Danaher Corp (DHR) 2013 Q4 法說會逐字稿

Good morning.

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

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

(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; Dan Comas, our Executive Vice President and Chief Financial Officer; and Matt Gugino, our Director of Investor Relations.

I'd like to point out that our earnings release, the slide presentation supplementing today's call, and the SEC Regulation G information relating to any non-GAAP financial measures provided during the call, which we refer to as the supplemental materials, are all available on the Investors section of our website, www.Danaher.com, under the heading Financial Information, and will remain available following the call.

As our year-end Form 10-K has not yet been filed, we have included as part of the earnings release, fourth quarter and full year income statements, year-end balance sheet, and full-year cash flow statement, and data reflecting our business segments.

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

A replay of this call will also be available until Tuesday, February 4. The replay number is 888-203-1112 in the US, and 719-457-0820 internationally, and the access code is 511-3533.

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

Please refer to the supplemental materials on our annual report on form 10-K when it's filed for additional factors that impacted year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to earnings, revenues, and other Company-specific financial metrics relate to the fourth quarter of 2013 and relate only to the continuing operation of Danaher's business.

And all references to period-to-period increases or decreases in financial metrics are year over year.

I'd also like to note that we'll be making 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 as a result of new information, future events and developments, or otherwise.

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

Matt, thanks.

Good morning, everyone.

2013 was a good year for Danaher.

For the full year, revenue increased 4.5% to $19.1 billion, with core revenues up 2.5%.

Using the Danaher Business System, or DBS, our team delivered solid core revenue growth, operating margin expansion, and excellent cash flow performance for the year.

In addition, our new product development and go-to-market investments drove relative outperformance in many of our businesses.

In 2013, we believe we increased our market share positions at Hach, ChemTreat, Gilbarco, AB SCIEX, Leica Biosystems, Kerr, Implant Direct, and Videojet.

Our focus and commitment to long-term growth investments position us well for 2014 and beyond.

Turning to the fourth quarter, revenue increased 3.5% organically.

All segments grew at or above expectations, led by our Communications, Water Quality, Diagnostics, Dental Technologies, and Product ID businesses, each delivering mid single-digit core growth or better.

From a geographic perspective, high-growth markets improved notably from the third quarter and grew at a high single-digit rate.

In China, sales increased high single digits with continued strength in Dental, Water Quality, Life Sciences, and Diagnostics.

High-growth markets now represent more than 25%, or approximately $5 billion of our annual revenue, up from $2.7 billion just three years ago.

In the developed markets, the US grew low single digits, and Western Europe was slightly positive for the second quarter in a row.

In 2013, we generated $3 billion of free cash flow, and our free cash flow to net income ratio was 113%.

This represents the 22nd consecutive year in which we delivered free cash flow in excess of net income.

We also strengthened our businesses through acquisitions and deployed approximately $1 billion on 14 strategic bolt-ons in 2013 despite the tougher M&A landscape.

Given the breadth and depth of our strategic platforms, we remain confident in our ability to deploy our $8 billion of available M&A capacity in a strategic yet disciplined way.

We continue to deliver solid margin performance, even while funding long-term growth investments.

Our gross margin was 51.5%, and almost 52% excluding productivity and efficiency initiatives in the quarter.

For the full year, our gross margin was 52.1%, and our operating margin was 17.1%.

In the fourth quarter, our core operating margin increased 100 basis points while our reported operating margin declined 40 basis points to 16.9%, in part due to the impairment of certain intangible assets in our Communications platform.

Absent this charge, our reported operating margin would have been 17.5%.

We reported fourth quarter adjusted diluted net EPS of $0.96, inclusive of approximately $100 million of productivity and efficiency investments, which we believe will provide about $75 million of savings in 2014.

For the full year, adjusted diluted net EPS was $3.42.

Turning to our five operating segments, Test & Measurement revenues increased 4%, with core revenues up 4.5%.

For the full year, revenues increased 1%, while core revenues grew 1.5%.

Core operating margin expanded 150 basis points, while reported operating margin decreased 210 basis points to 16.6%, due primarily to the previously-mentioned impairment charge.

Core revenue in instruments increased slightly.

Fluke core revenues grew at a low single-digit rate, an improvement from the first three quarters of the year, with demand strongest in the high-growth markets.

Of note, Latin America grew in excess of 25%, due in part to our increased commercial investments there.

Also contributing to the step-up in growth was the successful launch of our Ti 400 thermal imager, a wireless high-performance infrared camera with laser auto-focus capability that enables service engineers to quickly detect temperature measurements up to 1200 degrees Celsius and to communicate results back to their laptops or smartphones for further analysis.

Products introduced in the last two years are helping increase vitality at Fluke, and accounted for nearly a quarter of Fluke's fourth-quarter revenues.

At Tektronix, core revenues declined slightly, as strength in Western Europe was offset by weakness in US government and computer verticals.

In December, Electronic Products magazine named our PA4000 power analyzer its 2013 product of the year.

The PA4000 is the only T&M instrument so recognized, and is an advanced power testing tool that helps electrical engineers perform critical current measurements with precision and accuracy.

Core revenues in our communications platform increased low double digits, with broad-based growth across most of our product categories.

Sales of Tektronix Communications network management solutions increased more than 20%, driven by demand for mobile service providers in the US, Asia, and Latin America.

Arbor Networks ended the year with record bookings, driven by its Pravail enterprise security solutions and the recent launch of Arbor Cloud, an integrated on-premise and cloud-based DDoS protection service.

Here in the first quarter, Arbor will extend into the advanced persistent threat market, leveraging the security analytics technology of Packetloop, a company we acquired last year.

Sales of Fluke Networks' recently released TruView network and application performance monitoring software grew significantly, as enterprise customers look for faster more efficient ways to monitor network performance and troubleshoot problems.

After a slow start to the year, we were encouraged by Fluke Networks' mid single-digit revenue growth in the second half.

During the quarter, Tektronix Communications acquired Newfield Wireless.

Newfield's software provides mobile service providers with a visual representation of their network's performance, including call detail, traffic hotspots, and usage data.

This technology, combined with Tek Com's network management expertise, will enable providers to optimize their networks and maximize their subscribers' mobile experiences.

Turning to our Environmental segment, revenues increased 10%, with core revenues up 3.5%.

For 2013, revenues increased 8.5%, while core revenues were also up 3.5%.

Core operating margin improved 80 basis points, with reported operating margin down 50 basis points to 22.5%, due primarily to dilutive effects of recent acquisitions.

Our water quality platform's core revenues grew at a mid single-digit rate, with a double-digit increase in high-growth markets and solid demand in the North American industrial market.

Hach had its best quarter of the year, delivering growth in all regions and major product lines.

The business again grew at a double-digit rate in China, due in part to heightened government investment in conservation and municipal water quality projects.

ChemTreat had another outstanding quarter and continues to gain share, as our best-in-class field engineers deliver exceptional service and demonstrate the value of our solutions to customers.

As we highlighted at our investor meeting in December, development of our Sales Team in Latin America remains a key priority for ChemTreat, where we have doubled revenues in the past three years and grew more than 30% in the fourth quarter alone.

Gilbarco Veeder-Root's core revenues increased at a low single-digit rate, driven by payment, point-of-sale, and environmental solutions.

During the quarter, we introduced Insite360, a cloud-based platform that allows retailers to remotely configure and monitor their dispensers, inventory, and point-of-sale systems from any PC or mobile device.

Insite360 helps retailers identify theft, detect environmental issues, and prevent fuel runouts in real time, thus improving the economics and risk profiles of their businesses.

Earlier this month, we acquired Outcast Media, a leader in digital out-of-home advertising for the retail petroleum market.

Outcast enhanced our point-of-sale product offerings, and combined with Gilbarco Veeder-Root's Applause TV, will help advance promotion delivery designed to grow convenience store sales and enhance drivers' fueling experiences.

Moving to Life Sciences & Diagnostics, revenues increased 5.5%, with core revenues up 3.5%.

For the full year, revenues increased 5.5%, with core revenues up 4%.

Our reported operating margin increased 250 basis points to 16.7%.

Using DBS, we have been able to improve margins while also expanding our long-term growth investments.

During the year, we increased spending on commercial and innovation initiatives by approximately $120 million.

In our diagnostics platform, core revenues grew mid-single digits for the fourth quarter in a row.

Beckman Coulter Diagnostics' core sales grew at a low single-digit rate, with strength in immunoassay and clinical automation, particularly in high-growth markets.

Clinical automation sales were up double digits, as Beckman's best-in-class automation capabilities helped customers improve workflow, increase efficiency and reduce labor cost.

In China, we grew revenues approximately 20%, driven by a combination of our expanding install base and continued government investment in healthcare infrastructure.

2013 was an important year of several milestones at Beckman as we resolved many of our remaining regulatory challenges, including FDA clearance for with troponin on all of our immunoassay and integrated chemistry systems while continuing to improve quality and delivery.

Though it's still early, we are beginning to see the impact of the troponin clearance, as both our retention and competitive win rates have improved since September.

During the quarter, we introduced a new vitamin D assay in Europe and Australia for our immunoassay platforms, and also obtained US FDA clearance for the next-generation beta hCG assay, which is used as an early pregnancy test.

Today, we're positioned better than ever to focus on retaining and winning new customers and to more actively increase growth investments in the business.

Radiometer's core sales were up high single digits, with growth in most major product lines and geographies.

High-growth markets grew mid teens, with China leading the way.

Our instrument install base continues to grow, with placements of our AQT point-of-care immunoassay analyzer increasing more than 50% and our blood gas instruments up high single digits in 2013.

We believe this momentum positions us well for our performance in 2014 and beyond as we benefit from incremental consumables revenue.

Leica Biosystems saw a broad-based growth with sales up high single digits.

All major geographies grew at a mid single-digit rate or better, with strength in Japan and the Middle East.

Advanced Staining revenues increased approximately 20%, while core histology sales grew at a mid single-digit rate.

We had a record year in the Advanced Staining franchise, with net instrument placements increasing at a mid-teens rate, and believe we are still increasing market share.

Core revenues in our life sciences platform grew at a low single-digit rate, led by the high-growth markets.

Sales were up more than 20% in the Middle East and double digits in Latin America and Western Europe.

AB SCIEX core sales grew low single digits, with strength in proteomics and applied markets.

AB SCIEX continues to broaden its global reach, opening a new R&D center in Singapore during the quarter, AB SCIEX's first outside of North America.

The center brings development and manufacturing closer together while providing localized support for our Asia-Pacific customers.

In addition, AB SCIEX opened a new technical support and regional office in Dubai to better serve customers there in the Middle East.

As expected, Leica Microsystems core sales declined at a low single digit rate primarily the result of a difficult prior-year comparison due to the highly successful launch of the SP8 modular confocal microscope last year.

Orders grew double digits in the quarter, with confocal microscopes up more than 20%.

We are confident that Leica will return to growth here in the first quarter.

Turning to Dental, revenues for the quarter and full year increased 3.5%, while core revenues increased 3%.

Operating margin decreased 150 basis points to 13.7%, due in part to the negative impact of sales mix as our technology businesses grew faster than our higher-margin consumables businesses.

Spending on productivity initiatives and on targeted growth investments for new products set to launch in 2014, including 25 new introductions next month at the Chicago Midwinter show, also negatively impacted margins in the quarter.

For the full year, operating margin was 14.6%.

Dental consumables core revenues increased at a low single-digit rate, as demand for implants was partially offset by a decline in professional consumables.

We continue to have tremendous success with our digital dentistry initiative.

Since its launch in June of last year, we have sold more than 300 Lythos Digital Impression Systems, which in turn helped drive record order growth in our Insignia orthodontic case starts during the year.

Insignia's digital treatment planning tailors custom fabricated brackets, wires, and aligners to each aspect of tooth movement, thereby decreasing office visits and treatment time while improving the patient experience and clinical outcomes.

Dental Technology's core revenues grew mid single digits, as double-digit core growth in North America and China was partially offset by weakness in Western Europe.

Our new digital imaging solutions continue to be well received in the market, particularly our new i-CAT FLX 3-D digital imager.

Since the launch in the second quarter of last year, we've sold more than 200 units, the equivalent of more than one per day.

Additionally KaVo's DIAGNOcam, a hand-held radiation-free digital imaging scanner, won the German innovation prize for most innovative equipment product in dentistry in a survey of more than 4000 German doctors.

Moving to our Industrial Technologies segment, revenues increased 5.5%, with core revenues up 3%.

For the full year, revenues grew 3.5%, while core revenues declined 0.5%.

Our core operating margin increased 20 basis points, while reported operating margin declined 80 basis points to 17.3%, due primarily to increased spending on productivity initiatives and the impact of recently-acquired businesses.

Motion core revenues decreased at a mid single-digit rate, as growth in industrial automation and North American distribution was more than offset by a decline in our defense and engineered solutions verticals.

We are encouraged by the sequential improvement we saw in orders, which turned positive in the fourth quarter for the first time in a year.

However, we anticipate core sales will remain negative in the first quarter of 2014 as Motion exits some lower-margin businesses.

Core revenues in our product identification platform grew mid single digits, led by high single-digit growth in our core marketing and coating businesses.

Videojet had its best quarter of the year with strength in all major geographic regions.

Consumables revenue grew at a double-digit rate, as our marketing initiatives and successful product introductions over the past several years have helped expand our install base.

At ESKO and X-Rite, our innovation investments are helping accelerate growth, with new products representing nearly 20% of total revenue in 2013.

One of the most exciting new product introductions is PantoneLIVE, cloud-based color management solution that helps brand owners accurately communicate color specifications across their entire supply chain, improving the consistency of their brand image.

During the quarter, Asda, one of the largest supercentre chains in the UK, became the first retailer to implement PantoneLIVE.

So to wrap up, as we anticipated when we were with many of you last month in New York, we had a strong finish to the fourth quarter contributing to a solid year for Danaher.

Our Team's commitment to and application of the Danaher business system drove relative top-line outperformance, solid core margin expansion, and excellent cash flow throughout the year.

We believe the investments we have made to drive long-term growth and productivity, combined with our robust balance sheet and optimism on the acquisition front, leave us well-positioned to outperform in 2014.

We are initiating first-quarter diluted EPS guidance of $0.76 to $0.80 and reaffirming our full-year guidance of $3.60 to $3.75.

We anticipate approximately 3% core revenue growth in the first quarter, which will be impacted by one less selling day than the first quarter of 2013.

Thanks, Larry.

That concludes the formal comments.

Marquita, I think we are ready for questions.

(Operator Instructions)

Nigel Coe, MS.

Good solid end to the year, Larry.

Can you maybe talk about January?

I know January is a fairly weak month for the quarter, but maybe just put that 3% in the context of what you've seen so far in January?

I think you're exactly right, Nigel.

It's hard to say too much about January, given the nature of the month and how early it is.

But I think we were particularly encouraged by the way 2013 ended.

From a geographic perspective, the strength was broad based.

I think the same can be said from a line-of-business perspective.

We probably had a better book-to-bill than we had the year prior.

And I don't think there were any unnatural acts that, by and large, occurred.

So, it was just good to see that strength come into the new year.

I don't think we've seen anything in January that would deter us.

Again, we mentioned in the formal remarks that we are short a selling day, which will impact us probably more so in consumables than in equipment.

We know that Motion is still going to be exiting some of low-margin business there.

All in, we feel good about things, but when we say approximately 3%, we know that we clearly need a few more weeks behind us here to have a better beat on the first quarter, but so far so good.

Okay, that's great.

And then, I don't want to extrapolate or put words in your mouth, but given the seven-day pressure in 1Q, given that Motion is still going through the rationalization of the product lines, does this point us towards the higher end of that 2% to 4% for the full year, Larry?

For the year?

Yes.

Well, I don't think we're going to change that 2% to 4%, but clearly getting off to a good start here, and the approximately 3% range would at least put us at the midpoint.

And if the macro scene is better, Nigel, I'm highly convinced we're going to do well.

With our exposures from healthcare to industrial, environmental networking, an improved global scene will be very good for this portfolio, and we'll execute accordingly.

Okay, great.

And then switching to margins, and I want to dig into industrial.

And you mentioned in the prepared remarks that productivity initiatives was one of the reasons why we saw some pressure there.

But I'm just wondering, are we seeing any pricing pressure within industrial markets?

Nigel, it's Dan.

Good morning.

First of all, if you just normalize year-on-year restructuring, industrial tech margins were up 80, 90 basis points.

Okay.

We had a higher -- we had some additional opportunities; we took advantage of it.

In terms of pricing, it hasn't -- we definitely saw an impact probably late 2012, and we've seen that continue where we're not getting any pricing in equipment, generally speaking.

So, we're still getting the kind of pricing you'd expect on the aftermarket.

But the period of the prior year -- the getting a point or so on equipment and instruments -- it hasn't gotten worse, but since about a year ago, it's probably overall flattish for us right now.

Okay.

That's really helpful.

I'll pass it on.

Thanks, guys.

Steven Winoker, Sanford Bernstein.

Could you expand on the write down on the communications platform?

Talk about maybe what that investment was about?

And typically, how much you capitalize in R&D?

And thinking about it from an investor's risk profile going forward -- just a little more perspective there.

Was it acquisition related at all, or pure new investment, and why?

Steve, I'll start, and maybe let Larry chime in.

It was investment in a company -- relatively early-stage company that is continuing to perform reasonably well, but behind the expectations we had at the time of the acquisition.

Because of that, the accounting rules indicated that a write down of a piece of the purchase price was appropriate, so obviously we took that.

Obviously, the communications platform overall has been a very good, very high return for us.

Probably be a little bit more risk, and you can have situations like Arbor that play out well ahead of schedule.

This one we still believe in.

It's tracking okay, but it's a little behind versus where we thought it would be at this point.

Yes, Steve, Dan's exactly -- I would just add to that that we do a number of these things -- these sorts of investments to augment our competitive positions really around the portfolio.

And while you never want to see an impairment, to have that business up double-digit contributing is a good thing, and a good thing long term.

You look at a small investment that we made that was really the seed core in technology for Lythos, the digital impression system that we have up and running at dental.

We did something similar that was really the foundation for what became AQT at Radiometer.

So we have a number of these small bets that we make that we don't really end up talking much about, as Dan alluded to a moment ago.

Clearly, with the accounting rules, we've got to call this out.

But I think it's just really part of the mosaic in terms of the investments we make organically and inorganically to drive long-term competitive strength and profitable growth.

Okay.

And since we're talking about that segment, what's your sense for the sustainability of that low double-digit growth in Tek -- Tek communications, I mean?

Well, I think we're in a very good spot there, clearly, in terms of the challenges we are helping our service provider customers solve, as well as the folks on the enterprise side.

Network management, particularly with the mobile explosion, is a continuous challenge.

We're well positioned there.

From an enterprise perspective, network management, generally, it does not get easier.

And clearly, a day doesn't go by with the cyber security headlines being rewritten.

So we like where [coms], we like where Arbor, we like where Fluke Network is positioned.

I'm not sure we consistently sign up for double-digit growth there.

The Tek Coms business can be a little bit lumpy, but we like the long-term trajectory there, to be sure.

Maybe just turning to margins, on the dental side, a little more color on the restructuring and growth investments there -- a little more sense maybe for the nature of that?

Sure.

Steve, maybe just a little bit of context.

As we hinted in New York when we saw you, we had a little bit better visibility at the end of 2013 than we have the last couple of years.

So we knew we had a little bit more room to do some things, and dental was one place where we took advantage of that envelope.

As we said, it's about 100 basis points of costs that came forward.

Most of that was on the productivity side, just to continue to sharpen up the cost structure there.

But we're really in a sweet spot, both from a technology perspective, given where the product pipelines are, and a lot of that comes out in February at Midwinter.

But also on the commercial side, we wanted to pull some things forward, particularly in Asia, all of which I think gives us a good start to 2014.

And again, the mix bit of it was important as well.

I think it's always good to see equipment show strength, but there is a little bit of a squeeze there from a margin perspective in the short term.

Great.

I'll pass it on.

Thanks.

Jeff Sprague, Vertical Research.

Just a couple of questions.

Larry, just first on the deal front, can you give us a little more color on where your comfort factor is?

And the light in which I ask the question -- you may or may not have had interest, but we saw a couple healthcare deals trade away in the quarter.

Roper, yesterday, was saying a couple things slipped trough their fingers -- that others took it 20 times EBITDA.

It still sounds like a very tough market to actually get things done.

Well, I think we would be the first to acknowledge that, over the last four or five quarters, things have become more difficult in general.

But I think our optimism, Jeff, is genuine because we are going to pick through a number of different situations to populate the funnels, really across each and every platform.

And as we do that, even in this environment, we think there are opportunities for value creation.

We're going to stay disciplined, no doubt about that.

I think that we take some encouragement from the fact that we did deploy $1 billion last year across, admittedly, 14 smaller transactions.

But as Dan and I look out there, as we go through the monthly reviews we do with the businesses, I think that we're well positioned financially and operationally to put that capital to work.

But on the margin, you're spot on.

It is a little tougher given the valuations, particularly in the public arena, than a year ago.

So, how do we think then about plan B on other deployment if the deals don't materialize?

I was wondering also if Dan could maybe give us a little color, like, collectively what the acquired multiple was on those 14 transactions -- aggregated multiple and aggregated sales acquired?

Jeff, overall, about 3 times revenue.

And a low double-digit, 11 times -- and I may be off by 0.5 points EBITDA multiple.

They are largely bolt-ons and tuck-ins, so our confidence with those tend to be higher just because of the nature of what we can do on the cost side.

I'm just glad he didn't say it was 22 times there.

Jeff, it gets back to plan B. I think the Board, and certainly Dan and I and the team, are highly cognizant of the earnings power that we have in what is an underleveraged balance sheet.

I think the bias that we have, which is discussed, and frankly, reaffirmed, at virtually every Board meeting, is toward the inorganic investments that have worked very well for us in building a strong Company and driving a lot of value.

Things are going to come in ebbs and flows here.

But I think that bias is intact.

And we know that, frankly, just a few years ago, after a somewhat quiet period, we were uniquely positioned to go take Beckman on.

So again, I think this is a live conversation with a strongly shareholder-oriented Board at every meeting.

But the pronounced bias that we have is one we continue to think works for Danaher going forward.

All right.

Thanks, and good luck to Matt McGrew.

I'm especially going to miss the way he reads that forward-looking statement at the beginning of the call.

He does that well, doesn't he?

It's exceptional.

Good luck, Matt.

Thanks.

We've recorded it.

Thanks, Jeff.

Steve Tusa, JPMorgan.

I think you guys -- you mentioned the $100 million in restructuring, and the $75 million in benefits.

But I thought you said you did actually take some more here in the fourth quarter.

Or was that just offset with growth?

Is that just rounding error, or can you maybe quantify what you did in the fourth quarter, and talk about within which segments you did it in?

A lot of questions there, Steve.

I'll try.

It's basically fourth-quarter restructuring -- what was the absolute number and where did you --

The absolute number was a little bit over $100 million, compared to $120 million last year.

It was higher in industrial tech and dental, and it was low in life science & diagnostics.

So if you look at the core margin expansion, the LS&D, of [260], if you normalize restructuring, it would be more like 150 basis points of core margin expansion.

We spent a little bit more than $100 million in the quarter, but you could also see that we also really stepped up some of our growth investments.

So, R&D was up 13% year on year in the quarter.

It had been tracking up around 8% or 9% through the first nine months.

Sales and marketing at similar stores, we were up 9% in the quarter versus tracking maybe 6% or 7% for the first three quarters.

And as Larry alluded to, given where we saw some of the strength, there was an opportunity to deploy some money that hopefully will benefit growth in the future.

Okay, so it's really -- because that $100 million -- I don't think that's necessarily new, relative to what you said in the third quarter.

I was under the impression that you had a little bit of revenue upside in the fourth quarter.

So you invested some of that away.

But I guess what you're saying is you invested that, and it's reflected more in growth investments as opposed to productivity?

Sure.

Our R&D itself was up almost $40 million in the quarter.

Our run rate would have suggested more like $30 million.

Okay.

And then, one last question, just on the life sciences and diagnostics -- margins were very strong.

What is Beckman now doing, and what do you expect for Beckman margins next year?

For the full year, mid-teens.

A little bit stronger in the fourth quarter, though that is somewhat seasonal.

But as I mentioned, you can adjust it for the little lower restructuring -- very strong performance.

We're trying to get away from talking specifically Beckman, but it's a big piece of the segment, and we would expect that segment to again be one of the larger contributors to the year-on-year margin expansion here that we expect in 2014.

So, [things are] tracking well -- more costs are coming out.

Very pleased with how the year trended in terms of their Beckman margins.

Sorry.

One last one -- just on the days sales thing.

You said it's mostly -- obviously, mostly hits in consumables, so that's a higher-margin issue.

Is there any way to quantify the EPS impact of that, or at least the profit impact of that?

Well, if you just assume one day impact on consumables, no impact on equipment, there probably is a little bit, but that would be 0.5 points of growth.

0.5 points of growth on $5 million is $25 million, and that's a 50% call through that cost us $0.01, $0.015 in the quarter.

Okay, great.

Thank you.

Shannon O'Callaghan, Nomura.

Larry, a couple of the businesses that have been tougher -- Motion, you talked about orders turning positive in the quarter.

Tektronix is still down a little bit.

Can you give a little color on what you're seeing there?

Is that flattening and turning-positive dynamic just a comp issue, or are you seeing any things actually get better there?

Yes, I think in Motion, we were particularly pleased with the finish, especially on the industrial automation side.

If you look -- we were up basically at a mid-single-digit rate in industrial automation in the quarter.

Now, that's a portion of the business, but that's really where a lot of our growth investments, from a product and a go-to -market perspective, have been made, Shannon.

From a vertical perspective there, it was broad based.

Orders were up double digits in the fourth quarter in the US.

In China, we finally have traction from an execution perspective.

So there's a lot there, frankly, that we're quite pleased with, on top of the multi-year margin expansion that that team has put forward.

At Tek, not necessarily thrilled to be down again in the fourth quarter, but I think as we look forward, given the historical lag effect around PMI, we're optimistic that we return to growth here in 2014.

Things have been a bit bumpy, as you know, there.

The China space, particularly on the export side, has continued to be particularly challenging.

But all in all, Tek did a much better job from an execution perspective in a tough environment in 2013.

I think we held ground broadly, and are poised to get back on the positive side of things here in the new year.

Okay.

Thanks.

And then, for the whole Company, do you have what equipment and consumables each grew in the quarter, and just maybe any commentary on what you make of that in terms of customers' willingness to invest?

Yes.

I think that's -- I should have mentioned this earlier, Shannon.

As you know, the book of business here is about 60/40 -- 60% equipment, 40% consumables.

And where we've really seen the sustained growth of late has been in consumables.

And when talked about a, say, 2.5% core in the fourth quarter, we thought consumables would lead there, and we'd be slightly positive on equipment with consumables at a mid-single-digit rate.

To see consumables basically come in line, but to have equipment come in a couple hundred basis points better than that, I think, is another one of the signs that we could take from the fourth quarter to say: This broad-based geographic and product pickup that we saw came in equipment.

And those are clearly more important decisions, if you will, on the part of many customers.

So, we're going to look at that to see how sustained that is as we get started here in 2014, but I think that snapshot is one that's hard to interpret in anything other than a positive way.

All right.

Great.

Thanks.

Julian Mitchell, Credit Suisse.

In dental, you discussed some mix issues in Q4, and some new product spend, but if I look at the year as a whole, the margin was about flat.

How are you thinking about the mix items into 2014?

Do you think we should see dental incrementals pick up much, or this is something that could persist?

Julian, I think you saw an improvement through the first nine months of the year.

Again, the fourth quarter was impacted primarily by the higher restructuring, but as Larry alluded to, the mix with the equipment better than consumables.

Given we have a little higher restructuring spend here in Q4, we expect a significant number of new product launches in the first half of 2014.

I think that bodes well not only for the top line but also for margin expansion here in 2014.

Got it.

And then within life sciences, you had a 40% incremental operating margin last year as a whole.

Is there a sense in which a lot of the easy or early savings from Beckman have now been squeezed out, and so you should see incrementals normalize pretty quickly this year?

They'll come down a little bit.

But even our Radiometer, Leica Bio businesses, just given the high consumable content there, also continues to be very good, even in the quote, unquote more mature businesses, in terms of their tenure with Danaher.

Still seeing good follow-through, but it won't be probably at the level we saw in 2013.

Julian, I would add to that that if you look at the productivity investments that we made in the fourth quarter, LS&D still accounted for about a third of the overall total, as Dan noted earlier, down year on year, but still an important part of that spend, which I think speaks to just the visibility the teams have on opportunities.

Beckman is not the only relatively new business we have there, so they're all keen to get after it to continue to get those margins up, again, because we think that segment ought to be a 20%-er.

Thanks.

And then just lastly on your own investments outlook -- SG&A to sales was flat last year.

Do you think that stays flattish this year, and just any color on your CapEx assumptions for the year?

It should be.

We make -- as I mentioned, our sales and marketing were up 6%, 7% for the year.

And we did a good job, partially because of the 2012 restructuring actually having our G&A down a little bit.

A fair amount of the restructuring in Q4 was also targeting after G&A here in 2014.

So, it probably climbs a little bit given the continued investment in sales and marketing.

From a CapEx perspective, we're roughly teed up for a low- to mid-single-digit increase in CapEx -- PP&E type CapEx.

Great.

Thanks.

Deane Dray, Citi.

On Motion, I might have missed this, but could you size for us the revenue impact on the businesses that you'll be exiting in 2014?

And maybe share with us a little bit about what the tipping point might have been?

What's the decision-making as to, to exit those businesses?

Well, I'll let Dan answer the first part of that.

With respect to the second part, it was really simple.

I think these were below-margin opportunities we'd gotten a hold of that looked a little bit more attractive at a distance than they did up close.

So, effectively, as you know, Deane, we've had a multi-year effort to put a premium on margin expansion at Motion.

I think we give the team very high marks in that regard.

And the walk from the revenue, even though it impacts the print on the core revenue side of things, is the right thing to do.

And the team's been at that for the better part of a year now.

Deane, Motion was down mid-single digit in the quarter.

Absent the business [growth] we've exited, it would have been down low-single digits, probably down a point or two.

We expect that dynamic to continue here in the first quarter.

Business getting better -- still going to have about a 4- to 5-point hit on growth from the exit of the business, but it should be largely completed.

We'll have a little bit in Q2, but basically, largely completed by the end of Q1.

Okay.

Good, that's helpful.

And then, on China, the 20% up, was that an overall clinical, or was that a Beckman in particular, and maybe some color on there in terms of what the mix was?

Are these China-for-China products?

And maybe a little bit about what kind of business you're seeing in China in Beckman?

Yes.

I would say that, if you look at life sciences and diagnostics today, and I'll throw dental in there as well, we're clearly beneficiaries of this China-wide infrastructure build in terms of better clinical delivery.

We see that in the diagnostics business, as we see that in dental, and as well from a research perspective, both at SCIEX and at Leica.

We are still, I would say, Deane, in the early innings of driving the localized product agenda that I'd like to see us execute upon in that segment.

Now, we do have a pretty good Asian manufacturing footprint there.

A good bit of that is actually in Singapore.

You heard me reference in the prepared remarks -- the AB SCIEX footprint in Singapore.

Leica Micro enjoys a similarly substantial position there.

So we have work to do there.

But frankly, as these researchers and clinicians often return to China from their overseas educations and postings, they're looking for the same sort of gear.

And in turn, I think that's why you've seen Beckman and Radiometer, Leica and SCIEX do so well in China the last several years.

Is that helpful?

Yes, it is.

Thank you.

Isaac Ro, Goldman Sachs.

First one on dental, just wondering if you could maybe comment on what you're seeing in the underlying patient volume trends in the US?

And then maybe what's baked into your assumptions for patient volumes this year?

Well, we certainly know that, from a macro perspective, patient volumes have been, of late, more sluggish than we've seen over the last 10 or 15 years, particularly here in the US; western Europe to a slightly lesser degree.

But I think our view, Isaac, as you well know, is that we really want to drive innovation, couple that innovation with better commercial execution so that we can capture that value that we're adding on a per-doctor, per-operatory, per-patient basis.

And I think we've been doing that; lots of examples.

Most recently, this digital dentistry initiative in Ormco is one where we're getting a lot of traction in that regard.

And to the extent that we can do that, that drives share, that drives value capture.

And coupled with what we're doing in the high-growth markets -- I mentioned China a moment ago -- we think dental can be a good sustained mid-single-digit grower for us.

Got it.

That's helpful.

And maybe switching over to T&M, you mentioned some of the investments you're making on the software side of the business, which I would assume is going to carry higher margins over the long term.

So, if we assume that the capital equipment side of T&M remains a little sluggish, is it fair to say there will be enough mix shift here on the underlying business to move the needle on overall margins in the segment?

Maybe on the margin, Isaac, but it's a 20% segment.

And while some of the software businesses can carry higher gross margins, they also carry some higher investment levels.

It's probably more about driving growth there than margin expansion.

Right.

And that's one segment, Isaac, where variable margins on the equipment are well above the Danaher average.

So, we don't get as much of a pronounced mix there between core equipment and aftermarket, in whatever form it comes, as we might elsewhere, i.e., dental, as was explained a few minutes ago.

Got it.

And last one, if I could sneak it in, on the M&A side.

Just given your earlier comments, can you talk a little bit about where you think your funnel is strongest or maybe weakest for M&A by segment?

I would say it's pretty well balanced at this point, Isaac.

As you know, we've been working the environmental side of things pretty hard.

That is an area where we'd like to do more.

There's certainly spots within both industrial tech, particularly around product ID, as well as in T&M, particularly if we could lever the Fluke brand more broadly, that are high priorities for us.

So, we're working those hard.

But I don't mean to shortchange LS&D or dental.

They certainly have a good bit that they have their eyes on as well.

Got it.

Thank you very much.

Andrew Obin, Bank of America Merrill Lynch.

Just a question on cash flow.

I think free cash flow was flattish versus last year.

And as we look at 2014, do you expect a pickup in cash flow?

We just need to transition after we digest M&A to a more sustainable percentage of net income, which means cash flow is likely going to be flattish for another year.

Andrew, the impact in 2013 was really not a lower -- was not explained by lower M&A activity.

It's a little bit of an -- I hate to hide behind this, but a little bit of an accounting dynamic.

As you know, we sold both our tools joint venture and about half of our Align shares.

We brought in close to $1 billion from those two (multiple speakers) activities.

Those things were below the free cash flow line.

However, the $175 million -- $150 million of taxes we paid on those gains negatively impacted our free cash flow.

So, if we didn't have those two discrete items, our free cash flow would have been up $100 million year on year.

And what should I think for 2014 then?

If you adjusted for that, we'd have close to 120% conversion.

Amortization alone gets us 15 points of conversion, so something in that zone would be probably a reasonable guiding estimate here for 2014.

Got you.

And you said between 115% and 120%?

Yes.

Something in that zone.

And then the question on M&A.

As you look at the opportunities, do you think it's easier for you to do deals in $1 billion, $2 billion size?

Or do you have an advantage looking at larger deals, given the fact that you can extract synergies, you get to keep them, and so the economics changes quite a bit, you being a strategic buyer versus the --

Well, regardless of deal size, each investment requires a certain level of work.

We have done large deals, a la Beckman; we've done some smaller transactions.

But once you get past that dynamic, I think we feel pretty confident that both given the size of our financial capacity -- again, $8 billion of capital here in the near term -- coupled with our operating capabilities, both in terms of the quality of the team and the Danaher Business System, we are advantaged.

And that doesn't begin to address the fact that we take a long-term view, right?

And we can not only be patient, but we bring that owner's mentality to building out the business, and harvesting those top- and bottom-line synergies.

So, we've been at this a long time, and continue to believe that our organic strategy will complement what we do organically very well, and create value for shareholders and build a sustainable franchise along the way.

Thank you very much.

Charley Brady, BMO Capital Markets.

On the industrial tech business, maybe a little more color on really what you're thinking on core growth in 2014.

Q4 of this year was the best -- well, the only positive quarter of the year, and the best one in four quarters.

And you still have some of those businesses that really aren't going to be strong growers, at least in the first half of 2014.

So, maybe a little more color on where you're seeing a growth expectation on core for 2014?

Charley, as you'll recall, what we said in New York is we thought, for the full year, industrial tech would be up 1% to 3%.

Probably a little bit more of our cyclical exposure there.

So, if things spring back just broadly, I think we're well positioned.

Maybe the industrial automation performance I highlighted a moment ago suggests we're beginning to see some of that.

But I think, by and large, what will drive industrial tech, aside from some of the headwinds you mentioned, is the very strong performance we have seen and expect at Product ID.

Videojet, Linx, the marking and coding businesses have done very well the last couple of years.

We love what they're doing in terms of finding opportunities to invest in growth, and their execution around those investments.

And while it's still early, at X-Rite, and to a degree, Esko, those businesses both play important roles in managing some of the more complex supply-chain and brand-management challenges that our customers, particularly in consumer goods, face.

So, there's just -- it's a ripe field of opportunities.

The businesses are well positioned, and they ought to lead the way this year.

Thanks.

At this time, I'd like to turn the conference back over to our moderator for any additional or closing remarks.

We'll be around.

Thanks, everybody, for joining us.

We'll be around all day for follow-ups if you need anything.

Thanks.

That does conclude today's conference.

We appreciate your participation.

You may now disconnect.