Danaher Corp (DHR) 2013 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Danaher Corporation first-quarter 2013 earnings results conference call.

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 now like to 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 and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investors section of our website, www.Danaher.com, under the heading Financial Information and will remain available following the call.

The audio portion of this call will be archived in the Investors section of our website later today under the heading Investor Events and will remain archived until our next quarterly call.

A replay of this call will also be available until April 25, 2013.

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

The confirmation code is 5544079.

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

Please refer to the supplemental materials in our first-quarter Form 10-Q for additional factors that impacted year-over-year performance.

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

I would also like to note that we will 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 the subject of a number of risks and uncertainties, including those set forth in our SEC filings.

It is possible that actual results might differ materially from any forward-looking statements that we may 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 as a result of new information, future events or developments or otherwise.

With that, I will turn the call over to Larry.

Matt, thanks and good morning, everyone.

Before we start, I would like to take a moment to let our associates, our friends and the people of Boston know that they are in our thoughts in the wake of this week's most tragic and unfortunate news.

We entered the quarter with modest expectations regarding global growth and that played out largely as we anticipated with our core revenue growth coming in at 1%.

From a geographic perspective, high-growth markets, which represent 24% of our business, grew at a high single digit rate in the quarter.

China was up low double digits led again by our Dental and Life Sciences & Diagnostics businesses, which grew in excess of 20%.

Also encouraging was the double-digit growth we saw in our water quality and product identification businesses in China.

In contrast, sales in the US were flat, which was slightly below our outlook while Western Europe, as expected, was down low single digits.

Despite this low growth environment, the Danaher Business System continues to help us drive share gains, margin and cash flow.

In the quarter, DBS growth tools helped accelerate new product introductions across many of our businesses and coupled with our go-to-market initiatives, we believe drove share gains at Kerr, Videojet, ChemTreat, Tektronix Communications, Esko and Radiometer.

We were encouraged by our strong gross margin performance, up 50 basis points or $90 million year-over-year to 52.3%, which allowed us to sustain our core growth investments in both new product development and sales and marketing.

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

We announced the signing of over $300 million of new acquisitions during the quarter.

With our strong free cash flow, ample balance sheet capacity and the proceeds from the recent sale of the Apex Tools JV, we now expect to have about $8 billion available for capital deployment over the next two years.

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

Today, we reported first-quarter adjusted diluted net earnings per share of $0.75, up 2.5% relative to the comparable amount in the first quarter of last year and representing another record first quarter for Danaher.

Excluding the impact on prior-year earnings of the Apex JV, net earnings per share increased 6%.

Revenues for the quarter increased 3% to $4.4 billion with core revenues up 1%.

Acquisitions increased revenues by 3%, which was partially offset by negative currency translation of 1%.

Our gross margin for the first quarter increased 50 basis points year-over-year to 52.3%.

Our reported operating margin in the first quarter was 16.4% with core margins up 20 basis points.

First-quarter operating cash flow was $637 million with free cash flow from continuing operations of $520 million.

We expect full-year free cash flow to exceed $3 billion.

Our free cash flow to net income conversion ratio, excluding the gain on the sale of the Apex JV and the impact from $40 million of cash payments related to our fourth quarter restructuring was greater than 100%.

Turning to our five operating segments, Test & Measurement revenues increased 1% for the quarter while core revenues were flat.

Our core margins were down 25 basis points year-on-year.

Segment margin saw a significant sequential improvement over the prior two quarters.

Fluke core revenues grew at a low single-digit rate, their first quarter of positive core growth since the fourth quarter of 2011.

Mid-single-digit growth in North American industrial end markets and high single digit growth in high-growth markets was partially offset by softness in Europe and in other North American markets.

Last quarter, we highlighted Fluke's launch of the VT02 Visual Thermometer, which you may have heard about as it was featured in March in a broad nationwide [ranger] radio campaign.

Using DBS growth tools, Fluke identified a whitespace opportunity in an adjacent product category and developed this innovative entry price point temperature measurement tool with an integrated visual heat map to meet customer needs.

We have been encouraged by the sales ramp of the VT02 in both the US and Europe.

At Tektronix, core revenues declined at a low double-digit rate with continued weakness across many end markets.

Despite difficult market conditions, we continue to innovate and increase the breadth of our product portfolio at Tektronix.

During the quarter, we launched a multiphase PA4000 power analyzer, which will be used by engineers on the bench for the development of high-efficiency electrical products such as motors for hybrid vehicles, electric vehicles and household appliances.

This innovative new product is Tektronix's initial entry into this adjacent hydro segment.

Core revenues from our communications businesses grew at a low double-digit rate in the quarter driven by demand for both our enterprise tools and network security solutions globally.

Tektronix Communications' low teens growth was driven by demand for its mobile carrier network management solutions in North America and China.

Arbor Networks' network security solutions remain in very high demand as DDoS attacks have increased in both frequency and size.

Both sales and orders increased greater than 25% in the quarter as we won several new service provider accounts in high-growth markets and saw strong growth in our US enterprise business.

Environmental segment revenues increased 4.5% in the quarter with core revenues up 1%.

Core operating margins expanded 45 basis points with reported operating margin flat at 18.6%.

Water quality core revenues grew at a low single-digit rate in the quarter.

Hach-Lange core revenues grew low single digits with double-digit growth in China and the Middle East offsetting flat demand in the developed markets.

Healthy North American industrial activity, particularly in beverage and power, was partially offset by weaker US municipal demand.

ChemTreat marked their 11th straight quarter of double-digit core revenue growth.

Latin American core revenues were up mid-teens in the quarter as expansion efforts into the Mexican market continued to gain traction, including several large wins in the quarter with industrial accounts.

Over the last four years, the Mexican business has grown over 300% driven by their best-in-class go-to-market initiatives.

Gilbarco Veeder-Root's first-quarter core revenues were essentially flat in both the developed and high-growth markets with strong growth in Russia and India offset by a difficult comparison from prior-year regulatory changes.

We saw solid growth in our payment business in the quarter with shipments on several large-scale rollouts throughout Asia.

New payment technologies and innovations at retail service stations and convenience stores is an attractive growth driver for GVR.

Highlighting this, during the quarter, GVR announced a partnership with PayPal to develop digital payment and other mobile solutions for customers worldwide.

Using GVR's Passport POS, customers will be able to pay using their PayPal account with their mobile devices eliminating the need to carry cash or credit cards.

Moving to Life Sciences & Diagnostics, revenues for the quarter increased 1.5% with core revenues up 2.5%.

Segment core operating margins increased slightly while our reported operating margin decreased 60 basis points from the prior-year period to 12.7%.

Our Diagnostics businesses saw a good start to the year with mid-single digit core growth.

At Beckman Coulter, core sales increased at a low single-digit rate despite the impact of one less day in the quarter with growth in all major product categories.

This marks the fourth straight quarter of low single digit or better core growth at Beckman with high-growth markets continuing to drive this performance.

Beckman's best-in-class automation capabilities, an increase in the cadence of new product development and the significant quality and service improvements we have seen over the last 18 months position them well for continued growth.

We anticipate low single digit growth for the rest of this year and expect to be on track for mid-single digit growth in 2014.

During the quarter, we launched two new products -- the DHX600 hematology system and the Power Express total lab automation system.

The DHX600 extends the hematology portfolio to better address the needs of larger volume clinical labs.

Power Express continues to enhance Beckman's leadership in clinical automation by enabling labs to connect multiple analyzers easily to improve workflow, increase efficiency and reduce cost.

Radiometer's core sales increased at a high single digit rate in the quarter with growth in most major geographies and particular strength in China and the Middle East, which were both up over 30% in the quarter.

Our AQT line was up 40% in the quarter and we hit a milestone with our 1000th instrument placement since launch.

Last week, we closed the previously announced acquisition of HemoCue, a leader on hemoglobin and glucose point-of-care testing.

Leica Biosystems' sales increased at a low single digit rate in the quarter led by double-digit core histology growth.

Advanced standing revenues decreased mid-single digits as solid demand in North America and China was more than offset by a decline in Western Europe where we are transitioning from a distribution to a direct sales model in parts of that region.

Our Life Sciences businesses' core revenues increased low single digits in the quarter.

AB SCIEX's core sales grew mid-single digits led by the applied-in pharma markets.

We have been pleased with the very strong uptake of our new 6500 Triple Quad and QTRAP systems since their launch late last year.

During the quarter, AB SCIEX announced a multiyear collaboration agreement with the Institute for Systems Biology in Seattle for the development of new methods and technologies in proteomics research using mass spectrometry.

This research, led by 2012 National Medal of Science Award winner, Dr. Leroy Hood, will help develop a new approach to mental care by redefining biomarker research in [complement 3] genomics through qualitative swath proteomics analysis using the AB SCIEX 5600 TripleTOF.

We are pleased to support both the ISP and Dr. Hood in this groundbreaking research.

Leica Microsystems' core sales declined low single digits with strong sales in life sciences offset by weakness in industrial and medical markets.

The recently launched SP8.

our modular confocal laser scanning microscope, continues to be well-received globally and was a strong contributor to growth in the life science market during the quarter.

Turning now to Dental, our segment revenues grew 3% in the quarter with core revenues up 2.5%.

Core operating margin increased 20 basis points while reported operating margin expanded 40 basis points to 13.1%.

Dental consumables' core revenues grew low single digits in the quarter led by our sales for general dentistry consumables and infection prevention products across most major geographies.

In addition, our implant business was up mid-teens.

During the quarter, Ormco launched the Lythos Digital Impression System.

Lythos allows an orthodontist to have a complete digital orthodontic workflow beginning with the scanning of the patient's mouth through the creation of a 3D treatment plan to the custom design and manufacturer of the orthodontic appliance.

KaVo core revenues increased mid-single digits with robust demand for instruments and imaging products.

KaVo launched six new products in the quarter at two of the largest tradeshows in the industry, the Chicago Midwinter Dental Meeting and the International Dental Show in Germany.

New products include the [i-CAT Flex], which allows for a full 3D scan at a lower radiation dose than a panoramic x-ray.

In addition, Instrumentarium launched a CR reader, an easy use cost-effective phosphor plate imaging reader.

We also introduced an innovative twisted file adaptive endodontic product, which self-adjusts between a rotary and reciprocating motion providing the clinician with exceptional control during root canals.

Moving to our Industrial Technologies segment, revenues increased 7% for the quarter while core revenues declined 1.5%.

Our core operating margins expanded 105 basis points in the first quarter while our reported operating margin increased 30 basis points to 20.9%.

Our motion businesses' core revenues declined at a high single digit rate in the quarter with sustained weakness in most major geographies.

Our sales into US distribution were particularly soft.

Product identification core revenues were up mid-single digits with growth across all major geographies.

Videojet enjoyed high single digit growth in service and mid-single digit growth in both equipment and consumables in the first quarter.

During the quarter, we began shipping both the 1550 and the 1650 next-generation CIJ printers, which are targeted primarily at customers in the food and beverage markets where predictability of uptime and avoidance of errors is critical.

Initial customer feedback has been extremely positive on these new products and we expect that placements will continue to increase through the balance of the year.

At Esko, core revenue increased more than 10% in the quarter led by exceptional performance in high-growth markets, including Latin America and China.

[DBIT] continues to have a significant impact in driving growth at Esko.

Using dynamic resource allocation to fund internally go-to-market investments in high-growth markets, Esko has more than doubled the feet on the street in Latin America and China since our acquisition in 2011.

Over the same period, sales in those geographies have grown in excess of 35%.

Revenues at X-Rite grew at a mid-single digit rate in the first quarter compared to a year ago when it was a standalone company.

X-Rite becomes part of our reported core number later this quarter.

While still early, we are excited about X-Rite's contribution to the PID platform and the new collaboration and go-to-market opportunities that they bring.

An example of this collaboration is the Pantone Live where we recently launched two illustrator plug-ins that were codeveloped with Esko.

These plug-ins provide brand owners with instant access to essential brand color standards, as well as the Pantone Live color libraries directly from within their development software.

Reception of Pantone Live in the marketplace has exceeded our expectations with orders tripling sequentially from the fourth quarter.

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

DBS has helped drive share gains, margins and cash flow in this low growth environment.

We believe our solid recurring revenue base, the structural cost actions executed in 2012 and the significant amount of capital available to deploy position us well for the balance of this year and beyond.

We are initiating second-quarter adjusted diluted net earnings-per-share guidance of $0.80 to $0.85, which assumes 1% to 2% core growth.

We are also reaffirming our full-year 2013 adjusted diluted net earnings-per-share guidance of $3.32 to $3.47.

Thanks, Larry.

That concludes the formal comments.

Lisa, we are ready for questions.

(Operator Instructions).

Steve Tusa, JPMorgan.

Hey, good morning.

Just starting off with the Life Sciences & Diagnostics margin, was about 100 bps lighter than I guess we were expecting.

Can you just talk about, A, kind of what the margin was like at Beckman and then if there was anything else that drove that weakness?

Yes, I think with respect to -- what you are seeing there, Steve, is we knew, given some of the investments in the segment that we were making, particularly on the sales and marketing and R&D side, margins were going to be tight in LS&D.

That said, and I say that both with respect to the Life Sciences & Diagnostics businesses, as well as at Dental.

We had a couple of big tradeshows in Dental, for example, that we had to work through.

But that said, clearly, the revenue picture in LS&D, particularly in LS, was softer in the end than we anticipated and that certainly put some of the pressure on the margins that you see.

But also, in addition to the revenue, I think it is important to point out that we had a couple of not necessarily one-time, but I think special situations in the quarter on the expense side that we think mitigate as we go forward.

One was this conversion at Leica Bio with respect to the distribution to a direct sales model.

We had an opportunity to move forward in that regard.

I think that makes sense strategically.

That didn't help us from a cost perspective and frankly from a volume perspective as we worked through that late in the quarter.

In addition, as the regulatory front evolved over the quarter with a number of the Diagnostics businesses, we have an opportunity to accelerate some of our spending ahead of submissions and we thought again positioning ourselves to get those new products approved made sense.

So we went ahead and did that.

So can you -- I mean I guess R&D for the Company was up 40 basis points year-over-year.

I mean 6.7% is a really big number.

Can you let us know -- I know you disclose it in your Ks, but maybe in LS&D, what was -- I would assume it was up a little bit more than the 40 basis points.

It was and it also -- given some of this distribution transition we are going through, some of the sales and marketing was also higher.

We think that will sort of begin to even out here in Q2, so you will see I think more normalized margins in LSD in Q2.

Can you give any kind of magnitude, Dan, around what the R&D was up as a percentage of sales in LSD?

We were up combined over 100 basis points between R&D and sales and marketing as a percent of revenues year-on-year.

Okay, that makes --.

And then when you talk about these regulatory filings, I mean is this just greater than expected spending than you would have initially thought as you fixed the business or is this like -- are these like -- is this more proactive with new products?

It is probably somewhere in between.

It really is about what we do and when we do it.

So some of it is strictly timing and at the same time, as we work through the plans for those submissions with regulatory bodies, sometimes we will -- as time marches on, you get a better sense of the scope and the work required.

So we thought accelerating some of that spend was frankly an opportunity despite the pressure that you allude to here.

And again, I think the stronger those submissions are, the sooner they are in, the better off we are relative to getting those products out and launched in time.

Great.

And then just one last question.

It is probably a pretty stupid question, but I will ask it anyway.

I guess with the days sales, with a comp -- a tougher comp on the weather, a lot of noise going on out there and some pretty terrible reports coming out so far.

On a scale of 1 to 10, if 1 is 2009 and kind of 10 is the ideal operating environment, what do you think -- how do you describe the current environment you are operating in?

It is just hard to kind of tell how bad the trend is here.

I am just curious as to your high-level take on that.

Steve, I would say that we came into the quarter knowing that we were going to be missing a day.

I think we came into the quarter knowing that Good Friday would be the last day of the quarter.

So all of that was knowable.

What we saw through the quarter was frankly that our consumables business, which, as you know, represents about 40% of our overall sales, was very much in line with our expectations.

And if you adjust for the day that we missed, put aside all the end-of-March noise, I think we were good.

I think where we fell a little bit short here with respect to the quarter was really in equipment.

That 60% we thought we would be up a couple hundred basis points and that is where we got squeezed, particularly in the US as we saw some business soften in March when we thought we would finish more strongly.

I wouldn't say it is bad.

I think we saw the normal uptick in March.

It just wasn't pronounced in equipment again in the US principally around some of the higher ticket products.

We have mentioned tech.

I think we mentioned motion as well in the distribution.

So in the grand scheme of things, I don't think we are -- we are not necessarily excited about the macro numbers that came out here the last three or four weeks.

But that said, we missed the top end of the core range by about what?

$30 million.

If we had hit that, I don't think we would be talking about some of the OP and the EPS shortfalls here.

But that is the way it played out.

I think at this point, our sense is while it's early and we don't have everything that we will have in time, the shortfall's again largely a macro dynamic.

March didn't finish as strongly as we would have anticipated, but on a relative basis business by business, we think we are doing pretty well.

I think as we look at April, things have come back in a couple of pockets in the wake of some of that end-of-March softness, but again probably too early to read too much into that.

Certainly too early to read much into the first couple of weeks of April relative to the equipment side of the business because while things get pushed to the right at times, it may just be a couple of weeks.

Sometimes those customer decisions may take longer.

Scott Davis, Barclays Capital.

Hi, good morning guys.

A couple of things.

First, the big pullback you saw in motion was a little bit of a surprise when you have that big of a negative.

Were the timing issues there that customers just wanted to destock?

I mean I think you mentioned some weakness in distribution in US technology.

Is that something that is going to restart here in 2Q or we have some greater underlying weakness here that is more sustainable?

Well, I think that is a bit of a mixed bag, Scott, as we read it today.

I mean you mentioned distribution and tech.

I think those are two different markets for us.

Clearly, where we go to market through distribution, we saw a soft sell-out, as well as our own sell-in.

Certainly the tech OEMs that we deal with tend to be customers we deal with directly and we certainly saw pockets in tech that were soft.

I think our view is that, as we look at the second quarter, if you wanted to pick a segment that is likely to be down, it will be Industrial Technologies and it will be down largely on the back of motion softness.

Certainly not softness in product identification, which we think will continue to be one of our better performing businesses here in the near term.

Okay.

I want to move to two other quick things.

The medical businesses have been strong a couple quarters in a row here in China.

Are you seeing that broadening out at all to the other businesses like Fluke, for example, and the more shorter cycle businesses?

Yes, we certainly saw I think a broadening of the strength in China.

Again, the first quarter is a little hard to read sequentially given the timing of the new year there.

But that said, I think we are pleased with the overall print in China, both its depth and its breadth and as we have worked through our reviews of late with our teams there, I think by and large there are a few exceptions where guys aren't feeling good about the year.

It is really more a matter at this point of calibrating what sort of growth to expect there.

They will definitely I think be one of our better high-growth markets here the rest of the way.

I would say, Scott, on the industrial side, it was -- instead of all being down or flat, it was mixed.

So I guess that is a little bit encouraging.

PID and water had real good starts to the year in China, but I'd contrast that -- so that is a little bit of a positive sign, but I would say that T&M and motion didn't -- their numbers were down and sequentially did not feel any better.

Okay.

(multiple speakers)

(multiple speakers) but a couple pockets a little better.

Sure.

And then just last question on price.

When we have this type of a slow macro environment and it has been largely probably seven of the last 10 years, it's been a pretty good price environment.

Now we are seeing some weakness in commodities.

I mean what is the outlook for price from here?

Well, I think the price outlook in and around a point of price as we move forward ought to be something that we should achieve.

I think on the price cost equation in general, we are pretty pleased.

Clearly, having the gross margin up 50 basis points here, $90 million in dollar terms year-on-year would suggest we are executing pretty well not only on the price cost side, but also in terms of productivity, our Danaher-wide procurement activities, as well as bringing new products to market with higher gross margins, which give us the benefit of the mix up.

So if there is one thing I think we are particularly comfortable with it is that effect and clearly we will get I think additional impact from the 2012 restructuring in the gross margin mix as we move through the year.

Very helpful.

Thanks.

Good luck, guys.

Thanks, Scott.

Steven Winoker, Sanford Bernstein.

Thanks and good morning.

Just -- you mentioned $8 billion of capital available for deployment over the next two years.

I think that is up from $5 billion plus that you used to discuss.

Can you maybe talk about -- given the current environment, how you're -- where you are thinking about deploying the additional capital?

And you obviously mentioned one positive comment in the release, but give us maybe more of a flavor for how this might transpire.

Steve, the $8 billion figure in contrast to the prior frame is really a function I think of being on the other side of Apex, certainly a look here at our cash position, which is strong and our view of our cash flow now being $3 billion plus on an annual basis.

And it is really -- it is just that simple.

I think strategically as we think about capital deployment, our strategy is in no way changed.

I think our view certainly continues to have a bias toward inorganic growth to supplement what we do organically and we would like to do that across the entire Danaher portfolio.

So as you look today at the way Dan and I and the teams are working together, we are working I think funnels that are active across all of our growth platforms.

Clearly, we are keen to put that capital to work in that fashion.

And the acquisition that you just -- the $300 million one that you announced in I guess February was in Life Sciences.

I mean how is the industrial pipeline looking or the non-Life Sciences pipeline looking?

Steve, I would say we are, one, encouraged by the number of discussions we are having.

And I would say it is noticeably better than it was in the second half of '12, probably a little bit of a challenge maybe up to the last couple weeks given equity markets.

I do think some of this more choppy economic data of late, maybe including our own, on the margins could be helpful here in getting maybe some things across the finish line.

Okay and then on the top line or the implications for the second half, I think EPS implied given your guide is somewhere north of 10%, 11%.

So -- and top line given your 1% to 2% in the second quarter in this quarter at 1% implies a very significant acceleration in the second half.

How much are you thinking of -- and that is obviously despite deceleration on many, many fronts across the portfolio.

How are you thinking about that being as opposed to just comp based versus meaningful material underlying acceleration all of these major growth investments that you have been making for some time now -- give us maybe some flavor for how you were thinking and talking about it and what has given you that perspective?

Well, I don't think, Steve, that as we look into the second quarter let alone the second half that we are pounding the table that things are going to get better in a hurry.

I think what we are trying to do here with the second quarter outlook is give you a sense of our view out the window as to our operating environment and the way that we are going to perform.

If you look at the first quarter clearly we came in in the midpoint of the range on the bottom a little short of the range on the top.

I think that midpoint mindset if you will probably is what is most relevant as you think about the second quarter let alone the full year.

I think to come in at the high end of this range would require the US to get a little bit better -- that at least some of the most recent data points would suggest.

And probably the strength in China would have to pick up a bit more so than the encouraging news that we have seen.

And we probably would need to have Europe at least stabilize rather than being down a couple of ticks as it has been of late.

I am not suggesting that is our scenario, but as we look forward in this lower growth environment, I think again that midpoint mindset is probably what is most useful right now.

And I guess on that, I am just looking for, given the many investments that you have been making to drive the top line, to what extent internally can you sort of look at the payoff you are getting on those top-line investments and I know it is very hard to separate it from a tough macro, but what evidence are you seeing?

Well, I think we look at those investments one by one by one, right, at the operating company level.

So when we see the Dental team in China rapidly accelerating their growth and profitably so, it is an easy calculation to see those feet-on-the-street investments.

When you see an uptick in R&D at Videojet and in turn the flood of new products that have come out over the last couple of years and in turn the profitable growth of returns and the marketshare gains at VJ, you know you are getting a return there.

So not that every investment that you make is going to pay off, but I think by and large where we are investing we see that return not only in terms of the top line and the attendant share gains, but frankly also in the gross margins.

Okay, great.

Thank you.

Jeff Sprague, Vertical Research.

Thank you.

Good morning, gentlemen.

Just on Life Sciences in general, first, I just -- as you think about what next, I mean one of the things that strikes me and certainly not being an expert in the area is perhaps the moves of Thermo and others are kind of fortifying kind of a distribution footprint that maybe you can't replicate.

Do you view that as kind of a strategic issue to contend with and just what is your view on kind of how maybe the channels are evolving?

Well, Jeff, that is probably a longer conversation than we might do justice to this morning.

But I think in Life Sciences in particular, we have a number of distributor partnerships around the world, including Thermo.

But that said, the vast majority of what we sell in Life Sciences, and I am specifically talking to the research side and the applied side of that segment, not the Diagnostics, we sell on a direct basis.

These are not gloves and beakers that sell for two or three digits at a pop.

I mean we are talking about high-end highly engineered customized equipment that researchers, scientists spec out and really push us on with respect to innovation.

So those tend not to be distribution-oriented.

Hence, any moves or consolidation that you see there I don't think have a direct bearing on our competitiveness going forward.

Okay, great.

And I was just wondering -- what you just said to Steve on the outlook was helpful, but just thinking about the second quarter, you are basically guiding the second quarter flat year-over-year, but a little bit better revenue growth in Q2 than Q1.

Maybe some of this LS&D spending normalizes, perhaps some restructuring savings come through.

What is working kind of against maybe those positives to hold us at a roughly flat EPS result in Q2?

Jeff, part of it was in the core last year.

We reported $0.84 last year, but we did call out $0.03 of kind of one-time items.

In addition, we had the Apex earnings.

So absent those one-time items and absent Apex, to quibble, it was probably more like $0.79.

So again, not talking a lot of increase, but obviously $0.80, $0.85 on a normalized basis is up a little bit versus what really operationally we had last year.

Right.

Okay, great.

Thank you very much.

You bet, Jeff.

Thank you.

Nigel Coe, Morgan Stanley.

Yes, thanks, good morning.

Yes, so, Larry, you mentioned the midpoint mindset, I believe and I just wanted to clarify, is that more of a core growth mindset or should we apply that to EPS as well?

I think with respect to the quarter, perhaps the year, both.

Okay.

And then just taking a step back, you have given some good color on the trading conditions in 1Q, but take a step back to 4Q, obviously, we had that unusual strength and I am just wondering how much pullforward do you think there was from 1Q into 4Q?

Yes, I am not sure that our view would be materially different today than it was back in the fourth quarter.

Again, some of what we saw might have been a push out from the third into the fourth.

So I think what we are trying to do, Nigel, business by business, is really take stock of the trends through (technical difficulty).

-- see that $8 billion opportunity to deploy capital is something that requires the same check to be written.

Again, I think as we look at that capacity, we really think about that as a backstop for all of these growth platforms that we have.

So we have got seven or eight businesses here all with their acquisition maps and funnels and they're working that accordingly.

So I think our preference would be, if you are looking at $8 billion to divvy that up $1 billion to $2 billion across those businesses.

And I think they all have funnels that would represent or present those sorts of opportunities.

Now certainly if something of size came along that made sense for us, we would look at it.

But as you well know, if you look back over that time period, the bigger deals tend to come infrequently.

Right, right.

Okay, thanks, Larry.

Thank you, Nigel.

Deane Dray, Citi Research.

Thank you.

Good morning, everyone.

Larry, on investment, you talked about -- you have got four consecutive quarters at low single digit growth, nice and steady, but there is an expectation now that it ramps to mid-single digits in 2014.

So just talk a bit about what the driver is there.

Is that a new product cycle?

Well, I think the view all along was that we would have to pay off some of this inheritance tax, but, by '14, we should be able to move into that mid-single digit growth range.

I really think it is nothing more than the cumulative effect of both the fixes to quality, to service, in addition to the implementation of DBS not only to drive cost out, but really to lay in the daily management to help drive better execution both in sales and marketing and in new product development.

As we move forward, as you see in this quarter, with the launch of the DHX600, the Power Express, we are going to get a better lift from those products.

Certainly as we get behind -- we put behind some of the regulatory issues that we have had, that is going to be helpful.

So I just think we have got momentum building at Beckman, momentum on a global basis and that bodes well for that business.

Great.

And then I guess it shouldn't be surprising that you called out Arbor because lots of headline news about cyber attacks.

Can you just refresh us how Arbor's go-to-market market strategy, how much of their product and software is off the shelf, how much of it is a customized solution and maybe the mix between government customers versus enterprise?

Deane, we are well-positioned certainly in cyber security with Arbor, much as we are in mobile around the mobile explosion that the carriers are enjoying.

That is on the Tektronix Communications side.

At Arbor, I don't have the exact mix in front of us.

I think we are more weighted toward carriers than we are enterprise, but the enterprise initiative has been clearly an important part of what we have done here the last two years.

And that is where we are enjoying some of the outsized growth right now is financial institutions and others wrestle with these DDoS attacks.

That said, in terms of government, I just don't have that number offhand.

I think it is a relatively modest portion of the business, but it is represented in the customer set.

And would this be a business that would be one of those looking for M&A opportunities?

I think all of the businesses out there have their aspirations.

Clearly, in security, we need to be smart about both the strategic fit of anything that we might do there, let alone valuations, of course.

Great.

Thank you.

Jon Groberg, Macquarie.

Great, thanks a million for the questions.

So Larry, first, on the Tektronix business, the instruments, it sounded like it turned down again to down low double digits if I heard you right from I think -- it seemed like maybe it was starting to improve a little bit last quarter.

Can you maybe talk about what happened there and what the outlook is and also maybe in the context of that business, I think that is a pretty high gross margin business.

So kind of how -- what drove the gross margins sequentially given the weakness there?

Jon, you are right.

We certainly saw continued softness at Tek, as I think both Dan and I have alluded to here.

That was pretty broad-based.

Certainly in the first quarter here, I think we saw that particularly here in the US.

I think what we saw at Tek was really just a continued push right in our funnels in a whole host of areas.

Certainly a number of the customers that we serve on the development side in the Tek end markets are reworking their capital budgets for this year.

A little unclear as to how that plays out.

As you know, this business tends to track PMI a good bit on a couple quarter lag basis.

So I think we are optimistic that we get Tek stabilized later this year.

But that said, it is going to certainly be a headwind for us all within the first half.

Fortunately, we have got some offsets working for us in comps and at Fluke on a segment basis.

And Jon, on the margin side, the gross margin side across the Company, as Larry alluded to, we saw really good performance given Tek instruments, as you know, is a very high gross margin business.

Gross margins were down year-on-year in Test & Measurement because of that, but in the other four segments, they were each up 50 to 75 basis points.

Again, that is a combination of some of the price cost dynamics, the restructuring, bringing out new products.

We were really pleased in Dental we were up almost 100 basis points year-on-year in terms of gross margin and obviously means good execution on the cost side, but as importantly some of these new products come in at much better gross margin.

Okay, that's helpful.

Yes, very impressive gross margin.

And then if I can, just one follow-up kind of on the Life Science side.

In some of these smaller businesses -- I know you mentioned Advanced Staining was down, if I heard you correctly.

Actually Roche had a very tough quarter in Advanced Staining too.

So can you maybe -- I know there is some reimbursement and other things going on there.

Can you maybe talk about your outlook for that business for the year?

And then on some of these legacy Beckman Life Sciences businesses that actually are more distribution related, to one of the previous questions, does it make sense to maybe look to divest some of those businesses?

I am curious.

Thanks.

Sure, thanks, Jon.

Let me take those in order.

I think we continue to have a very buoyant outlook for Leica Biosystems.

Unfortunately, cancer is an issue around the world and we are hopefully part of that -- part of the solution there.

You referenced the negative control guidance in the US.

We think that probably had a little bit of impact for us in the quarter, but I think the major issue that we alluded to at Leica Biosystems was really this distribution change.

In parts of Europe, we are going from a distribution model to a direct model.

That creates near-term noise as you work through that.

I think it is the right strategic move to make.

It will help us grow faster in Europe long term, but clearly we saw revenue and cost issues in the quarter as we worked through that.

But that will settle out; we will be in a better place.

With respect to Beckman Coulter Life Sciences portfolio, they had a nice quarter.

We have a business there that I think is improving.

I was with them during the quarter.

We installed some new leadership, promoted Jennifer Honeycutt into the President's role there, one of our outstanding general managers.

I think we are optimistic, Jon, about that portfolio.

It's clearly, if you will, the forgotten part of Beckman Coulter.

There are a number of synergies with the rest of our group and while you are right, a number of those products go to market through distribution, they don't go to market exclusively through distribution.

And I think to the extent that we innovate, we build that brand, we are going to be able to certainly compete anywhere in the world either on a direct or a distributed basis.

Great, thanks a lot.

Shannon O'Callaghan, Nomura.

Good morning, guys.

Hey, so Larry, back in the third quarter, equipment disappointed and consumables hung in as kind of similar dynamic and it was also I think mainly US-based and then that dynamic basically reversed in the fourth quarter.

So you guys ended up missing it in the third quarter on that and beating in the fourth quarter on that.

Is there a reason why you don't think we might have a similar just choppiness, but shift quarter to quarter this time as a reason something that keeps you more cautious about 2Q and not expecting that kind of a I guess catchup that happened 3Q to 4Q?

Yes, I mean if you are reading anything in our language or tone in that regard, it may be a function of the March macro data that came out.

Let alone the fact that no fun being short even of a tight 1.5 to top-line range.

I think that said, again, as we look at the second quarter, there will be some things that certainly help us, having the benefit of that extra day, if you will, being on the other side of the holidays, etc.

But I think we are going to be as we typically are, cautious, hopefully smartly so, relative to the outlook here.

I think we -- again, we look at the quarter, acknowledge some of the noise, but don't want to point to that.

On a relative basis, we think we are doing well and that is ultimately what is going to matter.

As we move forward here, we continue to do that and make sure that we have got our investment on below properly tuned to the environment.

Clearly, little numbers matter a lot when you are talking about a couple hundred basis points on the equipment side that can move around as it clearly has here the last couple of quarters.

But that said, I think we are going to move forward here with a strong competitive position, thinking that the range that we have offered up this morning, the midpoint perhaps being the most likely scenario for the second quarter and the second half.

Okay.

Yes, I mean it does seem like maybe it is a function of the low growth environment, but your equipment sales are choppier than they used to be, I guess, right?

Well, again, I think a couple hundred basis points in growth is really the swing factor here and it has been a noisy operating environment frankly as we have dealt with some of these external issues.

But that said, the environment is what it is, right?

So we are going to move forward.

Yes, no, I hear you.

And then just quickly on China, I mean so medtech remains strong, the industrial stuff I guess is mixed instead of all down.

I mean is there anything that is kind of taking a leg down or gotten notably worse in the quarter in China?

I don't think so.

We have been wrestling with these issues that Dan alluded to at T&M, particularly Tek more so than fluke and at motion for some time.

So it has continued to be soft, but I don't think we would characterize it as legging down in any way.

Okay, all right, thanks a lot.

Ross Muken, ISI Group.

Good morning, guys.

So where, if anywhere, in the business did you see any impact from sort of the sequester and how do you sort of think about that as it relates to kind of what trend you saw in March versus April and any degree you can give, any anecdotal conversations you have had with either customers or peers to sort of understand how that is kind of also as an overlay influencing maybe the CapEx environment?

I think certainly part of the softness that we saw in the US, it was probably most pronounced at like a Micro, Ross, could be attributed to just some of the noise in and around the sequester.

And again, it wasn't as if budgets were being slashed, projects canceled and the like.

Things were just getting pushed right because of I think a degree of uncertainty that seemed to play out.

I think we certainly saw at SCIEX some softness in the academic realm as well and it is really with those businesses that we probably have most of our sequester exposure in Life Science.

We have pockets here and there of other government exposure, which could play out, Tek and motion for example being areas where we have that exposure, but it would be principally in LS and again, I think it is a noise factor for us right now as opposed to any part of a clear stepdown as we look out the rest of the year, at least at this point.

On the capital deployment front, it has been I think -- I have to check the figures for Q1 -- but I think it has been a fairly quiet M&A period overall for the market ex-maybe in my space the deal this week.

But I guess as you're thinking about that environment, it seems like, from your characterization, it is pretty active behind the scenes.

And so I guess as you look at sort of what you have been involved in or what you have looked at that hasn't come to market, is it price, is it timing, is it uncertainty and then have you seen the mix of buyers you are competing against change?

E.G., is private equity, a much bigger component of the process now versus where they were 12 or 24 months ago and how are you sort of thinking about that as a changing dynamic?

I mean clearly given the better leverage markets, again, what has happened the last couple weeks probably dampening that a little bit, we are seeing private equity more in different situations.

Where we have a strong point of view about what we can do with the margin, which is I said three out of four times, I'd say private equity is probably not going to be able to displace someone like ourselves.

In terms of the activity, I think the way you'd characterize it, and I would think that is something we hear from not only what we are seeing, but we hear from kind of bankers is the behind-the-scene discussion levels are definitely up versus where they were six months ago.

And I think that is encouraging.

Why things don't happen is all over the place.

It is sometimes price, it is sometimes transition issues, it is uncertainty.

But normally where we tend to see an increase in the number of discussions we are having about mid to larger situations, at least historically, that tends to roll out into some acquisitions.

Ross, I would just add to Dan's comments that, if you think about situations that we have looked at where we have ultimately decided to let things go, strategic fit, the strategic rationale is really important for us.

It has got to make sense in terms of the broader strategy and particularly in this low rate environment, we are still I think primarily focused on those returns on capital as opposed to accretion.

And that really has been I think the frame we have used over time to deploy capital.

Sometimes it has led us to be quite busy and bunched up and other times maybe a little quieter than folks expect.

But with our portfolio taking the long view through the cycle, we have tended to I think by and large make good bets that have generated good returns for shareholders.

And I think we continue to hold that view as we look forward.

Absolutely.

And then maybe just one quick last one on that.

To your point on return on capital, etc.

versus accretion makes total sense.

I mean given your view on the year, and stock is off another couple percent today, how are you guys thinking about sort of share repurchases?

And I know you bought a bit at the end of last year and then stopped.

And so I am just trying to get a sense for sort of your sensitivity and feeling on sort of intrinsic value and your sort of openness if we go through another soft patch to maybe reconsider again sort of reentering the market?

Well, I think you characterized it well.

We are always looking at it.

We look at it opportunistically in terms of what sort of return, sort of payback in buying back our own stock.

Again, having said that, given what we potentially see on the M&A side, it is right now a secondary consideration, but still something that is part of our calculus.

Great, thanks, guys.

Thanks, Ross.

That concludes the question-and-answer session.

I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thanks, Lisa.

Dan and I will be around all day, everybody, for follow-ups.

Thanks for joining us.

That concludes today's teleconference.

Thank you for your participation.