Danaher Corp (DHR) 2012 Q1 法說會逐字稿

Good morning.

My name is Augusta and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Danaher Corporation first quarter 2012 earnings release call.

Today's call is being recorded.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions) I would like to now turn the call over to Mr.

Matt McGrew, Vice President of Investor Relations.

Mr.

McGrew, you may 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 first quarter Form 10-Q and the reconciling of 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 financial information and subheading quarterly earnings and will remain available following the call.

The audio portion of the call will be archived on the investor section of our website later today under the heading investor events and will remain archived until our next quarterly call.

A replay of this call will also be available until April 26, 2012.

The replay number is 888-203-1112 in the US and 719-457-0820 internationally and the confirmation code is 4431956.

During the presentation we will describe certain of more significant factors that impacted year over year performance.

Please refer to the accompanying slide presentation, our earnings release, our first quarter Form 10-Q and other related presentation materials supplementing today's call for additional factors that impacted year over year performance.

All references in these remarks in the accompanying presentation to earnings, revenues and other company specific financial metrics relate only to the continuing operations of Danaher's businesses unless otherwise noted.

I'd also like to note that we'll be making some statements during the call that are forward-looking statements within the meaning of the Federal Securities laws, 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 make today.

These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements whether the result of new information, future events and developments or otherwise.

With that, I'll turn the call over to Larry.

Matt, thanks.

Good morning, everyone.

The first quarter progressed largely as anticipated against the highest core growth quarter of last year.

Sales from the developed markets grew slightly with the US again noticeably better than Europe, which declined this quarter.

China revenues were essentially flat while the rest of the emerging markets grew at a high single digits rate.

Overall, we were encouraged by a number of factors.

Both shipments and orders improved sequentially through the quarter, organic order growth was about 2 points higher than revenue growth as we built backlog across many of our businesses.

This was most noticeable in China where our book-to-bill exceeded 1.1.

Also in a number of markets sell out by our distribution partners was stronger than our sell in.

We were pleased with the team's execution in the quarter which led to 85 basis points of year over year corroborating margin expansion, a 37.5% year over year increase in free cash flow and a 19.5% increase in EPS.

We continue to aggressively invest in new product introductions and go-to market initiatives.

During the quarter we launched a number of exciting products, a few of which we will highlight through the call today.

We remain active and optimistic on the M&A front.

As you saw last week, we announced the pending acquisition of X-Rite, a global leader in color measurement.

Even after closing X-Rite and three other deals in the quarter, we expect to have approximately $5 billion of M&A capacity over the next two years.

So, with that as a back drop, let me move to the details of the quarter.

Today we reported record first quarter diluted net earnings per share of $0.73, a 19.5% increase as compared to our diluted net EPS last year.

Revenues for the quarter increased 31% to $4.3 billion with core revenues up 1.5%.

The impact of acquisitions, primarily the addition of Beckman Coulter, increased revenues by 30.5% while the negative impact of currency translation reduced sales by about a point.

Our gross margin for the first quarter was 51.8%, a 250 basis point sequential improvement from the fourth quarter.

Our operating margin in the first quarter decreased 80 basis points year over year to 17%.

DBS continues to be the primary driver of our outstanding cash flow performance.

First quarter operating cash flow was [$651 million], a 50% increase year over year.

Free cash flow was $534 million, an increase of 37.5% versus the prior year.

Our free cash flow to net income conversion ratio was greater than 100% inclusive of more than $50 million of incremental year-on-year cash spending related to our fourth quarter 2011 restructuring program.

And, finally, our tax rate in the first quarter was 25.3% which was modestly higher than we had forecast.

We expect the rate to be closer to 24% for the balance of the year.

So, now let me turn to the five operating segments.

To start with test and measurement, revenues there -- core revenues increased 2% for the quarter.

Core operating margin for the first quarter increased 195 basis points while reported operating margin increased 190 basis points to 22.6%.

Overall, our instruments business' core revenue declined mid single digits in the quarter.

Blue core revenues were down slightly in the quarter as growth in the US for our service and installation tools was more than offset by weak demand in Europe and China.

During the quarter we launched the new TI100 thermal imager platform designed for industrial and building inspection applications.

These imagers feature easy-to-use, innovative on-camera tools and plug and play connectivity with smart use software to connect, edit and analyze thermal images.

Initial orders have been quite strong.

Tektronix's core sales declined mid single digits in the quarter with continued softness in Europe and China.

In the US we continue to see solid POS, though our sell-in to distribution partners declined year over year.

We were also encouraged by the sequential improvement we saw in order activity across the business with book-to-bill finishing at 1.0 for the quarter, an acceleration from the mid-90's rate last quarter.

The recent launch of Tek's 70,000D Series 33 GHz Oscilloscope is off to a great start and our MDO4000 Mixed Domain Oscilloscope continues to gain broad industry recognition as a game-changing technology.

In the quarter, the MDO4000 received the prestigious Ace award in the ultimate product of test and measurement systems category, the ninth major award recognizing the innovation at the foundation of the MDO4000.

Core revenues from our communications businesses grew at a mid teens rate at the quarter led by a healthy demand for Tektronix Communications, network management solutions, wireless carriers in North America as well as our enterprise tools and network securities solutions globally.

Customer response to Fluke Networks recently launched Optiview XG and Arbor Network's prevailed network security system continues to be strong.

Moving to environmental.

Revenues increased 4% in the quarter with core revenues up 2.5%.

The segment core operating margin declined modestly in the first quarter with reported operating margin decreasing 70 basis points to 18.6%.

Water quality core revenues increased at a low single digit rate while orders were up mid-single digits due in part to solid demand across most industrial verticals.

Municipal spending was stronger than anticipated in the US but remains constrained in China, though project funnels are encouraging there.

Trojan is continuing validation work on its ballast water treatment solution and remains on track to begin shipping systems in earnest later this year.

During the quarter, the US Coast Guard issued their highly anticipated ballast water discharge standard, an important signal to the global community that the US supports international regulation.

ChemTreat continues to outperform based on the strength of their sales footprint and technical capabilities.

During the quarter they had several significant wins including a major US-based manufacturer with over 20 sites.

The first quarter marked ChemTreat's seventh straight quarter of double digit revenue growth, an outstanding achievement.

(inaudible) core revenues grew low single digits led by demand for our dispensers, vapor recovery solutions and automatic tank gauges.

Our 2010 acquisition of the L&T dispenser business in India has allowed us to expand our localization initiatives in that region.

Recently, Gilbarco launched a new dispenser platform designed and manufactured in India.

Customer reception has been extremely favorable, helping drive greater than 20% growth in our dispenser business in the quarter.

Moving to life sciences and diagnostics.

Revenues for the quarter increased 146.5%, largely due to the addition of Beckman Coulter.

Core revenues were up 2% in the quarter.

Core operating margin for the segment was up 25 basis points in the first quarter while our reported operating margin decreased 110 basis points from the prior year to 13.3% largely as a result of the Beckman Coulter acquisition.

The diagnostics business has got off to a solid start to the year with mid-single digit core growth which, as a reminder, does not include Beckman Coulter.

Radiometer's core sales increased at a high single digit rate with broad-based strength across most product categories and geographies.

Demand for our ABL80 blood gas analyzer in China was particularly robust, growing more than 20% in the quarter.

Following last year's regulatory approval, customer adoption of AQT in China has been strong, driven in part by the outstanding value proposition presented for our customers.

A large class three hospital in China recently purchased an AQT and informed us that they experienced a 66% improvement in turnaround time for cardiac marker results which allows the hospital to perform 2.5 times the number of cardiac tests versus their central lab.

We're obviously thrilled when we hear that sort of customer feedback from core customers.

Leica Biosystems sales increased at a low single digit rate with mid-teens shipments and order growth for advanced staining.

The core histology business was flat in the quarter largely driven by weakness in Europe.

Our life sciences businesses experienced flat core growth in the quarter.

AB SCIEX core sales grew modestly in the quarter; however, orders were up mid-teens, positioning the business well for strong core growth in the upcoming quarters.

Mid-single digit revenue growth in the US and emerging markets was largely offset by weakness in Europe.

The team continues to do an excellent job on the margin front as core margins were up over 100 basis points in the quarter.

At the conference in February, we debuted several new products including the 4500 Series of mass spectrometers, the Eksigent 100 Series of analytical flow rate liquid chromatography products and a new micro flow rate instrument.

The 4500 delivers 10 times better sensitivity compared to competitive systems in the same mid-range class and is well suited for applications in high growth applied markets.

The 4500 replaces the 4000 Series which is the best selling mass spectrometer in company history.

The 4500 was just named top new product at Pittcon by Instruments Business Outlook.

Leica microsystems sales were down slightly in the quarter, a solid demand in the life science research and industrial markets in North America and the emerging markets was offset by weakness across Europe.

Beckman Coulter continues to exceed our expectations as DBS continues to make an impact in many facets of the business.

In addition to the progress we've made in terms of quality with the resolution of sodium and glucose, we're also making progress in other customer facing parts of the business.

As we implement DBS across Beckman, we've been able to increase our on-time new instruments installations in the US by more than 20% and reduce unscheduled service calls by close to 15% since the closing last June.

We've also seen a dramatic decrease in past due scheduled maintenance calls which, when we closed in June, numbered over 2,000 and today are below 200 with line of sight to an even lower number.

As customers see the progress, the improvements are starting to show up in the numbers.

Previously, we talked about improvements in the retention and new win rates in November and December of last year.

The first quarter saw a continuation of those trends resulting in the second consecutive quarter of positive, though modest, revenue growth.

Operating margins in the quarter improved over 400 basis points year over year and represented the best Q1 performance since 2006.

While there's a lot of work ahead, we are happy with what the team has accomplished in the past nine months.

Turning to dental.

Segment revenues and core revenues increased 0.5% in the first quarter.

Reported operating margin increased 200 basis points to 12.7%, reflecting the actions we have taken to accelerate their profitability.

Dental consumables core revenues grew slightly in the quarter led by sales for our orthodontic solutions and infection prevention products across most major geographies.

This was largely offset by softness in our general dentistry consumables where we believe our sell-in to distribution partners was less than our sell out.

During the quarter, we introduced several new orthodontic products, including the DamonClear passive self-ligating bracket solution for the lower arch.

Customer reaction here has been extremely positive.

Kerr reached a significant milestone during the quarter with the millionth Sonicville shipment.

Sonicville is a first-of-its-kind product that enables clinicians to perform posterior restorations with a fast, easy to use and reliable [bulk] fill technology using a sonic activated hand piece.

The technology, developed in conjunction with the Cabo team, has been a tremendous success for Kerr and Cabo, exceeding our expectations each step of the way.

Cabo core revenues increased slightly in the quarter with growth in imaging and equipment in North America and Europe offset by weakness in instruments globally.

During the quarter, Cabo received recognition for its Lux 550 LED light which won the most innovative product in the devices and equipment category as voted on by the recent IDS trade show attendees.

Moving to our industrial technology segments.

Segment revenues increased 8.5% for the quarter with core revenues flat.

Our core operating margin declined 20 basis points in the first quarter with our reported operating margin down 150 basis points to 20.6%.

Product identification core revenues grew slightly in the quarter led by solid global demand for consumables and Videojet's continuous ink jet printers primarily in Europe and Latin America.

As I mentioned earlier, last week we announced our merger agreement with X-Rite.

Headquarters in Grand Rapids, Michigan, X-Rite manufactures, markets, and supports innovative color solutions through measurement systems, software, color standards and services.

The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in the second quarter of this year.

The acquisition is expected to be dilutive to EPS by approximately $0.03 in 2012 and $0.04 accretive in 2013.

We're excited by the strategic opportunities that lie ahead for ESKO and X-Rite and I look forward to sharing more about this opportunity with you in the coming months.

Our motion business' core revenues declined at a high single-digit rate in the quarter with softness in the industrial automation technology and renewable energy markets across most major geographies.

We are encouraged by recent order trends as this was the second quarter in a row where our book-to-bill has exceeded 1.0.

As a result, we expect to resume growth in the second half of the year.

So, to wrap up, the year started largely as we expected.

We were particularly pleased with the team's execution which led to excellent core operating margin expansion, cash flow and earnings performance and are encouraged by the momentum with which we exited the first quarter.

The sequential improvement within the quarter, solid bookings growth and an attractive acquisition environment we believe positions us well for the balance of 2012 and beyond.

We are initiating second quarter diluted EPS from continuing operations guidance of $0.76 to $0.81 for the quarter which includes approximately $0.01 of anticipated dilution from the pending X-Rite acquisition.

The second quarter earnings per share guidance assumes 3% to 5% core revenue growth.

We are narrowing our full-year diluted EPS guidance from $3.20 to $3.35, to $3.25 to $3.35 which includes $0.03 of anticipated dilution from X-Rite.

Thanks, Larry.

That concludes the formal comments.

Augusta, we are now ready for questions.

Thank you, sir.

(Operator Instructions)

We'll go first to Shannon O'Callaghan of Nomura.

Good morning, guys.

Good morning, Shannon.

Larry, can you fill out the thoughts a little bit on China?

You guys have talked about some of the signs you had seen of easing there, less on the last call.

Have you seen things play out through the quarter, and how has that contributed to this overall pick-up in orders you've seen through the quarter?

Right.

Well, I think, Shannon, China was certainly central to a good bit of what we saw improve during the course of the quarter.

Our book-to-bill in China in the first quarter was greater than 1.1.

I think that's obviously helpful in terms of our internal metrics.

I'd add to that, in a number of businesses, water particularly, we saw strengthening through the quarter in our project funnel.

And I think that's part of what gives us the optimism that some of the external data that we see strengthening, like PMI, suggested as we go through the year here, China should get better.

So, we obviously weren't pleased with what we saw in China.

I wouldn't say by the same token that it was particularly surprising in that regard.

And as we look here, I think we'll see strong acceleration in China, and we should see China, I think, in the mid to high single-digit range here straight away in the second quarter.

And you said it was flat in 1Q, right?

Correct.

Okay.

And then, can you maybe just talk a little bit about the trajectories on Tek instruments versus motion?

So, I think Tek was down mid-single digits in the quarter, motion -- high singles.

You said Tek is going to improve through the year.

Does that go positive already in 2Q?

I know motion doesn't, it stays negative.

So, can you just talk about the different trajectories and improvement in those two businesses?

Yes.

I think they will -- both businesses will improve in part because, obviously, the comps will get easier in both businesses, and again, I think we're seeing encouraging trends both with respect to our internal metrics, ie, bookings, in addition to some of the external data points, be it PMI, NASDAQ, what have you.

That said, I think it's going to take Tek longer to go positive.

I think they'll both be challenged here in the second quarter.

I suspect we'll see motion go positive in the second half.

It may well be though, Shannon, I think until the fourth quarter that Tek Instruments is positive on the core front.

Okay.

Great.

Thanks, guys.

You bet.

Our next question comes from Nigel Coe of Morgan Stanley.

Thanks.

Good morning, guys.

Good morning, Nigel.

Larry, could you maybe just give a little bit more color on the full-year outlook?

You gave us obviously a lot of detail back in December, but earnings numbers have come up about $0.05 at the low end, but in terms of businesses or geographies, can you give us a bit more context in terms of what you're seeing right now compared to December?

Well, I think that what we said in December, again, I think played out by and large as anticipated here in the first quarter.

I think that as we look forward here, Nigel, again, I think we are encouraged by a number of the bookings trends that we saw, particularly in the US and the emerging markets.

We again saw that spread between the US and Europe, this time about 700 basis points.

Obviously, we saw Europe soften a bit.

One key point with respect to Europe as we look forward is, the second quarter is really the last quarter of last year that we'll be working against what we saw a mid-single digit growth.

So, the European comparisons get a little easier, but we're not anticipating any rebound in the underlying market conditions in Europe.

That said, I think the US book-to-bill numbers, the sell-in, sell-out dynamics, our funnels and the like give us optimism that barring some change in the macro scene, the US will continue to be good and strong for us.

If we look at emerging markets ex-China, we're very pleased with what we saw in the first quarter, we are up high-single digits.

And, again, if that holds as we would suspect it will, that, in combination with an improving China, gives us more tailwind out of the emerging markets than we've seen here in the last couple of quarters.

So, I think all in, we certainly have a number of dynamics that we're working through.

We talked to Tek, we talked to motion a moment ago, but on balance with what we've seen in life sciences and diagnostics, very encouraged there.

I think if we look at product identification there as well, encouraging outlook.

Environmental, both within water and at GVR is going to be getting better as we go through the year.

So, barring some sort of cataclysmic macro change, we think we're going to continue to see the acceleration we talked about with you in New York in December.

Okay, great.

And then the sell-in and sell-out dynamics, have we seen that challenging (inaudible).

Would you characterize that as now largely complete, or are you still seeing some pressure there?

Well, I think that where we saw it, Nigel, probably most pronounced in T&M and in dental, I would say that it probably by and large has run its course, but I wouldn't want to speak for the network distribution partners that we have around the world.

I think a number of them, despite good, healthy sell-through in the first quarter, continue to take a conservative posture.

That's -- we're going to play the long game here and work with them to make sure they are stocked with products that they need, and that we're both generating demand in the marketplace.

But in terms of that continuing at the rate that it has here of late, I would find it -- I find that unlikely to be the case.

Okay.

Great.

And then just one more, if I may.

Environmental margins were down year-over-year.

Can you maybe just talk about that?

Was that mainly mix?

Nigel, it was a little bit of mix, but it really was more investment.

They had a nice step up, I mean, all across the segment, good step up in year-on-year gross margin percentage.

We have stepped up some investment there.

Obviously, the ballast water is part of that as well, but the margins were obviously relatively flat year-on-year, but a lot of that was driven by increased investment.

And does that continue through the year?

You'll see some improvement in part because we expect growth, core growth through the balance of the year, but that investment will continue.

Okay.

Thanks, guys.

Thanks, Nigel.

Our next question comes from Deane Dray of Citi.

Thank you.

Good morning, everyone.

Good morning, Deane.

On X-Rite, I was hoping you could walk through the value proposition of this business, both from the color brand management, but also a bit more on the technologies.

If I'm not mistaken, there's some overlaps with -- of all businesses, Hach in the photo spectrometer side.

Deane, you're absolutely right.

We actually were once in the color business back in the old days with Dr.

Lange.

Both Lange and Hach used similar photometric technology to glean the results that their instruments produced.

So, it's a space that we know for a long time.

I think that with X-Rite -- or, excuse me, with ESKO, our perspective on X-Rite really evolved from it being an attractive opportunity, one, that just made a ton of sense.

It was the number one company atop the ESKO funnel.

I think from a value prop perspective for shareholders, I think we'd say that this is an attractive $600 million adjacency to what we do within product identification, good underlying growth.

I think the company clearly is the market leader here; they have a strong 3 to 4 times share lead on competition, two great brands in both X-Rite and Pantone.

I think you see all that play out both in the 60% gross margins and the 20% operating margins.

I think the deal economics are such that we should hit that double-digit return within three years, probably do better than that as we have at ESKO.

So, in terms of the space, the company, the deal -- we like that.

What X-Rite enables us to do is basically help brand managers throughout their entire supply chain from the time they conceive the packaging for a new soda or a new tube of toothpaste, all the way until that packaging is manufactured and sent into the distribution network to not only manage the packaging thoughtfully often in a digital frame, but now add to that the key element of color management.

So, whether you talk to a Unilever, a Proctor, a Coke, they see this as a fundamental challenge and opportunity in their business not only with respect to cost savings because they'll often have literally scores of versions of a white, a red, a yellow, but also the complexity as their businesses have globalized in keeping those brand standards up to the global standard.

So, we're off to a great start with ESKO.

As you well know, this has been a strong grower for us from the get-go, and I think the opportunity to partner with X-Rite is going to be another good addition to Danaher, but also turbo charge what we're doing in product ID going forward.

Great.

Thank you.

And then, over on the tools side, for Apex Tools, can you comment on operating results?

And I know you have to be a bit guarded in how you comment on both the timing, but how are you thinking about the opportunities to monetize this asset, and what might the timing be?

Deane, this is Dan.

Off to a good start there.

The combined business posted the best-ever gross margins in their history, even on a kind of pro forma basis.

Very good operating margins as well.

Naturally a little bit slow here in Europe, but continued good progress in the emerging markets.

We're not going to comment on external rumors.

I think we've said from the start, we wanted to -- the team to really get after a lot of the cost savings and the go-to-market opportunities; that continues, and we'll see what happens over time.

But it's fair to say that the whole thesis of putting these two businesses together is playing out at or above plan?

I think we and Cooper could not be happier with the team's execution and the benefit we thought we achieved by putting these units together.

They've been a very constructive partner, Deane.

Thank you.

Thank you.

Our next question comes from Jon Wood of Jefferies.

Hi, thanks a lot.

Good morning.

Hi, Jon, good morning.

Hi.

So, Larry, can you just give us a bit more color on Beckman?

Obviously, you had some modest growth there, better than the flat you talked about.

Can you parse out the core chemistry and immunoassay businesses from the life sciences piece, and any expectation on a troponin re-filing or change in expectation?

I would love to hear an update there.

Jon, let me try to cover a number of those bases.

I think we couldn't be happier, just as a headline, with where we are.

As you point out, from a performance perspective, the top line is improving, there's no doubt about it.

That is, in part, a function of I think what we're doing on the quality and the service front.

I'll come to that in a moment, but obviously, we're also seeing excellent progress on the cost side.

In terms of the core, we were at a low single-digit growth number.

We were not flat.

We'll take that as encouragement.

That's two quarters in a row now.

I think the underlying dynamic there really is in and around the retention and the win rates, which continue to improve.

What we saw back last year continued through the course of the first quarter.

We were up on a retention rate basis, up about 700 basis points, say, the last five months versus the preceding five months.

So, good traction there just for a whole host of different reasons.

The win rates are improving as well.

So, if you think about that as a trajectory, I think we're -- we couldn't be more pleased with the recovery in the marketplace, and, in turn, though there is a lag effect, to growth in the business.

On the cost side, we were really pleased with the way the first quarter played out.

If you go back in time, you really have to go back to '06 to see them at 16% at the operating level, that's more than 400 basis points from where we were a year ago.

Just lots of things coming in as we had anticipated.

I think from an integration perspective, the reception to Danaher and DBS continues to be thoughtful, strong, just as good as it could be.

You talked about the diagnostics and life science split.

We have split the businesses, as you know, organizationally.

We will be -- once we're in the core growth reporting mode, we will report those businesses separately, but to your question as to how the core growth splits, both DX and life sciences were, in essence, both at that low single-digit rate.

The organizational evolution as part of that integration continues.

We've brought on a new Chief Medical Officer, an important and critical hire.

There are a number of other things that we're doing lower down in the organizational chart now, that I think bodes well for the future.

And you asked about troponin on the quality and service front.

I think we continue to see DBS changing the way that we are doing the work there.

Quality clearly is job one.

Very pleased with some of the other assays that I mentioned in the prepared remarks that have been cleared, sodium and glucose.

Troponin has been slightly slower, but the results have been steady, the progress good, and I would expect that while we are not going to try to provide a real time update on these filings going forward, we should be in a good place on troponin very soon.

All right.

Very comprehensive.

Services also, Jon, just if I can add one final point.

What we're doing on the service side, you heard some of the data around installation, performance up 20% from a year ago, unscheduled service calls down 15%, a 90% reduction in [past due maintenance calls.

These are all sorts of things that] most Danaher businesses take for granted.

A huge opportunity for us to possibly impact customers at Beckman by way of DBS.

So, all in all, a long way still to go here, but nine months in, we're thrilled.

All right.

Great.

That was very comprehensive.

Thank you.

My follow-up, just quickly on SCIEX -- up modestly, but bookings up mid-teens.

How impactful was the introduction of the 4500 inter-quarter?

Meaning, did it impact the shipments of that legacy system, and was that the primary driver to the booking strength in the -- let's call it the second half of March?

Or did that not -- did you not start to book actual business from the 4500 in the quarter?

Jon, the introduction of the 4500, while exciting, really isn't a material part of that dynamic.

I would say that really what we saw was strengthening in the order books at SCIEX through the course of the quarter.

Timing is part of the reason you see that book/ship delta that we highlighted, and, obviously, with a bookings quarter like that in the double digits it gives us a lot of optimism on top of what we introduced at Pittcon.

And hopefully we've got a few things to show at ASMS that, as we go through the year, we should continue to see AB SCIEX be an important growth driver for the segment and for the Corporation.

Very good.

Thanks a lot, Larry.

You bet, Jon.

Thank you.

We'll go next to Steve Tusa of JPMorgan.

Hi, good morning.

Good morning, Steve.

You [guys mentioned automation] being weak.

You kind of called it out.

You don't usually do that in the 10-Q.

Could you maybe just give us a little bit of color geographically, and how bad was it in the quarter for motion?

Well, I think that automation, a number of the machine builders that we service at motion, both at Kollmorgen and Thompson, have seen build rates in some of the verticals that we serve as we highlighted, Steve, slow.

I think the build rates are clearly what's impacting our growth in those segments currently, or in that segment, those businesses currently.

I think we are heartened by the strengthening in the order book and the book-to-bill, but, as you well know, that's going to really be a second half positive effect on our core growth in those businesses.

So, I wouldn't say that it was horrible or a disaster or anything like that, but I think coupled with some of the softness that we've seen in China, particularly in some of the clean tech verticals there, that combination had motion down in the quarter, as we described.

Right.

But that automation stuff, that's separate from the technology you called out?

They seemed like two separate kind of discrete end markets you were talking about.

That's correct.

Okay.

And then just the China pick-up, I mean, is this -- it seems interesting that it turns on a dime here.

You see one good month of lending come out of China.

Do you find it strange that the translation from what you see in the macro data converts that quickly to orders, or is there something different going on there?

Is it really a loosening, or is it just an end of destocking?

It just seems to have turned on a dime for you at the end of the quarter, from flat to up [8%]?

Yes.

I am not sure I would characterize China turning on a dime here at quarter's end.

We certainly saw slowing through the second half, anticipated a slow but improving start to the year, and I think that's, on balance, what we saw.

I think that we would have anticipated in a few places frankly the business to have done a little bit better.

If I look at water, for example, encouraged by the funnel build here, but we were down in China in the year or in the quarter against what was not a particularly strong comp.

We talked to motion.

That's an important dynamic for us in the quarter in China as well, as is Tektronix.

Sure, but I guess flat to up high single digits in the second quarter seems like a pretty significant turn.

It is.

Part of that is just the calendar.

A lot of what -- a lot of the improvement we're expecting in Q2 we booked in March, so, our order growth rate was much better than our shipment growth rate in China in the first quarter.

So, we go in with a fair amount of backlog.

So, yes, from a shipment perspective, we're thinking flat to maybe mid to high single, but from an order perspective it's gotten better, but that trajectory is not quite as steep, if that makes sense?

Right.

Just one more quick question.

If I do the math on 3% to 5% organic in the second quarter, I'm getting to something like a 20% incremental margin to get to your EPS numbers.

Am I missing something there?

That's ex-dilution; I've pulled that out.

Is there some reason why the incrementals are going to be -- core incrementals are going to be weaker in the second quarter?

Steve, I'd have to look at that.

I don't think -- I'd be surprised if it's that low, and there could be some -- I don't know if there's any acquisition noise in there.

There may be, again, some with X-Rite, but I would expect it would be more in the 30%s, but I'd be happy to look at that with you.

Yes.

(multiple speakers) It's kind of a top down.

Okay.

Thanks.

Thank you, Steve.

Our next question comes from Scott Davis of Barclays Capital.

Hi.

Good morning, guys.

Good morning, Scott.

Guys, I want to get a sense -- long-term core growth rate has always been -- your target at least has been 5%-plus, and I went back, I looked at the average.

I think since '99, an average is 3.1%, and since the last five or six years it's 3.5%.

How much should we care about this?

DBS obviously helps a lot on margins, but doesn't seem to be doing much on core growth.

You spend a fair amount on R&D.

Is this something that becomes an increasing focus as time goes on, or just the nature of your business model, you have to bring in assets like Beckman and slow down growth to fix things, and that's just what we should expect is this 3% to 4% rather than a 5% to 6% or something?

How do you think about that?

Scott, I would, for one, not accept and wouldn't allow anyone on the payroll to accept 3% to 4% core growth through the cycle on a core basis for this portfolio.

I mean, we certainly have, I think, as you look across the business stem to stern, a strong set of businesses.

Clearly new businesses are going to come in, they're not going to be performing at a peak level, but that said, I think we're a mid-single-digit-plus grower through the cycle with the businesses that we have.

And anything we bring in will be brought in to strengthen our ability to grow, let alone generate margin expansion and returns for shareholders.

So, I would argue that DBS has positive impact on businesses, top and bottom line, on the balance sheet as well.

This is a quarter [perhaps with the] headline number, though it being I think what we had talked about for some time working against the highest growth quarter from a year ago, it's not a headline we relish putting out there.

But that said, I think as we look at the underlying trends in the businesses, whether we look at book-to-build and backlogs, whether we look at how we're performing in our markets, some of these issues around the channel dynamics at the start of the year, I think we feel very good about the acceleration that we've talked about.

The comps do get easier.

That's an element, to be sure.

But there's no reason you should lower your expectations.

I'm not lowering my expectations with respect to what we can do through the cycle.

No, that's a very fair answer.

Just getting back to your point on the sell-in versus the sell-out.

It seems like a common theme in this call is that your distributors were taking down some inventory.

Why was that, exactly?

Is it product cycle, is it just timing?

What's the common theme there?

Well, I think that there -- I think it's hard to characterize what we saw, Scott, in two very different markets -- P&M on one hand, dental in another, with two or three truly common denominators.

I think that said, we saw in a number of places at the end of last year, despite good sell-out, a cautious position on inventory on the part of a number of our partners, all managed businesses, that carried into this year, again, despite some of the strength that we were seeing at the counter and elsewhere on a sell-through basis.

I think that corrects itself, it has to.

So, I'm heartened by the sell-through.

The inventory adjustments that we take here in the short term perhaps create a little pressure, but I think you take the long view here -- we want to be working with partners who are growing at or above market.

We want to be their core or their key supply partners, and I think we're in that position.

Again, part of the rationale, part of the logic that gives us the confidence to say, as we move forward here we'll benefit from that pick-up, that readjustment, if you will, on the top line.

So, just as a quick follow-up, Larry.

When you think about the evolution of Danaher over time, does it become more important that you compensate managers for core growth going forward, given the size of the asset base you have now or not?

Not knowing exactly how you compensate everybody, but when you think about it, does that become a greater emphasis over time that -- look, these are the assets we have, and we need to grow them, and we need to gain share and we need to grow them, and 4% ain't going to get it done.

So, how do you compensate people to do that, to accelerate that?

Scott, big, important topic.

Let me simply say this -- yes, we have been increasing the weighting of core in our comp schemes, and we'll continue to do that, not because we want to be a 5% to 7% versus a 4% to 5%, but the fact of the matter is, these businesses that are a part of the Danaher portfolio, the bets that we have made are growth businesses and growth markets, right?

So, this is not a Danaher of a different time where, as some might reflect, was simply a margin play.

I don't think it was true then, but it's certainly not the case today, and we need to make sure that we are growing these businesses in order to perpetuate the leadership positions that they enjoy in their markets.

If their markets are as good as we think, and the businesses are strong and get stronger, we should be delivering numbers more in line with what I think your expectations are pretty much in line with my own.

Makes sense.

Thanks, guys.

I'll pass it on.

Thanks, Scott.

We'll go next to Steven Winoker of Sanford Bernstein.

Good morning.

Good morning, Steve.

Good morning.

Can you just maybe start with the math on the $5 billion, given about almost $3 billion of cash -- free cash flow that you're looking at?

How are you -- just walk me through the math on why it's not a bigger number at this point.

Well, I think we talk about at least -- capacity of at least $5 billion.

That's on top of X-Rite, which is at over $600 million, so, that's roughly two years of current cash flow, and the math is not any more complicated than that.

Okay.

And in terms of your willingness to borrow or drive the balance sheet any harder, I mean, we obviously see that in select situations.

Has your thinking changed on that front at all?

Well, clearly as we've gotten bigger, our cash flow has gotten larger, our ability to borrow more under our current credit rating increases, and we would expect that to continue.

Okay.

And then back to the core growth question -- just a couple.

One clarification -- if I just comp on number of days versus a year ago, is that taking off about 1.5% or 1% in terms of how you think about the core growth number you just put up?

Steve, we had the same number of shipping days both Q1s.

Okay.

So, no impact on that front.

That's correct.

And then the [NPVI] number is still hovering around 29%, right?

Or around high 20%s?

Are you talking about [vitality] the new products as a percent of sales?

Yes.

Yes.

And I guess the question there is -- if you think about this over time as indicative, we're going through quarter after quarter of constant drum beat of new product introductions that, as year by year goes by, I'm expecting to see those start to gain a lot more traction.

How do you think about that number, and I'm looking for other ways to think about core growth and traction on that from DBS, et cetera, to some of the earlier comments made, and wondering if that's not a decent way to think about it?

Well, I think it's one important piece of the puzzle, Steve, but I think there are a whole host of factors.

Innovation of new products is one.

Obviously, the success of what we do from a sales, marketing and service perspective another.

And what we're able to do out of the factory, in terms of quality and delivery is a third, that are parts of that mosaic that, when we are executing well on the right things, should allow us to grow at or above market rates.

So, I wouldn't want to get too fixated on any one input in that regard.

I really do think it takes a broad, integrated effort to drive the share gains that we see at a place like Videojet or ChemTreat that we've seen over the last several years.

And you think 30% is roughly the right number?

You're not -- even though it's only one metric, as you mentioned, you're not thinking that thing should be 35% or 40%?

I think that we would always like to take numbers like those, that you believe in your gut are correlated with growth and share, up.

But that number -- the right number for certain businesses will be higher than it will be for others, right?

You take a business like a Micro or Tektronix where product life cycles are a little shorter, maybe the competitive [intensity] is a bit more than we might see elsewhere.

They need to be at a higher number.

Likewise, if you look at some of the water businesses, be it Hach Lange with a high consumables stream, or ChemTreat, the new product or the vitality ratio there is not likely to be that high, in part just because of the way you do the math if you were being honest about it, and obviously we would be.

So, I think we try to calibrate those sorts of metrics business by business, so no one business goes off chasing a corporate mandate where we're trying to clear our corporate bar that isn't appropriate to the context of the market they compete in.

Okay.

Thanks.

Thank you, Steve.

We'll go next to Jeff Sprague of Vertical Research.

Thank you.

Good morning.

Hi, Jeff.

Good morning.

Good morning.

A lot of ground covered.

Let me just be quick, one or two items.

US muni, Larry, can you give a little more color on what you're seeing there, and is this just some random projects that have started to hit, or are you actually seeing -- ground swells may be too strong a word, but some true pick-up in underlying activity?

Jeff, I would say it's more underlying activity than big projects per se being let.

So, we will see that most positively at Hach, again, because that's more of a razor blades model, as you know, there.

Conversely, that will pinch us a bit over time at Trojan as those big projects are slowing.

Okay.

And your visibility on China muni, I think you said orders picking up.

Do you have pretty good visibility on when those actually get let and move forward, or is it still just order activity and pipeline building?

Well, I would say that we have good visibility there, Jeff, with respect to projects.

Again, given the selling cycle, given the way the municipalities plan these efforts, and when initial planning commences compared to when we actually ship product, there's a good bit of time there.

The challenge is really applying historical practice and trends to that funnel, and trying to anticipate when orders will be let.

I think through the back half of last year, and even here early in the year, we've just seen certain projects get pushed a bit, more than we would have anticipated, more than we have seen historically.

So, I think that's why we're particularly heartened with the book-to-bill there.

So, we're seeing these funnels improve -- that's good.

Seeing a north of 1.0 book-to-bill -- even better.

So, that's the way I would describe it.

It's certainly better visibility than we have in some other businesses, but it's been a little noisy say in the last six to nine months.

And then just finally, maybe for Dan.

Price play any role in the organic growth number this quarter?

There was a little bit over 0.5 points, Q1 is often a little bit light for us in price.

I think that we'll get a little bit better.

Again, we're getting pretty good price on consumables, though it's relatively flat on equipment and instruments.

Great.

Thanks a lot, guys.

Thanks, Jeff.

We'll go next to Jon Groberg of Macquarie Capital.

Hi.

Thanks a million for taking the questions.

Just a couple of quick ones.

First is just a clarification, Larry.

You gave organic growth or core growth expectations for 2Q, and I may have missed it, but for the full year just no change to your core growth outlook?

Is that right?

That's right, Jon.

And, Larry, if I think about Europe, all of the danger that Europe is not one country, right, but if I look at Europe, I would say it's a little -- if I see the results coming out of your business, it's not exactly what I would expect.

You have things like SCIEX and Leica Microsystems down, PID up.

Can you maybe just talk about what's -- what you see happening in Europe, and maybe how that's trended over the last few months just given everything that we read and hear over there, and maybe your interpretation of what's happening?

Well, I was in Europe this week.

I'm not sure that having been there recently gives me any truly unique perspective, Jon.

I think things are simply sluggish in a whole host of places.

I think we can understand what happened at Leica and SCIEX, again, while softening, we are heartened by some of the leading indicators.

But that said, probably the best thing we have going for us right now in Europe is the simple fact that the comparisons get easier.

As we get into the second half, we say good-bye to these mid single-digit growth quarters that we saw last year, and that will help what we print.

But while we're not unduly pessimistic about Europe, I don't think we harbor any illusions about the underlying economy, particularly in those places where it's soft, bouncing back dramatically as we go through 2012.

And, Jon, as you point out, it's not soft across the board.

We were talking about the muni business and the water business in the US.

Actually, we had a good first quarter in our municipal business in Europe.

You mentioned Videojet, still decent growth, Radiometer as well, so we still have some key businesses that are performing reasonably well in Europe, so it's not soft everywhere.

So, outside of just broadly you said being sluggish, it's not like you can look over the last three or four months at trends in any particular businesses or orders that are going on that you can draw some conclusion about, you just expect broadly sluggish across all the businesses?

Q1 played out very much as we expected, which is consistent sequentially from Q4, kind of the normal seasonality.

Some businesses soft and some businesses still posting pretty good numbers.

Okay.

But, Jon, to Dan's point, rest assured from an operating perspective, whether you cut it by company or whether you cut it by country, it doesn't mean those teams all get to take a pass on '12, right?

There are countries where we see particular businesses, Dan highlighted a few good examples, where there are opportunities we should be able to grow.

And at a minimum, you can always go grab share, but when you roll it all up, obviously Europe is going to be the challenge for us from a geographic perspective this year.

Okay.

And then just if I can quickly on dental.

For first quarter, it looks like all-time high margins, and pretty good improvement year-over-year.

I know you've been focusing on that.

Is that sustainable where we're at?

Were there some particular one-time items in the quarter?

How do you think about the margins there?

Jon, they were not one-time items.

We got off to a very good start.

We had a very good Q4 that was masked from a reporting perspective because of all the restructuring we did, but you saw that play out nicely in the first quarter.

And if you look at that segment, and you were to add back the amortization, [we actually were up from a] true operating profit perspective, we were north of 15% in the quarter.

So, off to a good start, and think we can sustain that.

Okay.

Great.

Thanks.

Thanks, Jon.

We have time for one more question.

That will come from Richard Eastman of Robert W.

Baird.

Yes, good morning, and, Larry, congrats on the X-Rite acquisition.

I think that is going to look very good on Videojet and ESKO.

Thanks, Rick.

Good morning.

Just in terms of the test and measurement business, and I guess when I look at the distribution channel itself, are you very comfortable that there's no share gain or loss going on in the distribution channel on the instruments side of test and measurement, in particular at Tek, given the sell-in is lower than the sell-through?

And dental, I would think you would have a better perspective given the channel there is more concentrated, more consolidated.

But are you comfortable that there's no share gains or losses in the channel on the instrument side in T&M?

Yes, I think if we look at T&M, and when we talk about this dynamic, we're talking about both Fluke and Tek, you're going to have puts and takes in any one month, any one quarter.

But I think if we look at the last year or two in those businesses, I don't see it.

I know some others may suggest otherwise, but I think if we look at those businesses, particularly with the new product momentum that we think we will generate going through the year, what we're doing to generate brand preference, let alone broad end-user demand, we're doing good work there.

And I think as we go through the year, again, barring a change in the macro environment, that will present itself more than it has here in the first quarter in our top-line numbers.

Okay.

And I think in dental, the same dynamic applies.

I didn't mean to leave them out.

No, that's fine.

And also just within the T&M business, and the instrument piece, is it fair to say -- is the tone of business and the book-to-bill, was it greater than 1 in China, and the tone of business maybe turning in China versus Europe?

[Have we seen the bottom] in the T&M side?

I'm sorry, Rick, you're talking about the T&M in China -- have we seen bottom?

Within the instrument businesses within the T&M business, so, really Tektronix and Fluke -- have we seen the bottom in Europe, and conversely, is the tone of business turned in China?

I'm just trying to distinguish between geographies there?

Rick, overall, our book-to-bill was nicely north of 1 for instruments.

Okay.

In the first quarter.

[I'm not sure I have that broken down] geographically.

Okay.

All right.

It was obviously encouraging given we had a sub-1 in the fourth quarter, to see that go north of 1 in the first quarter.

It's a good sign.

Okay.

And then just, Dan, real quickly, just one question on CapEx.

CapEx in the quarter looked significantly high.

Does that back off this year, or is that a good run rate?

That's really the dynamic of Beckman and the leasing model.

I see.

Okay.

So, as we see growth there, that number will spike up some?

Yes.

Yes.

Okay.

Great.

Thank you.

Thank you, Rick.

And, Mr.

McGrew, I'd like to turn the conference back to you for any additional or closing remarks.

Thanks for joining us, everybody.

Dan and I are around today for follow-ups.

That does conclude today's conference.

Thank you all for your participation.