Danaher investor, if we don't, feel free to come up and talk to the management afterwards. So with that, it gives me a great pleasure to introduce Dan.

Daniel L. Comas

Good afternoon. Hopefully, you're enjoying the cupcakes. What I thought I do is try to talk a little more broadly than just kind of the typical Danaher investor pitch. Go through a little bit of the evolution of the portfolio this company has changed a lot to John's comments -- opening comments. Tie that a little bit to the Danaher business system, many of you know that's kind of our operating model, it's our culture, but that in itself has also changed a lot over the last 10 or 15 years and then, end up with a few things around M&A. As you know, we've been an acquisitive company, talk a little bit about the process as we do it at Danaher.

I'll forgo the reading of the forward-looking statement. So if you think is what's happened to Danaher over the last 10 or 15 years is -- was above the company. I really think there are 3 characteristics that really changed -- that characterized Danaher today that didn't exist kind of 15 years ago. One is moving into businesses with high gross markets. We'll talk about what we view is the importance of that in a couple of minutes. Two, significantly growing our recurring revenue base, our aftermarket, our consumables, our service software that we sell -- we license off on a monthly basis. And then finally, adding to our exposure to high-growth markets, both organically and inorganically. Also talk a little bit, as I mentioned, DBS and then end up on M&A.

So just look at Danaher in 2001 and Danaher today in the portfolio, granted we're a much larger company today. But I think we're also pretty different. So if you go back to 2001, 2 of our 5 segments were 50% gross margins. But 70% of the company was represented by businesses that have more like a 30% gross margins. And what we really noticed for us, the difference between the 50% and the 30%, the 50%, we were, by and large, selling analytical instrumentation, often with a consumable element, often a razor-razorblade model. We really felt that the customer, the professional end user of those instruments was really willing to pay us for the technology that. They were willing to pay us for the service in a way that we couldn't kind of replicate in those lower gross margin businesses. And I think that was instructed to us since we thought about evolving the portfolio.

So fast forward 10, 11 years later, we still have environmental electronic test. They're still 50% gross margin businesses, but you can see they're 5 to 6 sec [ph] the revenue side. Then, with our Industrial business, which were largely kind of 30% gross margin businesses, we really changed that portfolio by getting to what we called Product Identification where we're a leader in marketing encoding again, a razor-razorblade business, a model that we really like. And we took our industrial gross margin up from about 30% 10 years ago to about, as you can see, 50% today. And then we've gone into 2 entirely new areas, Life Science & Diagnostics and Dental. Again, both businesses with a razor-razorblade model that you can see collectively 50% gross margin. So all 5 of our segments today are at 50% or north of 50%.

So how do we do that? Clearly, a lot of capital had been deployed by Danaher over the past decade. We've deployed about over $20 billion over the past 10 years. And you can see the number of deals, I think if you add across, there's probably about 175 deals. And you -- clearly, you read about the big deals like the Beckman Coulter or Sybron, speaking of our Dental business. But actually most of our deals are quite small, often typically under $100 million. We call these bolt-on deals. But I think they've been really important to us. They need to bring in technology, distribution or increase our exposure to high-growth markets. And I think it's been a big part of our success in building out these platforms. That's what we do most of our deals.

The second largest batch are what we call adjacent-type acquisitions, and these are markets that we are not in today, but are adjacent to markets that we're in today. So we were not a player in tomography, but we have this great brand with Fluke, and we're able to take a rapidly growing instrumentation segment in tomography, put that -- put the Fluke brand on that and to -- and grow and create a very large business, both organically and inorganically.

On the water side, we were all about analytical instrumentation, but we saw an opportunity to expand ourselves both from the service side but also on the water treatment side. So we did acquisitions, primarily businesses to businesses, ChemTreat and Trojan, to expand our presence there as well.

And our Product ID business, as we -- as I opened up with, is largely a marketing encoding business but again, we've been able to expand that into other areas around packaging, providing software solutions into packaging, both with our Esko and X-Rite acquisitions. And clearly, so that's the second element. And then the third element of acquisition, they tend to be biggest, so they tend to be very few are the large acquisitions like a Beckman Coulter, that really established kind of a new leg.

I think what we bring to capital deployment, and we really kind of comes down to really 3 simple themes for us. One is the strategy first mentality. We don't think about businesses first. We think about markets that we want to be in and invest in, and then we think about what are the companies within those markets that we want to attempt to acquire.

Two is to have a model to run those businesses, and we think that's a Danaher Business System. Important, not only to integrate those acquisitions, big part of what we do. We normally bring in about 15 new companies a year, but to run those businesses over the long term.

And three, to bring financial discipline. We've had the same metrics around our return hurdles for the last 10 years. And I think keeping that discipline has really served us well. And I think it's that combination of those 3 factors that, at least historically, have made it successful with M&A.

But as you think about any kind of portfolio evolution, while it's been largely on the inbound side for us, it's also been on the outbound side. So if you go back to 2001, we're a lot bigger today, but we've actually divested 1/3 of our portfolio back in 2001. These are all good businesses. We had sizable gains when we sold them, but we came to the point of view over the last couple of years that they fundamentally made more sense in the hands of other people, that they didn't fit in with our long-term strategy in both because of the nature of the businesses, but also because of the growth characteristics.

And as we all know, it's often hard to sell businesses, you got to deal with the delusion that every one of these deals was dilutive when we sold it to our earnings, but we saw strategically, was the right thing to do. And I think it served us well about, again, growing earnings and managing earnings are very important, but really having a firm point of view about the portfolio and where you want to take it and what you want take out of it is very important as I think, as we're growing our portfolio.

So here you can see the gross margins. 2001, we were a 38% gross margin business. Today, we're north of 52%. That's largely been the types of businesses we've acquired, but I think it's also been the Danaher Business System that's done a real good job as you can see some examples of expending the gross margin. One of the things we've learned, which is maybe a little bit counterintuitive, we actually have found it easier to improve the gross margin of a high gross margin business than a low gross margin business. We said, well, why -- that doesn't sound like that, makes a lot of sense.

But I think we learned, as we look at some industrial businesses, that with 30%, 35% gross margins, you went into one of their facilities, they're often pretty well run. They were thoughtful about the supply chain. You're owning some businesses, and this is true I think on the industrial and health care side, we'd find a 50% gross margin business, and they're really the people in R&D and they're really the people in sales and marketing. They didn't have the best players running the facilities, they didn't have the best people focused on the supply chain.

And you can see businesses like SCIEX and Trojan and Videojet, those are businesses we've owned anywhere from 3 to 10 years. You can see both the gross margin and the overall operating margins improvement, but I think, as importantly, are the businesses that we've owned for 15 years. Fluke, we're up 2,000 basis points from the acquisition, half of that has been gross margin. Hach is up 15, and I think that 400 is probably more like 600 basis points gross margin improvement. Again, important -- and we think about DBS having a significant impact on an acquisition in the first year or 2, but also in these long-tenured businesses continually to work on and improve the businesses.

And if we look at our portfolio today, where we've got about a 52% gross margin and about a 17% operating margin, we think that absent acquisitions, we can organically get that up to about a 20% margin business overall with the next kind of 4 to 5 years averaging about 50 to 75 basis points of margin expansion.

So another key element of our evolution over the past decade has been an emphasis on recurring revenues. If you go back to 2007, 25% of our revenues were in the aftermarket. If you go back to 2002, it's even less than that. Today, we're at 40% of our revenues in the aftermarket. These are consumables, these are service contracts, spares and repairs. And this has been a focus both organically and inorganically.

On the organic side, one of the things we've learned is that with new products, when you're in a razor-razorblade business, when you come up with new instruments, new equipment that use consumables, by coming up with new products faster than your -- than our competitors, we've been able to build the installed base faster than our competition. That's so important because, obviously, that drives the higher margin consumable business. Clearly, organically, we've done -- inorganically, we push this number up as well, whether it's ChemTreat, which is on the water service side; Beckman Coulter, which is about 70% of the revenues or in the aftermarket; or even within our Test & Measurement business, which really on the one hand doesn't have a razor-razorblade model within it. We've been able to, through acquisitions, significantly expand our service element within Test & Measurement. So you can see within Test & Measurement, was at the lowest ratio 5 years ago, is at 10%, it's up to 30%. And we hope to continue to grow that and see good balance across here.

So why do we like recurring revenues? One, they tend to be more predictable. The profitability tends to be better. But I think, particularly, in a low global GDP environment that we're operating in and maybe operating in for a while, you can see the impact it's had on our overall core growth. If you go back over the last 3 quarters, the 60% of our revenues that come from instruments and equipment are basically been flat, negative 1, positive 2 flat. Our consumables, our spares and repairs, our service revenues, consistently up 3%, 4%, 5%. So even just this model itself, without any further acquisitions, we'd expect that 40% to grow, particularly if we continue to be in kind of a low global growth environment.

In addition to the evolution around the gross margin, the aftermarket has been increasing our exposure to the high-growth markets. Not that long ago, just a couple of years ago, in fact, less than 20% of our revenues came in the high-growth market. Today, we're up to 25%. And the strategy may differ a little bit company by company, but there really 3 fundamental themes that we look to drive our efforts in the high-growth markets. One is about expansion on feet on the street. For example, some numbers up here. These are really sales and marketing people in the high-growth markets. Two has been acquisitions. We don't talk much about this, but we have done probably now dozens of acquisitions of distributors, distributors in high-growth markets that may have anywhere from 5 to 20 salespeople. Well, we take that on and investors often say, well, you take them on because you're trying to capture that margin that they're getting. We say no. We take that on and we buy that distribution so we can control the sales force and we can control our ability to add. So you think of a distributor, tend to be not very high cash flow businesses and they may have 20 salespeople, they might be willing to add 1 person a year. We buy that team of 20 and within 12 months, we're up to 25 people. So we really control our destiny to go to market in the high-growth markets.

Bringing in more localized products. Our Videojet business, our largest Product ID business. When we acquired the business 10 years ago, less than 10% of their revenues came in the high-growth markets. Today, it's about 40%, and where a lot of that growth is coming from. Again, a situation where adding feet on the street, bringing in localized products has helped accelerate their growth.

And you can see this chart, and what we've highlighted here is a number of sales and marketing people, we've added to each of these 6 big businesses at Danaher over the last 5 quarters. Videojet added 18% headcount on go-to-market headcount. Our Dental business, 64%, and you can see the range in between. The reality is we know we're not growing at these growth rates in the high-growth markets. So to fund this, we do something what we call DRA, dynamic resource allocation. So the goal is to fund this. What we did is we went out to the global organization, and over the last 5 quarters, we've been able to reduce our global G&A headcount and our global manufacturing headcount, pretty large number, across Danaher by 2%. That in turn has kind of funned this. So again, back to this environment, where is our growth is coming from, you can see at the top.

Last 3 quarters our developed markets, U.S., Western Europe, Japan, basically flat. Our high-growth markets averaged about 9%. The reality is, as we go across these businesses, our markets in the high-growth market will probably grow in more like the markets themselves, probably growing more like the mid-single digit. And I think that difference between, call it, 5%, 5-plus percent to 9% has been that investment. We are very conscious part of the strategy.

We'll spend a lot of time on this and clearly, we invest a lot in new products. A lot of products have been launched here in the first half of 2013 and a lot we expect to come here -- come forth here in the second half again, hoping I think will help us on the top line.

So that talks about kind of the evolution of the portfolio over the past decade. We had a game plan. I think we've largely executed what we wanted to do over the last 10 years, and we think it's very much a template of how we expect to go forward. We've also had to think about how we run our businesses. We're more global, we're diverse businesses, some very different business models that we had 10 years ago. I think 10 years ago, we were more of a -- more reliant on acquisitions. Today, I think we should try to strike more of a balance between acquisitions and organic growth. So we've had to evolve how we run our businesses, and that's really come to us to our Danaher Business System.

I think many of you have read about some of our success, particularly around the lean principles, and that's really what defined the Danaher Business System 15 years ago. I think we've evolved the Danaher Business System to now be equally weighted, not just about lean principles, but also growth tools, as well as leadership. And we really think about those 3 key elements is what it makes up DBS today.

And I really believe that this more comprehensive approach to DBS has been, one, fundamental to our succes is now a $20 billion revenue company, but also puts us in a position where we can scale up from here and continue to grow that revenue base. And while I think we would still be a very good company, a $20 billion, if we only focus on lean principles, I think ultimately will be a point where we begin to limit our growth and capabilities.

A little bit of a busy slide here, but trying to give you a little bit of a history of the Danaher Business System over the last 25 years, pretty much our kind of history as a public company. As many of you know, DBS is modeled after the Toyota production system. We first deployed DBS at our Jake Brake facility, you see Jacobs production system in the late 1980s. I think one of the key milestones for us was the introduction of what we call policy deployment in 1991.

Policy deployment is the process that we used to execute our strategic plan. It's probably the most important tool in what we call the DBS toolkit, and to bring daily focus to one of the key initiatives in a company strategic plan. You can see that in -- about 2001, we launched our first growth tool. And that was in the area of value selling, and we've added significantly to our tools in the growth area over the last decade. And then finally, we've added the third leg, which is around leadership, having the tools in place to make sure that our associates continue to expand their capabilities and their capacity.

I think one of the other interesting things that probably not that well highlighted on this slide, DBS is always evolving. And as I mentioned, we probably bring in 15 companies a year, new companies a year. I would also look at what a newly acquired company, what's the one thing they do really well? And we often sort of developed that into a tool and bring that into the DBS toolkit.

So just a pictorial of the 3 different elements, leadership, lean and growth. I think at the intersection of these 3 different legs of DBS are basically what we call DBS fundamentals. These range from what we call voice of the customer; really understanding the needs and wants of the customer; value stream mapping, which is basically where we take a process and we map it out and we figure out where are the inefficiencies in this process, where can make improvement. Sometimes we do a value stream map on a production floor. We'll do it for an R&D effort. We even done it within our M&A organization where we looked at a series of deals, and we mapped them out and we figured where we are wasting time, where can we be more efficient. Standard work, transactional process improvement, what we call Kaizen basics, 5S, daily problem-solving. And I think the key thing about the fundamentals is when a company, one of our division is really executing well, we know that they are engaging these fundamentals across their -- all their different functions.

So a little bit on growth. We really think about the framework of growth in 3 different areas. And we call dream, develop and deliver. In the context of dream, we really look to our businesses, doing a lot of customer work. We talk about voice of the customer to come up with new ideas and new products, new solutions, new services. Develop is really picking those ideas, prioritizing those, figuring out which of those we really need to go after. And deliver is really about execution and the daily management of that and try to go through a little bit more of a live example. Radiometer was our first acquisition in the health care space about 10 years ago. Very nice company, was about $300 million of revenues, high-teens operating margins, with consistently growing 3%, 4% year. And I think more than -- maybe more than any one of our businesses, they really did terrific jobs sort of engaging some of these growth tools.

First in the area of dream, and it's kind of highlighted here. There were largely a blood gas analytics business. But through a lot of customer work, they saw an opportunity to get into an adjacent market. We get into an adjacent market in a big way, and this is where their AQT product line, something we've talked a lot about publicly, which was a combination of largely inorganic effort with a small inorganic piece as well. And by sort of dreaming, by doing a lot of market where our customer work, they really able to expand themselves than being just a blood gas analytics business.

I think in the secondary of delivery, they've done a good job as any of accelerating a new product development. And doing it in such a way that in a core business that fundamentally is growing 3%, 4%, they've been able to bring out new product faster than competition and accelerate share gains and accelerate their growth.

And in the area kind of the deliver, 6, 7 years ago, less than 10% of their revenues were in the high-growth markets. And they made one of their key strategic initiatives to go after the high-growth markets. That was really through policy deployment, the daily focus on what they were going to do to expand their presence in the high-growth markets. They've had a lot of success there. So 5 years ago, Radiometer had less than 10% of revenues in the high-growth market. Today, it's in the low 20s, and inching up towards 25%.

So really, I think Radiometer has been a terrific example of engaging the tools around DBS, specifically around growth to deliver this type of performance. So again, a business we acquired 10 years ago, little less than 10 years ago, $300 million of revenues, 20% operating margins. Today, they're 2x that revenue base and they've taken the margins from 20% to 30%. And then, again, largely in a market that's been a low market, that's growing low to mid-single digits, you can see up here, if you took the average share over the last 12 quarters, they've averaged organic growth around 8%, well in excess to the market.

So the third leg of DBS, let's talk about leadership. It's one thing when I became CFO, we were about 1/4 the size. It's one thing to try to manage a $5 billion company, it's very different when you become $20 billion with the hopes -- our hopes are becoming larger than that. Clearly, you need to spend a lot more time on talent. So the third leg of DBS, a tool to really help our associates to learn, to be able to deliver results. We do a much better job, again, go through an example around their development plans and what does an associate need to do, what do they need to focus on, sort of outside their daily work to get to the next level, and finally, do a lot of coaching and training.

So we kind of realized this is just kind of PowerPoint. So what I thought I would do is talk about my organization, the finance organization globally across Danaher and talk about it in the areas of talent assessment, development, succession planning to give you an example of how we sort of deploy the DBS tools within the area of talent.

So what is our process today around finance talent across Danaher? First of all, we rate and rank annually 400 finance associates. We go down -- we go deep into the organization. What do we do with that 400 -- the ranking of 400? Clearly, we focus on the top 20%. Those are the people that probably are going to be promoted, have a big future potential within Danaher but also probably somewhat at risk of being poached by another company. So I won't give you any of those ranges. But we also focused on the bottom 10%. We don't take a hard and fast rule about the bottom 10%. But we say, we need to have a point of view in some cases, the associates in a role they shouldn't be in. In some cases, they actually just need more mentorship to be successful. Again, having a thoughtful point of view about what we need to do with those individuals.

We do an in-depth talent review of about 200 finance associates across Danaher. 50 of those are covered within a year. And it's not the 50 you wouldn't actually think. So we take our Videojet shift, Videojet business. I'm not doing a review of the Videojet CFO. I get plenty of interaction with her throughout the year. But actually in doing the development plan of her direct reports because again, those are the people that we're going to need to become the CFO into a new acquisition.

We do -- I do monthly calls with my senior leadership team and always talk about talent. We talk about open positions. We talk about new acquisitions coming in that we need to fill. We talk about people that we need to move around to get a different experience. Again, it gives you a great visibilty to what's going on around our finance organization globally.

And then we do a lot of training. 2 to 3x a year, we bring in 20 of our finance leaders. Again, it's typically not the CFO, it's the level below that. And myself and other finance leaders will teach over the course of a couple of days about what those individuals needed to do to get to the point where they can become the CFO of the business within Danaher.

Finally, in terms of succession planning. We look at the top 45 roles across Danaher. This goes down to about -- CFO of about $200 million division. And for each of those 45 roles, we have a succession list. And that list is a series of names and it's people who are ready now to succeed, people who are maybe 1 to 2 years away and then people who are 2 to 5 years away. And the people who are further out, why do they need to be doing, what training, what other roles do they need to potentially be in a position where they can be a future successor in those 45 roles.

I think we're really proud of the fact that over the last 2 years, 70% of our finance roles, open finance roles, have been filled with internal people. They say, "Well, how many new finance roles can you have in a year?" We have a lot. Because again, we bring in 15 companies a year and the position we change the most in a new acquisition at the senior staff level is the CFO. And my comfort is much greater where when we can take an internal person and put them in to a new acquisition. But we then need to have the backfill for that person so they can go off into that new acquisition.

I didn't do this when I first got into the role 7, 8 years ago. I could not, and we could not manage talent successfully the $20 billion company without this process and I think, as importantly, I think it will allow us to scale up from here. We do -- and if you can imagine, we do the same thing on the general management side as well.

So let me finish with M&A. And let me try to start by answering a question we get asked a lot by investors or a comment maybe we get a lot from investors. And the comment is as follows. It's really hard to see what's going on in your base business over the course of 3 or 4 years because of all the acquisitions you do. So what I'm going to do is try to kind of demystify that on the following slides.

What we've done is I've shown, going back to 2008, and this is right out of our 10-K, I took our EBITDA operating profit, add back amortization but obviously after depreciation, tax effective that at our provisions, tax provision at the time 24%, but I also showed EBITDA after cash taxes because our cash tax rate has been more like 15%. And then I show our invested capital, and all I do to show invested capital is our year-end shareholders' equity, plus our debt, less our cash. Pretty good approximation for the capital we've got invested in the company. And you can see on the blue bars, our ROIC kind of on a GAAP basis, if you will, in 2008 was 12.7% and our real cash on cash return was 14.2%.

The middle column 2012, again, EBITDA after tax, these are right out of our 10-K. But what I did in the third column is, I said, "let's try to isolate those 2008 businesses and what they would look like in 2012." So I took our 4 big acquisitions, 2009 and 2012, back then SCIEX, Esko and X-Rite. And I took out both the invested capital and the profits of those businesses. I have less than all the other bolt-ons during that time period, but they probably don't move the needle that much.

And you can see that our return on invested capital, despite, which is, obviously, the worst economic year for us and a lot of people in 2009, I wanted to include that, that downturn in here, our return on invested capital on our core business is up about 200 basis points over the last 4 years. Again, I think a real testament to the Danaher Business System and the value it creates, not only in new acquisitions, but the businesses we've owned for a while.

Now people who are maybe probably mostly pretty good at math and finance, you try to figure out, "What does that mean for the 4 deals you did during the time period and how are you tracking?" Probably some of you wondering, "Could I back into that?" And since I concluded that you probably could, I figured I would just kind of show it here. So these are the 4 large deals we've done over the last 4 years as of December 2012. And the weighted average life of that investment was about, at December '12, we've had 1.5 years into those 4 investments. And you can see on an EBITDA aftertax, we're at a 7% return and on a cash on cash, we're about 8%. For 1.5 years in, we're right on track in terms of hitting our return metrics. Again, just trying to give a little sense of what's happening in the core business and sometimes we will get the comment, "Well, this is -- Danaher is really an acquisition story." I would make the argument that, yes, our acquisitions are a big part of what we do, but we also do a really good job of what is truly our core businesses, businesses that we've owned 5, 10, 15 years.

So let me talk a little bit about our M&A process and our activity levels today. The first thing, as we think about M&A, is we don't run M&A as a $20 billion company. We really think of ourselves from an M&A perspective and how we manage it as 8 mid-cap companies, 8 businesses that are -- they're all today, anywhere from $1 billion size to $4 billion size, and these are our 8 growth platforms: Product ID, Water Quality, Retail, Petroleum, Gilbarco Veeder-Root business, TM -- Test & Measurement, Communications, Test & Measurement Instruments, our Dental business, and our Life Science & Diagnostic agnostics business.

I think it's important to manage it that way because, one, I think it provides focus; and two, it provides market flexibility. Just like equity markets, M&A markets go in cycles and sometimes one of those sectors will be white hot from an M&A perspective. And our view is, okay, we're just not going to spend time there for that 1 or 2-year period. Give us the opportunity to sort of play the market a little bit. Go back 2 years, industrial M&A was very, very expensive, health care was relatively inexpensive. We bought back [indiscernible] again, an opportunity to kind of play the market cycle a little bit as well.

Today, give a sense of what we're working on, I went through the 8 different platforms and looked at the funnel. And we really think about funnels in 3 different areas. I think they're all equally important. One is the active deals we're working on, that's where there's some level of conversation with a potential seller. Today, we have about 75 active deals. We're not going to buy all 75 of those companies. Some of them are small, some of these are $5 million, $10 million businesses, but pretty good distribution across those 8 areas.

I think as importantly, we're currently evaluating about 50 different adjacent markets. So each of these platforms have anywhere from 3 to 7 markets that they're currently doing market work on -- we'll do market work on over the next 12 months where we have an initial hypothesis that this could be an attractive adjacency for us. We're going to love offering [ph] deals in the space, but we're doing the market work first. And again, I think that market strategy first mentality, I think is a point of M&A as anything.

The third element of this is cultivation targets. So outside the 75 active deals, we're currently cultivating about 225 companies. What does that mean? That means that someone within Danaher has their name next to that company. It might be my boss, Larry. As you can imagine, he's probably working on the bigger stuff. Myself, an EVP, a group executive, a president or whatever M&A people who typically have a responsibility within every 90 days have a touch point. So if this is a division of a public company, it might be my name, and my responsibility will be to stay in touch with my counterpower, the CFO of that company, to see if that -- we could have unlocked that company out of that larger entity.

Again, I think it's a big part of what we do and I think investors often say, well, you do all this cultivating so you can get these one-off transactions. Sometimes it's work that way. I think the real benefit is actually different than that. Like cultivating a company, and a lot of companies we own are companies that we cultivated for 3, 5, 10 years. And when we cultivate a company for 4 or 5 years and we're seeing them 3 to 4x a year, when they -- if and when they ultimately decide to put themselves up for sale, even if they decide to have a full auction, as a result of the cultivation, we really know what are the 3 or 4 questions that we need to answer in diligence to determine one way or the other, whether we want to own the business.

And if you think about this funnel and how we operate with that, the deals, the market work and the cultivation targets are reviewed on a monthly basis with every -- with each of our EVPs, and Larry and I review each of these across these 8 businesses at least every other month. And I think it's that process and rigor that's really important here. And it's this process in M&A, just like the process we have around new growth and talent, that gives me confidence that we can continue to the play our free cash flow back into attractive opportunities.

Question-and-Answer Session

John G. Inch - Deutsche Bank AG, Research Division

You want to do the questions?

Daniel L. Comas


John G. Inch - Deutsche Bank AG, Research Division

Anyone has a question?

Unknown Analyst

You talked about the importance of gross margins, and you talked about how it's easier to improve an already high gross margin business. So you're at 52% right now, which doesn't leave a lot of businesses left that have even higher gross margins than that. But one of those areas is software. Can you talk about software companies and what role acquisitions of them might play?

Daniel L. Comas

Sure, I mean, I think we've -- we clearly a bit more active in the software space the last couple of years. Just think of -- our Tek Communications business is really largely a software business that we acquired when we bought Tektronix. This is on the communications side. That business was about $200 million, largely breakeven when we bought it. And I think both organically in the last 6 years, organically and inorganically, that business is now approaching $700 million with 20% operating profit. That's a good example where we've taken the business both organically and inorganically expanding it. It's very interesting if you go to their large operation outside Dallas, they actually have set up their software department as almost like a factory. And instead of everybody in isolated cubicles, they're actually kind of more centered around cells, and they actually think that that's done a lot around to improve their software productivity. So we've done a handful of recent software acquisitions. We actually bring them to Dallas to show them how we do software development more with a sort of Kaizen mentality than a more traditional software process.

Unknown Analyst

Yes, the -- you mentioned on the other slide there, Gilbarco Veeder-Root had a new product launch in CNG. Is there also an LNG coming as well?

Daniel L. Comas

We're getting pretty specific. Yes, I don't know if they have a product. I know we've talked about it in their recent strategic plans, but I don't know.

John G. Inch - Deutsche Bank AG, Research Division

Thank you very much.

Daniel L. Comas

Thank you.

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