Danaher Corp (DHR) 2014 Q1 法說會逐字稿

Good morning everyone.

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

At this time, I would like to welcome everyone to the Danaher Corporation first-quarter 2014 earnings results conference call.

(Operator Instructions)

I will now turn the call over to Mr. Matt McGrew, Vice President of Investor Relations.

Mr. McGrew, you may begin your conference.

Good morning everyone, and thanks for joining us.

On the call today are Larry Culp, our President and Chief Executive Officer; Dan Comas, our Executive Vice President and Chief Financial Officer; [Matt Gugino], our Director of Investor Relations.

We are also joined by Steve Rales, our Chairman of the Board.

Given last night's announcement on the CEO transition, our earnings call is going to be a slightly different format here this quarter.

Larry and Steve will open with a couple of remarks on the transition, before getting into the details of the quarter, and then the Q&A.

With that, let's get through the disclosures.

I'd like to point out that our earnings release, the 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 investor section of our website, www.Danaher.com, under the heading financial information.

The audio portion of this call will be archived in the investor section of our website later today, under the heading investor events.

It will remain archived until our next quarterly call.

A replay of this call will also be available until April 24, 2014.

The replay number is 888-203-1112 in the US, and 719-457-0820 internationally, and the confirmation code is 6763223.

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

The supplemental materials and our first-quarter Form 10-Q describe 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 first quarter of 2014, and relate only to the continuing operation of Danaher's businesses, and all references to period-to-period increases or decreases in the financial metrics are year-over-year.

During the call, we will make 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, and 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.

With that, I'll turn it over to Larry.

Matt, thank you, and good morning, everyone.

Before we get into the details of the quarter, I'd like to say a few words about the announcement we made yesterday regarding the CEO succession.

Next year marks my 25th anniversary with the Company, with more than half of that time as President and CEO.

I'll be in the fortunate position next year of having 14 years in the CEO saddle, while yet still shy of my 52nd birthday.

Although many CEOs do not serve this long, I'm sure last night's news comes as a surprise for many of you, not because of my tenure, but because of my age.

I'm convinced in my head that it's the right time for a transition, both for Danaher, and for me personally.

This decision is mine.

So let me answer the obvious question: Why?

It's pretty simple, actually.

After spending half of my life at this great Company, I'd like to do something different in the next chapter of my life.

Danaher today is strong.

I think you see that in our results, and we have every conceivable strategic degree of freedom in front of us.

The team is strong, and Tom is the right person to be our next CEO.

I'm a life-long student of Thomas Jefferson, and have always been struck by the wisdom of what he's written about the benefits of revolution, every 20 years or so.

So while I don't anticipate a revolution, per se, at Danaher, I do think a fresh look, a free swing, will be of value to the Company.

That said, this decision is hard on the heart.

I love this job, and more importantly, the people with whom I get to work every day.

I will miss them greatly.

So many of you have asked, so what am I going to do?

Well, after this call, I'm going to go back to work.

We have a lot going on, and there's much I want to do before next March.

Plus, Tom, the rest of the team, and I will be working closely to effect a smooth, Danaher-class transition.

In time, I'm looking forward to spending more time in some areas of real interest to me, particularly education, and perhaps even teaching.

I'm also keen to do some things with my family that the 24/7 nature of this job can make difficult, and I'm hopeful that I'll be able to bend a rod more regularly than I have in recent years.

But good-byes are a long way off today.

So let me stop there, and hand it over to our Chairman, Steve Rales, for a few comments, before we discuss the details of the first quarter.

Thank you, Larry, and good morning everyone.

I'd like to begin by saying that the Board fully endorses everything that Larry has just said.

He has done an outstanding job for this Company for 24 years, and in particular as CEO during the past 13 years.

As most of you know, we will be sorry to see Larry eventually move on, but we respect this personal decision, and are fully confident we will have a smooth transition, just as we did with our two previous CEO transitions.

As all of us well know, Larry has been instrumental in driving Danaher's success.

Just a few highlights.

Revenues on his watch have grown from about $4 billion to nearly $20 billion, while our market cap has grown from under $10 billion to more than $50 billion.

Shareholder returns are 5 times that of the S&P 500 Index since Larry took the reins.

Our annual revenue in high-growth markets has increased 10-fold from less than $500 million to now $5 billion, and free cash flow has exceeded net income every year of his tenure.

At the same time, Larry's played a central role in expanding the Danaher Business System and in building Danaher into a science and technology company.

He has also developed a deep and talented management team that is ready to take on new challenges.

Larry is the first to acknowledge that there is always more work to be done, but meantime, the Board and management recognize his many achievements, and we thank him for his remarkable work.

Fortunately, Danaher has a history of developing strong managers, and Tom Joyce is ready to become our next CEO.

Tom has spent 25 years at Danaher, and at 53, still has plenty of runway ahead of him.

He has succeeded throughout his career in challenging assignments in all parts of Danaher.

Tom is a superb strategic thinker, with strong operating and people skills.

He is currently responsible for our Water Quality, Life Sciences and Diagnostics platforms, which collectively represent $9 billion of annual revenues.

He helped shape the current portfolio with the acquisition and integration of many of Danaher's leading brands, including Beckman Coulter, AB SCIEX, and ChemTreat.

He's also a seasoned teacher and practitioner of DBS, and has played a key role in enhancing many of the tools and metrics upon which DBS is built.

All of us have great confidence in Tom's ability to lead Danaher, to execute on our strategic priorities, and in turn, with a supporting cast of 65,000-plus associates, create significant value for our shareholders.

Now, let me turn the call back to Larry to talk about earnings.

Happily so, Steve.

Thank you.

We're off to a good start in 2014, as our team's execution, a function of our commitment to the Danaher Business System, drove better than expected top line growth, outstanding margin expansion, and solid earnings performance in the quarter.

We saw a positive impact of DBS across our portfolio, where the acceleration of new product introductions and go-to-market initiatives helped drive mid single digit growth or better, in a broad range of our operating companies including Hach, Gilbarco, Radiometer, AB SCIEX, Implant Direct, Videojet and ESKO.

This strong growth, coupled with our solid cost management by the team, led to core operating margin improvement of more than 125 basis points in four of our five segments.

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

This morning, we reported adjusted diluted net earnings per share of $0.81, up 8%, and representing another record first quarter for Danaher.

Revenues for the quarter grew 5% to $4.7 billion, with core revenues up 3.5%.

The positive impact of acquisitions increased revenues by 2%, which was partially offset by negative currency translation of 50 basis points.

Despite the headlines, high-growth markets remained, strong increasing at a high single digit rate.

China grew approximately 10%, led by our water quality, Gilbarco Veeder-Root, diagnostics and dental platforms.

Latin America and the Middle East both grew at a double-digit rate, and India was up high single digits.

The developed markets grew at a low single digit rate, as both the US and Europe grew low single digits.

This marked the third consecutive quarter of positive growth in Europe.

Japan sales increased at a double-digit rate.

Gross margin increased 30 basis points to 52.6%.

Our gross margin expansion, along with the productivity and efficiency initiatives made in 2013, has allowed us to grow our investments in R&D and sales and marketing.

Core operating margin expanded 100 basis points, with reported operating margin at 16.9%.

On the capital allocation front, M&A remains our primary focus, and in the first quarter we deployed approximately $160 million on five bolt-on acquisitions, to further strengthen our competitive positions within our test and measurement and environmental segments.

We also increased our annual dividend to $0.40 per share from $0.10 per share in February.

With a healthy balance sheet and robust acquisition funnel, we remain confident in our ability to deploy more than $8 billion in M&A capacity.

Turning to our five operating segments, test and measurement revenues grew 2%, with core revenues up 1%.

Core operating margin expanded 125 basis points, and reported operating margin increased 20 basis points to 22.1%.

Core revenues in our instruments platform grew low single digits.

Fluke core revenues increased at a low single digit rate for the second quarter in a row, led by demand for industrial test products in China and Europe, and calibration products globally.

Next month, we are launching Fluke Connect, a collection of 20 Fluke tools that wirelessly connect to a smartphone app, allowing maintenance technicians to capture, store, and share data on mobile devices, and in the cloud.

Using data captured in our analytical software, technicians will now be able to quickly and proactively address problems with critical equipment, before it fails.

Fluke also closed on the acquisition of Unfors RaySafe, a global leader in testing devices, software, and systems, for diagnostic imaging equipment.

Unfors complements Fluke's existing offering of biomedical testing products.

At Tektronix, core revenues declined slightly, as solid growth in Latin America and the Middle East was more than offset by weakness in US military and government verticals.

Core revenues from our communications platform grew low single digits, as strong demand for mobile network monitoring and enterprise network analysis tools was partially offset by weakness in network security.

At Fluke Networks, we introduced the LinkSprinter network tester and cloud service, a pocket-sized tool that allows network specialists to view, e-mail, store and analyze their test results on smartphones, or in the cloud.

Revenues from new products such as the LinkSprinter have increased 20% from the comparable amount in 2013, and now represent nearly a quarter of Fluke Networks' total sales.

Our products are evolving to take full advantage of the tremendous opportunity made possible by today's computing and communications technologies.

Both Fluke Connect and Fluke Networks' LinkSprinter launches are examples of that shift, and provide our customers with the ability to not only perform complex testing, but to access, analyze and act on critical information in real-time.

Moving over to our environmental segment, revenues increased 6%, with core revenues up 4%.

Core operating margin expanded 145 basis points, while reported operating margin was up 30 basis points to 18.9%.

Our water quality platform's core revenues grew at a low single digit rate, led by a double-digit increase in the high growth markets.

Hach had another strong quarter, led by double-digit growth in service, and healthy municipal demand in Europe.

During the quarter, Hach expanded its product line with the acquisition of BioTector, a global provider of on line TOC, or total organic carbon, analyzers, that monitor water quality, help reduce waste, primarily in the petrochemical and food and beverage industries.

At Trojan, we received IMO type approval for our full suite of UV ballast water treatment products in early March.

With this approval, our team can now seize the opportunity to help customers who have been waiting for an IMO-approved ballast water solution.

Importantly, our testing was performed at a US certified lab, which will provide us with an advantage as we seek US type approval in the next stage of the regulatory process.

We believe Trojan's low energy requirements, small footprint, and ease of use differentiate our solution, and position us to capitalize on this tremendous opportunity.

Gilbarco Veeder-Root core revenues increased mid single digits, led by point-of-sale and payment solutions globally, and strong dispenser demand in Western Europe and China.

Our comprehensive product suite continues to differentiate us in the marketplace, and GBR was recently voted the best POS system and fuel dispenser manufacturer by the Petroleum Marketers Association of America.

In life sciences & diagnostics, revenues grew 6%, with core revenues up 4%.

Core operating margin expanded 75 basis points, and reported operating margin was up 50 basis points to 13.2%.

Core revenues in our Diagnostics platform grew at a low single digit rate.

At Beckman Coulter, core sales were up low single digits, led by healthy demand in the high growth markets.

Beckman continues to strengthen its competitive position, with first-quarter wins in North America exceeding those made during all of 2013.

This marks Beckman's best quarter since the acquisition in expanding its install base.

We also achieved an important milestone on the regulatory front, receiving closure of the last two FDA warning letters at our Chaska and Miami facilities.

Earlier this month, Beckman expanded its world-class automation capabilities, with the introduction of the UniCel DxH Connected Workcell.

This scalable work flow management solution enables our hematology lab customers to connect up to three analyzers to a slide maker stainer, increasing efficiency, and reducing turnaround time for these critical tests.

Radiometer core sales increased high single digits, as we continue to benefit from our growing install base of acute care instruments.

This represents the ninth consecutive quarter of high single digit growth or better for Radiometer.

Demand was strong across all platforms, with core blood gas sales up high single digits.

High growth markets remain robust, led by China and the Middle East, each of which grew over 20%.

Sales at Leica Biosystems were up mid single digits, led by mid teens growth in advanced staining and digital pathology.

Core histology revenues decreased mid single digits, in part due to a large project shipment in the prior year.

During the quarter, we received FDA clearance for the Leica BOND Oracle HER2 IHC System on the Leica BOND-MAX.

This HER2 test is used to help determine the appropriate treatment for breast cancer, and in combination with the speed and efficiency of the BOND-MAX, provides patients with quicker access to important test results and treatment plans.

Our life sciences platform had a good start to the year.

Core sales increased mid single digits, with all major geographies contributing to the growth.

AB SCIEX core sales grew high single digits, as strength in the clinical and academic markets drove double-digit growth.

Earlier this month, we expanded the capabilities of our mass spec offerings in clinical settings, with the release of a newborn screening assay for use on the 3200MD IVD system in Europe.

This assay allows labs to detect metabolic disorders in newborns more accurately and more efficiently than traditional diagnostic tests.

In our separations business, we launched the CES IMS, which helps our customers more accurately predict the efficacy and reduce the time to market for pharmaceuticals.

Leica Microsystems core sales were up mid single digits, with growth in most major product lines.

Geographically, high growth markets grew double digits, with sales in Japan up more than 20%.

Dental had an outstanding start to 2014 as the investments we've been making in new product development helped drive excellent top line and operating margin performance.

Reported and core revenues grew 6%, representing the segment's best quarterly performance in three years.

Both core and reported operating margin increased 170 basis points, to 14.8%.

At the Chicago Midwinter Dental meeting in February, we were excited to announce the formation of the KaVo Kerr Group, which strategically unites our leading dental consumables, equipment, high-tech and specialty brands under one global platform.

Together, our brands have the scale they need to better drive innovation, improve clinical outcomes, and simplify work flows.

Both customer and end user reception since the launch has been very positive.

Dental consumables core revenues grew mid single digits, with broad-based demand across all major geographies.

Orthodontics, professional consumables, and implant revenues all grew mid single digits or better.

During the quarter, Kerr launched the SonicFill Dental composite system in China and Japan, further expanding the product's global application.

SonicFill is the only solution that enables clinicians to perform cavity restorations in posterior teeth, with an easy-to-use single step sonic activated handpiece.

SonicFill has already been a tremendous success around the world, with more than 4 million tips shipped worldwide since the initial launch in the middle of 2011.

Dental technologies' core revenues also increased mid single digits, with solid demand for our suite of imaging products.

At the Chicago Midwinter show, we launched more than 20 new products, including the DEXIS CariVu, a portable imager that pairs with our software and uses illumination technology to better assist doctors in identifying lesions and cracks in teeth.

Finally, in Industrial Technologies, revenues grew 4.5%, with core revenues up 3%.

Our core operating margin expanded 185 basis points, while reported operating margin increased 160 basis points to 22.5%.

Motion platform core revenues improved sequentially from the fourth quarter, but still declined at a low single digit rate.

Strong sales in North American distribution were more than offset by a weak defense market, and the impact of exiting certain lower margin product lines.

We expect to complete that transition in the second quarter.

We remain really pleased with the team's execution on operating margins, which increased more than 200 basis points from the prior year.

Our product identification platform core revenues were up mid single digits, with growth across most major geographies.

Videojet's growth was balanced with mid single digit growth in both consumables and equipment.

During the quarter, Videojet launched the 8610 thermal ink jet printer, the world's first TIJ printer specifically designed for fast-drying inks, enabling customers to print high-resolution codes on non-porous surfaces four times faster than other ink jet technologies.

At ESKO, our suite of packaging management and design software grew double digits, as the need for more efficient solutions across packaging work flows continues to build.

ESKO remains the work flow management software provider of choice for brand owners, with sales increasing more than 30% in this market.

So to wrap up, we're off to a very good start in 2014, as our team's execution drove better than expected revenue growth, outstanding margin expansion, and solid earnings performance.

The Danaher Business System has helped build momentum across the portfolio, by driving continued share gains, and funding increased growth investments.

We believe this momentum, along with our robust balance sheet, and confidence on the acquisition front, position us well in 2014.

We are initiating second-quarter diluted net earnings per share guidance of $0.90 to $0.94, which assumes core growth comparable to the first quarter.

We are also reaffirming our full-year 2014 diluted net earnings per share guidance of $3.60 to $3.75.

Thanks, Larry.

That concludes the formal comments.

Debbie, we're ready for questions.

(Operator Instructions)

We'll go first today to Scott Davis with Barclays.

Congrats, Larry, on a great run.

Also, just having the guts to make the decision.

I mean, a lot of guys would sit around and kind of milk this job for a while.

Obviously you're not doing that, so congrats.

Thank you, Scott.

Is there any risk -- how do you avoid, with the change being 12 months out, how do you avoid 12 months of inertia here?

How are you going to think about deals and does this increase your -- how does it change?

It would be kind of awkward, I think, to announce a substantial deal and then pass it on to Tom at this juncture, but is that the wrong way to think about it?

Scott, I understand the concern.

I think that's the last way we would think about it.

Tom and I have worked together for 25 years, we have been full partners for over a decade.

So I think that on the M&A front, Tom begins to be more a part of that conversation, as we think about identifying, cultivating, pursuing targets.

We wouldn't chase anything at this point that Tom wasn't fully bought into, but we do not slow down here at all, in terms of what we want to do from an M&A perspective.

I think that we've got the time here to effect operationally and organizationally a very smooth transition, and I'm exceptionally confident that Tom, Dan, the rest of the team and I are going to be able to work together, as we always have, over these next several months during transition.

Tom will of course be spending time with businesses that he doesn't know as well, getting up-to-speed on some of the CEO duties that will be his come March, but from an M&A perspective, I think it's very much business as usual.

You go back to my first year as CEO, I'll never forget my first Danaher leadership conference, where we announced three deals that week.

So there's, I think, precedent and confidence to suggest here that the transition in no way will dilute or impede our activity on the M&A front.

Okay.

Fair point.

I don't know if Steve Rales is still there, available for questions.

If he is, I'd love to ask him one, if he's available.

He's here, Scott.

Great.

Steve, I guess my question for you is, when Larry took over, as you said, it was a $4 billion revenue Company, now it's a $20 billion Company, substantially more complicated, and the quality is definitely a lot higher for sure.

How does the mandate for Tom change?

He's stepping into a -- he's filling the seats of a guy who just had a five-bagger in market cap in 13 years.

It's a pretty tough shoes to fill.

How does the mandate for Tom change?

How does the Board think about how this Company goes from $50 billion of market cap to something that's acceptable to shareholders in that same time frame?

Thank you, Scott.

I think the conversations about longer-term strategy and capital allocation are regular subjects for the Board, and this is a Board that's not unfamiliar with either of those.

We'll examine the market as we always do, have lengthy conversations with Larry, Tom, Dan, and the rest of the team, and we'll continue to evaluate opportunities, as we have for the last 25 or 30 years.

We think it's an exciting runway ahead.

We've never opinion in a better position from a balance sheet standpoint.

And I think there are plenty of opportunities that will be very exciting, and I expect shareholders at the end of the day will be winners as a result.

Okay.

Fair point.

Thanks, Steve.

Congrats, Larry and good luck to Tom.

Pass it on.

We'll take our next question from Steve Tusa with JPMorgan.

Congrats, Larry.

Echo Scott's comments.

Thank you very much.

How are you looking at the macro environment, and maybe you could just talk about specifically what's going on in China and in Europe?

Sure.

Well, I think that we were pretty pleased from a geographic perspective with the way things played out.

Just maybe a word on the US.

We saw, like a number of companies, a slow start to the year, particularly in businesses where getting out every day is important, whether that be at Beckman on the diagnostic side, all the way to Matco.

But we really were encouraged by the building strength during the quarter, and the way we exited the first quarter, and even the way we've begun April here.

Europe, third quarter in a row being positive, admittedly it's up low single digits, but that too has been encouraging, just given the history.

Our European leadership conference was held just two weeks ago, and the mood there, Steve, was as buoyant as it's been in several years.

So we're optimistic there, particularly with respect to life sciences, the dental side of things, and PID, are all well positioned in Europe.

China, clearly a lot of headline concerns there, but we're pretty pleased to see a double-digit first quarter with a bit better balance between our healthcare businesses, which as you know, the last few years have really led the way, dental was up over 20%, LS&D up about 10, with the industrial businesses also doing better, particularly in the environmental realm.

So, we're going to watch China carefully, some of the other high growth markets.

That's why we said back in December we thought the gap between the high growth markets and the development markets might narrow a bit.

That played out for us here in the first three months, but still very much high growth markets in the pole position.

So we like what we saw broadly around the world in the first quarter.

And the April -- you said April was -- how good as April started.

Are you assuming that falls off here in the second half in your consistent guidance for the second quarter, is there a comp issue in the second quarter, with similar organic?

No, I think we're really talking about a comparable quarter in the second quarter.

Mindful that it's still relatively early in the year, obviously a host of concerns out there in terms of the macro scene.

I think, if we look at the way the first quarter played out, we knew we were hurt by one less selling day, particularly in consumables.

We were probably helped a little bit given the Japanese tax dynamics.

I suspect that they wash, and while we were thrilled with how strong dental, Hach, Videojet, life sciences were relative to expectations, we did have a choppy start in T&M, particularly in comms, and that's a space that both with some of the mobile carriers and with some of our larger enterprise customers, we want to watch carefully.

So I think comparable to the 3.5 we have rung up here in the first quarter, feels about right.

But we really like the exit rate in March, and while it's just a couple of weeks, are encouraged by the start here in April.

And one last question.

Larry, I know you're probably -- this is probably a dumb question, but I guess in your mindset are you still of the mind, you want to spend some time with your family, do we take this to mean you're done with the large public company gig?

I mean, are you going to take -- are you kind of retiring?

I mean, politics?

Have you thought about kind of what the next step is at all?

I mean, should we be surprised to see you resurface at another public company in a few years?

Or it's probably like a tough question to answer, obviously at this stage.

Thanks for asking it.

Steve, you know, I'm very fortunate, given the great run that we've had for a long time here.

There probably hasn't been a large public job that hasn't been floated my way in the last six, seven years.

But you see where I am.

This is a great job.

Tom's a -- he's a lucky guy to have that opportunity here in a while.

My view is, I'm going to be full speed up until March 1, and then I'm going to be in an advisory capacity doing anything and everything that Tom wants me to do, including get out of the way.

But I'm genuine and serious about wanting to do some other things.

So while I would never say never, I think I've had a pretty good job here, and in this realm, it will be tough to beat.

Okay.

Congrats to Tom by the way too.

We'll take our next question from Nigel Coe with Morgan Stanley.

Yes, thanks, good morning.

Hate to sound repetitive, but congratulations, Larry.

If you do decide on politics, I think the government could use some DBS methodology.

Just think about that.

Thank you, Nigel.

So, it sounds like March was stronger than Jan, Feb, doesn't feel like the weather had a big impact on your organic performance.

I'm wondering the impacts on consumables and equipment and whether that dynamic had any impact on your margin performance during the quarter, and how that maybe shook out by segments.

Sure, Nigel.

It's Dan.

Good morning.

Consumables were up 4% during the quarter, which has been, as you know, pretty consistent, maybe 50 basis points lighter than what we saw in the second half of last year.

I think you could really explain that entirely by the one less selling day.

I think what was really encouraging during the quarter was the equipment side.

We were up 3.5%.

That is the best number we have posted in a number of quarters, so our balance, stability, it was the first -- as Larry alluded to, better breadth in China.

This was the first quarter in a long time that all five segments were up in China, healthcare was up more than industrial, but, again, seeing some footing there.

We were up 100 basis points in terms of core margin expansion, so good improvement there.

Do we make a little bit more money on consumables and equipment?

We do, but it didn't really seem to impact margins at all during the quarter.

Just coming back to the -- there's obviously pretty healthy debate on capital deployment.

PE seems to be pretty active, pushing up multiples to some pretty high levels.

A lot of other companies are out there, saying they want to do more M&A.

I'm just wondering, is the environment tougher to deploy capital, and maybe just throw into that as well, what is the message on dividends?

You obviously increased that four-fold during the quarter.

Still relatively low in terms of payout.

What is the message on dividends?

Nigel, let me speak to M&A, maybe Dan will talk a bit to dividends.

I think from an M&A perspective, there's no question that the environment, given valuations, first in the public markets and the spillover effect in the private market, has been more challenging the last couple of years.

I think we've acknowledged that.

But fortunately, given the breadth of our portfolio and the inventory of markets we have an interest in, we don't have to buy market indices, right?

All we're really looking to do is identify and invest in discrete companies, which we think are great fits with the Danaher portfolio.

And it's really from that perspective that we're out talking to a lot of people really across the entire corporation about opportunities that we think would be glove fits for Danaher and for DBS.

So different environments are challenging in different ways.

I don't think today that we see private equity, even with their resources, being a primary competitor for us.

It continues to be rare for us to see PE as the competition around an asset that we might covet.

Clearly, the last several months have had some situations where we've been mentioned in combination with private equity, but largely around assets where our interest was partial, not full.

When we have a strong interest in an asset in its entirety, I think we have great confidence in our ability to carry the day.

Dan?

Nigel, on the dividend, despite the increase, we know it's still relatively modest.

It represents, at $0.40 a share, would represent about 10% of our free cash flow per year.

So we're not trying to signal anything there.

The strong bias is still very much M&A, and expect that to continue, but it does create another vector to return some capital to shareholders.

Okay.

Thank you very much.

We'll take our next question from Jeff Sprague with Vertical Research Partners.

Larry, the accolades are going all year.

I'll just echo them.

We'll miss you.

Thank you, Jeff.

Good luck.

I just wanted to come back again and maybe approach M&A again through a question to Steve Rales, if he's still there, and will take another one.

Steve, you have kind of a unique position with your involvement with Colfax also obviously.

They do seem to be able to get stuff done over there.

I guess it does beg the question, is it simply a law of large numbers dynamic, that has come to bear, as it relates to Danaher?

Is there a need potentially to reevaluate the portfolio or think of a new leg to open up another vector for capital deployment?

Do you think a question of size really has crept into the ability to perpetuate the business model?

Thank you, Jeff.

First, let me say, yes, I am a shareholder of Colfax Corporation, full stop.

Second, going back to what we talked about earlier, our Board has very long view, and our objective is to continue to try and find a way, along with management to make our businesses better, and add value for shareholders.

It's an evolving process.

It's an ambulatory process.

We're constantly looking at M&A.

There's a certain lucidity, if you will, to the law of large numbers.

We think more about opportunity and making our businesses better.

Truthfully, Larry and Dan do a very nice job communicating the Company's view on M&A, so I would defer to either of them on your question.

Jeff, I would just add that we really don't think being a $20 billion revenue base Company, a $50 billion market cap in any way gets in the way, in terms of doing M&A.

I think it's just the opposite.

At every step along the way, as we've gotten bigger, and in turn stronger, we've had more degrees of freedom.

We've had more latitude, more capacity to do the things that we think really build an outstanding Company over time, witness Beckman Coulter.

If you look at the way we've run M&A on a daily basis, it really starts with all nine of the strategic platforms, which would be great mid-cap companies all by themselves, if they were standalone entities.

And it's really that family of mid-cap companies working their market funnels around competitors, distribution, technology, bolt-ons that may be of interest, in addition to the adjacencies which give us the bulk of our flow around the smaller transactions that you see.

The team here in Washington, which I think is outstanding, is really the group that targets the new spaces, the larger situations, which naturally are going to be less frequent, and at times more meaningful, just in terms of the sheer amount of capital deployment.

So I don't think that while we have great respect for Steve and the team at Colfax, we don't really think that there are lessons there, that will help us deploy the next $8 billion-plus in capital we intend as we build out our Company.

Fair enough.

Just a quick one for Dan, if I could.

You did get a number of small deals done apparently in the first quarter.

Can you give us an idea of how many transactions were in there, and what the average valuation was?

Jeff, we closed five acquisitions in the quarter, which was an increase, and we are seeing actually an increase around small deals, which hopefully portend will be a positive sign about potentially getting something bigger done.

We spent about $160 million, so relatively modest.

A mix, some of those are businesses that are relatively low margin today, but will come in as bolt-ons, will create opportunities on the margin side.

So those are all situations where we think we can get a 10% return, exceed 10% within three years.

Thank you very much.

And good luck, Larry.

Thanks, Jeff.

I'll still be around a while.

We'll take our next question from Steve Winoker with Sanford Bernstein.

Obviously I'll echo that congratulations, Larry.

Fantastic.

Thank you, Steve.

So, hey, since you're a student of Thomas Jefferson, I can't help but recite one of his quotes, right?

Delay is preferable to error on the capital deployment side.

You didn't say that second part.

But it's a great quote and I understand, that's sort of how you're thinking about it.

Is that $8 billion still the right number I should be thinking about?

Steve, it's Dan.

Clearly, if you looked at the balance sheet, the breadth of our -- and quantity of our free cash flow, you could pencil out a large number until we actually get some deals of size, I think we'll stick with the $8 billion.

And Dan, while I've got you, since we are in this period where M&A is a lot smaller in terms of our viewing the portfolio right now, where can ROIC go?

I'm just assuming that there is a continued delay for a little bit of time.

How do you see ROIC playing out in that event?

Well, you've been seeing a 50 to 100 basis point increase in annual ROIC, given that we've had fewer acquisitions.

I would be happy to see that stop for a little bit, would bring in some larger ones, but I think, if you look at Q1, I think representative of last year, up 3.5% core growth, and earnings up 8%, we're getting, I think, good relative performance on the top line and good margin expansion along with it, and that's obviously increasing our overall returns.

Okay.

And sorry, if I could just add one more, just on the mundane earnings side, the dental strength that you guys had was a surprise to me anyway.

What do you really attribute that to?

Is it products, market?

Can you identify that and give us a sense for the sustainability, or do you just think it's sort of a lumpy demand, and we just happened to see a spike this quarter?

Steve, I think if you look both at the consumables versus technologies divide, as well as a look around the world, the strength was very broad based.

I don't think they continue at that rate.

We did get a little bit of help in Japan, given the VAT increase.

But we've long said dental is a mid single digit grower.

Strong imaging and digital franchises and technologies.

And while there are rarely home run products in consumables, we had a wonderful wave of products launched at Midwinter.

The team continues to execute better, both in the US and in Europe.

While China clearly is a concern for a lot of folks, our dental business continues to do very well there.

So again, I think we probably come down a little bit from what we saw in the first quarter, but dental ought to continue to be a contributor to us, for us, as we go through the year.

Okay.

Great.

Thank you.

We'll take our next question from Shannon O'Callaghan with Nomura.

Congrats, Larry.

Great job.

And really happy for you.

Good luck with the next part of the journey.

But we'll have you around for a while.

Thank you.

You mentioned, speaking of being around for a while, you mentioned wanting to get some things done before you leave.

Are there any big things on that checklist that you think you want to make sure you get done before you hand it off?

I'd like to write a few more checks before I go.

Okay.

So mainly M&A focus.

Anything other than that, internal initiatives or other things that you feel like you want to bring to closure, or no?

I think a lot of our internal initiatives around the high growth markets, around what we're doing in terms of taking full advantage of the web, what we're doing increasingly at a platform and regional level, is work that we won't finish when Tom hands the baton off.

But this is work that Tom and I and the rest of the team have been engaged in together for some time.

Tom and I will be dividing and conquering over the next year, and that's where I've been focused, and would expect to continue to be focused.

Clearly, getting the team ready as well, as they assume new and additional responsibilities, will be part of where I'll be focused.

But also, just making sure that Tom's ready.

I can vouch now from experience that this is one of the more meaningful transitions that you have as an operating leader.

Tom is more than capable, but we want to make sure he is just tuned all the way up, come March 1, to be ready to go, as I know he will be.

Okay.

Thanks.

And then, you've seen some of these other encouraging trends across the businesses.

Where do you think the tech instruments business is at this point?

You had some of this military government pressure.

That's one vertical.

But maybe talk across the others, and where do you think that is, and what's it going to take to get it going?

Well, I think that we'll take the stability that we're seeing in some of the larger tech verticals like computers, communications, semi and the like.

The broader distribution has actually been decent, but again, because of the mil-gov dynamics, particularly in the US here at the start of if year which we saw, and I know some competitors have spoken to, puts us in that flattish zone.

We'd like to think we see a little bit of an uptick from there, but don't anticipate necessarily a pronounced springback at Tektronix through 2014.

But gradual improvement.

Okay.

All right.

Thanks a lot.

We'll take our next question from Julian Mitchell with Credit Suisse.

Congratulations.

I just had a quick question, broader one on test and measurement, really.

If you look at the organic growth in that segment the last 10 quarters, it's about 0.5% or less.

I just wondered if there was something with the portfolio you thought needed some major work in T&M, or if it's just a function of sluggish macro, and that kind of thing?

Julian, thank you.

Relative to your question, I think you really have to look at the segment in two halves.

The communication platform has really been a nice performer for us, particularly around the mobile network build out that we've been a large part of.

We think that opportunity and that challenge, just to keep up with the explosion in bandwidth demand that we're all generating, will be with us for a while.

Soft start to the year in network security, but as you know, the last couple of years that's been a strong performer for us, and we're optimistic that we'll return to that type of performance as we go through the year.

But on the instrument side, Fluke has had a tough go of it, particularly in places like China, where the slowdown in the industrial sector has been particularly pronounced.

At Tektronix, we just spoke to that a moment ago, with Shannon.

I think those dynamics are well-known.

But we're encouraged by Fluke here putting up another quarter of positive growth.

We really like these new products that are coming out.

In a review just last week with the commercial team, I really liked what I saw in terms of the launch plans for the second quarter and the second half.

So while Fluke's unlikely to be a high single digit grower for us any time soon, we think we get Fluke back here to a more normal low to mid single digit range as we go through the course of the year.

And while tech will be challenged, we'll build on that stability, and hopefully get them back to growth as we go through the year.

Great.

Thanks.

And then life sciences, the last couple of years, each year you had margin expansion of about 150 BPs each year, Q1 was up I think 50 BPs, the life sciences margin.

Is that kind of the run rate going forward, just because I guess most of the Beckman savings have now been squeezed out?

Julian, core margins -- this is Dan.

Core margins were up about 75 basis points in the first quarter, so there was a little bit of acquisition noise.

Life science was stronger than diagnostics, and again, I think diagnostic, their shipments were up low single digits.

That was, we believe, largely impacted by one less day.

If you look at their orders, they were up mid single digits.

I think that's encouraging.

That creates a little bit of a negative mix just because the incremental sales of our consumables is at a higher margin.

So I think you'll see continued very good margin performance and expansion in the segment.

Thanks, Dan.

And lastly, on the CapEx, I think you talked before about low mid single digit CapEx increase this year.

Q1 was up a lot more than that.

Have you changed the full year view at all, or it's just a timing thing in Q1?

It's coming up in part because of increased placement at Beckman, because of our leasing model.

That shows up in CapEx.

So some of the increase in CapEx is less traditional PP&E, it's actually expanding our installed base at Beckman, which is obviously a good sign for the business.

Great.

Thank you very much.

We'll take our final question today from Brandon Couillard with Jefferies.

Larry, could you elaborate what you saw from an order perspective at Beckman, understanding weather and one less selling day were headwinds.

But given your comments about win rates in the US, when do you think we translate into a core revenue inflection in the Beckman Diagnostics unit?

I think we did a little bit better from a bookings perspective, and again, better in bookings than we did in shipments.

The trend through the quarter was positive for us in that regard, primarily with consumables.

But that North American equipment comment that we made, we think is significant, because it's really the culmination of so much of the work the team has done the last several years.

As you know, it will take a while to get those orders converted into new boxes on the lab floor, and in turn, see that consumable stream.

But we think that as we move forward sequentially through the course of the year, we will see a pick-up as a result of those increased wins here in North America, not unlike what we're seeing already, in terms of some early benefit from the return of troponin to our full suite of analyzers.

So it will be gradual.

I wish it was more rapid.

But we'll take the early indicators here of progress, and then we can build on the prints through the course of 2014.

Thanks.

Just one for Dan.

Operating cash flow's a little soft, even excluding the discrete factors from last year.

What's your operating cash flow outlook for the year, and how quickly would you expect that timing dynamics from the first quarter to normalize?

I think you'll see an improvement here in Q2.

As Larry alluded to, given the stronger shipments in March relative to the first two months, that hurt us a little bit from a timing perspective on CapEx, but I think that will shortly reverse itself.

Thank you.

Okay.

Thanks everybody.

We're around all day to take follow-ups.

Ladies and gentlemen, thank you for your participation.

This does conclude today's conference.