Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Danaher (NYSE:DHR)

Q4 2013 Earnings Call

January 28, 2014 8:00 am ET

Executives

Matt R. McGrew - Vice President of Investor Relations

H. Lawrence Culp - Chief Executive Officer, President, Director, Member of Finance Committee and Member of Executive Committee

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

Analysts

Nigel Coe - Morgan Stanley, Research Division

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Jeffrey T. Sprague - Vertical Research Partners, LLC

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Julian Mitchell - Crédit Suisse AG, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Andrew Obin - BofA Merrill Lynch, Research Division

Charles D. Brady - BMO Capital Markets U.S.

Operator

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.

Matt R. McGrew

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 [ph], our Director of Investor Relations.

I'd like to point out that our earnings release, a 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 in 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 Investors section of our website later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until Tuesday, February 4. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally, and the access code is 5113533.

During the presentation, we'll describe certain of the more significant factors that impacted year-over-year performance. Please refer to the supplemental materials and our annual report on Form 10-K when it is 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.

Also like to note that we'll be making some statements during the call that are forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. It's possible that actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events and developments or otherwise.

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

H. Lawrence Culp

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 & Diagnostics. High-growth markets now represent more than 25% or approximately $5 billion of our annual revenue, up from $2.7 billion just 3 years ago. In the developed markets, the U.S. 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 5 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 3 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 Ti400 thermal imager, a wireless high-performance infrared camera with laser autofocus capability that enables service engineers to quickly detect temperature measurements up to 1,200 degrees Celsius and communicate results back to their laptops or smartphones for further analysis. Products introduced in the last 2 years are helping increase vitality at Fluke and accounted for nearly 1/4 of Fluke's fourth quarter revenues.

At Tektronix, core revenues declined slightly as strength in Western Europe was offset by weakness in U.S. 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 U.S., 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. During 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.

Close [ph] at Fluke Networks' recently released TruView network, an application performance monitoring software, grew significantly as enterprise customers looked 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 Comm'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 the dilutive effect 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 it 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 3 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 enhances 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 help customers improve workflow, increase efficiency and reduce labor cost. In China, we grew revenues approximately 20%, driven by a combination of our expanding installed base and continued government investment in health care infrastructure.

2013 was an important year of several milestones at Beckman as we resolved many of our remaining regulatory challenges, including FDA clearance for 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 U.S. FDA clearance for the next-generation beta HTT 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-teen, with China leading the way. Our instrument installed 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 outperformance in 2014 and beyond, as we benefit from incremental consumables revenue.

Leica Biosystems saw 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 as a 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 3D digital imager. Since the launch in the second quarter of last year, we've sold more than 200 units, the equivalent of more than 1 per day. Additionally, KaVo's DIAGNOcam, a handheld radiation-free digital imaging scanner, won the German innovation prize for most innovative equipment product in dentistry in a survey of more than 4,000 German doctors.

Moving to our Industrial Technology 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 marking and coding 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 installed base. In 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, a 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 supercenter chains in the U.K., 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 1 less selling day than the first quarter of 2013.

Matt R. McGrew

Thanks, Larry. That concludes the formal comments. Marquita, I think we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Nigel Coe with MS.

Nigel Coe - Morgan Stanley, Research Division

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 talk about 3% in the context of what you've seen so far in January.

H. Lawrence Culp

Yes. 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, right? 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 sort of 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 the low-margin business there. But I think all-in, we feel good about things. But when we say approximately 3%, I think we know that we clearly need a few more weeks behind us here to have a better bead on the first quarter. But so far so good.

Nigel Coe - Morgan Stanley, Research Division

Okay. That's great. And then, even though no one extrapolates or prorates the [ph] amount, but given the 7-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?

H. Lawrence Culp

For the year?

Nigel Coe - Morgan Stanley, Research Division

Yes.

H. Lawrence Culp

Well, I don't think we're going to change that 2% to 4%. But clearly, getting off to a good start here in 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, right? With our exposures from health care to industrial, environmental, networking, an improved global scene will be very good for this portfolio, and we'll execute accordingly.

Nigel Coe - Morgan Stanley, Research Division

Okay, great. And then switching to margins. And I just wanted to begin with Industrial. 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?

Daniel L. Comas

Nigel, it's Dan. First of all, if you just normalize year-on-year restructuring, Industrial Tech margins were up 80, 90 basis points. 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 '12, 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, you're getting a point or so on equipment and instruments. It hasn't gotten worse, but since about a year ago, it's probably overall kind of flattish for us right now.

Operator

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

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Could you expand on the write-down on the Communications platform, talk about maybe what that investment was about, I think, and typically, how much you capitalize in R&D and sort of think 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?

Daniel L. Comas

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 kind of high return for us. Probably, there'll 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.

H. Lawrence Culp

Yes. Steve, that's it 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 to seed core [ph] technology for Lythos, the digital impression system 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.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

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

H. Lawrence Culp

Well, I think we're in a very good spot there, clearly, in terms of the challenges we're helping our service provider customers solve, as well as the folks on the enterprise side, right? 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. Clearly, a day doesn't go by with the cyber security headlines being rewritten. So we like where Comms, 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 Comms business can be a little bit lumpy, but I think we like the long-term trajectory there to be sure.

Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then maybe just turning to margins. On the Dental side, a little more color on the restructuring and growth investments there. What -- a little more sense maybe for the nature of that.

H. Lawrence Culp

Sure. I think maybe just a little bit of context. As we hinted in New York when we saw you, I think we had a little bit better visibility at the end of '13 than we have the last couple of years. So 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, 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 the sweet spot, both from a technical -- or 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.

Operator

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

Jeffrey T. Sprague - Vertical Research Partners, LLC

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 of health care deals trade away in the quarter. Roper, yesterday, was saying a couple of things slipped through their fingers that others took at 20x EBITDA. It still sounds like a very tough market to actually get things done.

H. Lawrence Culp

Well, I think we'd be the first to acknowledge that, over the last 4, 5 quarters, things have become more difficult in general. But I think our optimism, Jeff, is genuine because we're going to pick through a number of different situations that 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. So it is a little tougher, given the valuations, particularly in the public arena than a year ago.

Jeffrey T. Sprague - Vertical Research Partners, LLC

So how do we think then about kind of Plan B, another deployment, if the deals don't materialize? And I was wondering also if Dan could maybe give us a little color, like collectively, what the acquired multiple was on those 14 transactions, kind of aggregated multiple and aggregated sales acquired.

Daniel L. Comas

Jeff, overall, about 3x revenue and kind of a low-double digit, 11x, and I may be off by 0.5 point kind of EBITDA sort of 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.

H. Lawrence Culp

I'm just glad you didn't say it was 22x there. Jeff, the -- just 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 under-leveraged balance sheet, right? 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 balance or 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, right? 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.

Operator

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

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

So I think you guys mentioned $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. Was that just offset with growth? Is there -- is that just rounding error? Or can you maybe quantify what you did in the fourth quarter and talk about where -- within which segments you did it in?

Daniel L. Comas

A lot of questions there. I'll try...

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

It's basically fourth quarter restructuring. What was the absolute number and where did you have them?

Daniel L. Comas

So 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 lower in Life Sciences & Diagnostics. So if you look at the core margin expansion of LS&D, up 260, if you normalize restructuring, it'd 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 where we -- we also really stepped up some of our growth investment. So R&D was up 13% year-on-year in the quarter. It'd been tracking up around 8% or 9% through the first 9 months. Sales and marketing, a similar story. We're up 9% in the quarter versus tracking maybe 6% or 7% for the first 3 [ph] quarters, as I already 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.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

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 in -- it's reflected more in growth investments as opposed to productivity.

Daniel L. Comas

Sure. I mean our R&D itself was up $40 million, almost $40 million in the quarter. Our run rate would have suggested more like $30 million.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

Okay. And then one last question. Just on -- the Life Sciences & Diagnostics margins were very strong. What is Beckman now doing? And what do you expect for Beckman margins next year?

Daniel L. Comas

We -- for the full year, mid-teens, a little bit stronger in the fourth quarter, though that is somewhat seasonal. But as I mentioned to Jeff, with a little lower restructuring, very strong performance. We're trying to get away from talking specifically kind of 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 '14. So things are tracking well. More costs are coming out. Very pleased with how the year trended in terms of their Beckman margins.

Charles Stephen Tusa - JP Morgan Chase & Co, Research Division

And sorry, one last one, just on the day sales thing. You said it's mostly -- obviously, mostly hits in consumables, so that's a higher-margin issue. Is there any way to kind of quantify the EPS impact of that or at least the profit impact of that?

Daniel L. Comas

Well, if you just assume 1-day impact on consumables, no impact on equipment, probably just a little bit, but that would be 0.5 point of growth. 0.5 point of growth on $5 million (sic) is $25 million and that's a 50% fall-through, that costs us a $0.01, $0.015 in the quarter.

Operator

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

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Larry, a couple of the businesses that have been tougher, I mean, Motion you talked about orders turning positive in the quarter. Tektronix, I guess, is still down a little bit. Can you give a little color on what you're seeing there? I mean, is that flattening and turning positive dynamic, just a comp issue? Or are you seeing things actually get better there?

H. Lawrence Culp

Yes. No, I think at 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 digit in the fourth quarter in the U.S. I think, in China, we finally had traction from an execution perspective. So there's a lot there, frankly, that we're quite pleased with on top of the multiyear 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 '14. Things have been a bit bumpy, as you know, there. I think the China space, particularly on the export side, has continued to be particularly challenging. But I think 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.

Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division

Okay. 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?

H. Lawrence Culp

Yes. I think that's -- actually, I 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 we thought -- when we talked about as a 2.5% core in the fourth quarter, we thought consumables would lead there. 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 of hundred basis points better than that, I think it's another one of the signs that we can 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 just that snapshot is one that's hard to interpret in anything other than a positive way.

Operator

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

Julian Mitchell - Crédit Suisse AG, Research Division

In Dental, you discussed some mix issues in Q4 and some new product spend. But I guess if I look at the year as a whole, the margin was about flat. How are you thinking about the mix items into 2014? I mean, do you think we should see Dental incrementals pick up much or this is something that could persist?

Daniel L. Comas

Julian, I think you saw an improvement through the first 9 months of the year. Again, the fourth quarter was impacted primarily by the higher restructuring, but as Larry indicated, kind of the mix, with the equipment better than consumables. So 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 '14, I think that bodes well not only for the top line, but also for margin expansion here in '14.

Julian Mitchell - Crédit Suisse AG, Research Division

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 I guess 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?

Daniel L. Comas

They'll come down a little bit, but even our Radiometer and Leica Bio businesses, just given the high consumable content there, also continues to be very good even in the "more mature businesses" in terms of their tenure with Danaher, still seeing good fall-through. But it won't be probably at the level we saw in '13.

H. Lawrence Culp

Julian, I would just add to that, that if you look at the productivity investments that we made in the fourth quarter, LS&D still accounted for about 1/3 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's 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.

Julian Mitchell - Crédit Suisse AG, Research Division

And then just lastly on the kind of your own investments outlook. SG&A to sales was flat last year. Do you think that stays sort of flattish this year? And just any color on your CapEx assumptions for the year.

Daniel L. Comas

It should be. I mean, 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 '12 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 '14. So it probably climbs a little bit given the continued investment in sales and marketing. From a CapEx perspective, we are roughly teed up for kind of a low- to mid-single-digit increase in CapEx, kind of PP&E type CapEx.

Operator

We'll take our next question from Deane Dray with Citi.

Deane M. Dray - Citigroup Inc, Research Division

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?

H. Lawrence Culp

Well, I'll let Dan answer the first part of that. I think, with respect to the second part, it was really, really simple. I think these were below-margin opportunities we've gotten a hold of that looked a little bit more attractive at a distance than they did up-close. So effectively -- as you know, Dean, we've had a multiyear effort to put a premium on margin expansion in Motion. I think we give the team very high margin 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 has been at that for the better part of a year now.

Daniel L. Comas

Deane, so we were -- Motion was down mid-single digit in the quarter. Absent the businesses we've exited, it would have been down low-single digit, probably down 1 point or 2. We expect that dynamic to continue here in the first quarter. They're just getting better so we're 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 have a little bit in Q2, but basically largely completed by the end of Q1.

Deane M. Dray - Citigroup Inc, Research Division

Okay, good. That's helpful. And then, on China, the 20% up, was that an overall clinical or was that at 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.

H. Lawrence Culp

Yes. I would say that if you look at Life Sciences & 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 businesses, 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 enjoyed 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?

Deane M. Dray - Citigroup Inc, Research Division

Yes, it is.

Operator

We'll take our next question from Isaac Ro of Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

First one on Dental. Just wondering if you could maybe comment on what you're seeing in the underlying patient volume trends in the U.S. and then maybe what's baked into your assumptions for patient volumes this year.

H. Lawrence Culp

Well I think that 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 U.S., 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 at Ormco, I think, 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.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. That's helpful. And then just 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'll be enough mix shift here on the underlying business to move the needle on overall margins in the segment?

Daniel L. Comas

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. I think it's probably more about driving growth there than margin expansion.

H. Lawrence Culp

Right. And that's 1 segment, Isaac, where the 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.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Got it. And then just 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?

H. Lawrence Culp

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's an area where we'd like to do more. There are certainly spots within both Industrial Tech, particularly around Product ID, as well as in T&M, particularly if we can 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.

Operator

And we'll go next to Andrew Obin with Bank of America Merrill Lynch.

Andrew Obin - BofA Merrill Lynch, Research Division

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 sort of digest M&A to a more sustainable percentage of net income, which sort of means cash flow, is likely going to be a flattish for another year?

Daniel L. Comas

Andrew, the impact in 2013 was really not a lower -- it's not explained by lower M&A activity. It's a little bit of -- I hate to sort of 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 2 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 2 discrete items, our free cash flow would have been up $100 million year-on-year.

Andrew Obin - BofA Merrill Lynch, Research Division

And what should I think for '14 then?

Daniel L. Comas

I mean, I think 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 '14.

Andrew Obin - BofA Merrill Lynch, Research Division

Got you. And you said between 115% and 120%?

Daniel L. Comas

Yes, something in that zone.

Andrew Obin - BofA Merrill Lynch, Research Division

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 sort of $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...

H. Lawrence Culp

Well, I think regardless of deal size, each investment requires a certain level of work. I think we've 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, and 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.

Operator

And we'll take our final question from Charlie Brady with BMO Capital Markets.

Charles D. Brady - BMO Capital Markets U.S.

On the Industrial Tech business, maybe a little more color on kind of really what you're thinking on core growth in '14. I mean, Q4 this year was the best -- was the only positive quarter of the year, the best 1 in 4 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 '14. So just maybe a little more color on where you're seeing kind of a growth expectation on core for '14.

H. Lawrence Culp

Charlie, what we said -- as you 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 business 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 opportunity. The businesses are well positioned, and they ought to lead the way this year.

Operator

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

Matt R. McGrew

We'll be around -- thanks everybody for joining us. We'll be around all day for follow-ups, if you need anything. Thanks.

Operator

That does conclude today's conference. We appreciate your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Danaher Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts