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

Danaher Corporation (NYSE:DHR)

Q1 2014 Earnings Conference Call

April 17, 2014 7:30 AM ET

Executives

Matt McGrew – VP, IR

Lawrence Culp – President and CEO

Steve Rales – Chairman

Daniel Comas – EVP and CFO

Matt Gugino – Director, IR

Analysts

Scott Davis – Barclays Capital

Steve Tusa – J.P. Morgan Securities

Nigel Coe – Morgan Stanley

Jeffrey Sprague – Vertical Research Partners

Steven Winoker – Sanford Bernstein & Co

Shannon O'Callaghan – Nomura Securities

Brandon Couillard – Jefferies

Operator

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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (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.

Matt 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; 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 calls can be slightly different format here this quarter wherein Steve will open with a couple of remarks on the transition before getting into the details of the quarter and then the Q&A. So with that, let’s get through the disclosures.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, our first quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the 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 and 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 U.S. 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 relates 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 the 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 may make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements.

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

Lawrence Culp

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 am sure last night’s news comes as a surprise for many of you not because of my tenure, but because of my age. I am 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 with 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 has written about the benefits of revolution every twenty years or so.

So while I don’t anticipate a revolution per se at Danaher, I do take a fresh look of free swing to be a value to the company. That said, this decision is hard on the hard. 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 I am going to do. Well, after this call, I am going to go back to work. We have a lot going on and there is much I want to do before next March. First, Tom, the rest of the team and I will be working closely to effect the smooth Danaher class transition.

In turn, I am looking forward to spending more time in some areas of real interest to me, particularly education and perhaps even teaching. I am also keen doing some things with my family with the 24/7 nature of this job to make difficult. And I am hopeful that I will be able to bend the rod more regularly than I had in recent years.

But good bye to the long way off today. So let me stop there and hand it over to our Chairman, Steven Rales for a few comments before we discuss the details of the first quarter.

Steve Rales

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 to 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 his 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 I have watched them 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 of five times that of the S&P 500 index since Larry took the rings. Our annual revenue and high growth markets has increased ten-folds 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 has played a central role in expanding the Danaher business system and is building Danaher into a science and technology company. He has also developed the 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 mean time, Board and management recognizes his many achievements and we thank him for his (Inaudible).

Fortunately, Danaher has a history of developing strong managers and Tom Joyce is ready to become our next CEO. Tom has spent 25 years with Danaher and in 53 still has plenty of runway ahead of him. He has succeeded throughout his career and 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 represents $9 billion of annual revenues. He help shape the current portfolio with the acquisition and integration of many of Danaher’s leading brands including Beckman Coulter, AB SCIEX and ChemTreat. He is 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 the supporting cast and 65,000 plus associates create significant value for our shareholders.

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

Lawrence Culp

Happy with that Steve, thank you. We are off to a good start in 2014 and our team’s execution a function of our commitment to the Danaher Business System show better than expected top-line growth, outstanding margin expansion and solid earnings performance in the quarter.

We saw positive impact to DBS across our portfolio for the acceleration of new product introductions and go to market initiatives help drive mid-single-digit growth or better and 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 cross-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 U.S. and Europe grew low single-digits. This mark 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% and 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 margins 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.

We have 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 U.S. 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-size tool that allows network specialist to view emails store and analyze your test results on smartphones or in the cloud.

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

Apart from evolving to take full advantage of the tremendous opportunity may 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 online TOC or Total Organic Carbon analyzers that monitor water quality and help reduce waste primarily 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 see the opportunity to help customers who have been waiting for an IMO approved ballast water solution. Importantly, our testing was performed at a U.S. certified lab which provide us with an advantage as we seek U.S. type approval in the next stage of the regulatory process.

We believe Trojan 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 GVR was recently voted the best POS system and fuel dispenser manufacturer by the Petroleum Marketers Association of America.

In life sciences, and 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 Diagnostic platform grew at a low single-digit rate.

At Beckman Coulter, core sales were up 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 and 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 each critical test.

Radiometer’s 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 impart 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 of Japan up more than 20%.

Dental had an outstanding start to 2014 with the investments we’ve been making in new product development help 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, hi-tech and specialty brands, under one global platform and get our brands at the scale they need to better drive innovation, improve clinical outcomes and simplify workflows. 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 products’ global application. SonicFill is the only solution that enables clinicians to perform cavity restoration 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 sets 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 and 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.

And finally the Industrial Technologies’ revenues grew 4.5% with core revenues up 3% and 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 was 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 margin 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 inkjet printer, world’s first TIJ printer specifically designed for fast drying ink enabling customers to print high resolution codes on non-porous surfaces, four times faster than other inkjet technologies.

At ESKO, our suite of packaging management and design software grew double digit as the need for more efficient solutions across packaging workflow continues to build. ESKO remains the workflow management software provider of choice for brand owners with sales increasing more than 30% in this market.

So to wrap up, we are off to a very good start in 2014 as our teams’ 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.

Matt McGrew

Thanks, Larry. That concludes the formal comments. Debbie, we're ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll go first today to Scott Davis with Barclays.

Scott Davis – Barclays Capital

Hi, good morning guys.

Lawrence Culp

Good morning, Scott.

Scott Davis – Barclays Capital

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 are not doing that, so congrats.

Lawrence Culp

Thank you, Scott.

Scott Davis – Barclays Capital

Is there any risk, I mean, how do you avoid with the change in 12 months out, I mean, how do you avoid 12 months of inertia here? How are guys going to think about deals?

As this increase your – I mean, how does it change? I would be kind of awkward I think to announce the substantial deal and that passed on to Tom at this juncture. But is that the wrong way to think about it?

Lawrence Culp

Scott, I understand the concern, but I think that’s the last way we would think about it. Tom and I have worked together for 25 years. We have been both 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 identify and cultivating pursuing targets. We wouldn’t chase anything at this point that Tom wasn’t fully brought 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 got the time here to effect operationally, organizationally a very smooth transition and I am 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 of course will 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 mark, but from an M&A perspective, I think it’s very much business as usual. And I have to go back – if 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 is think precedent and confidence to suggest here that the transition no way will dilute or impede our activity on the M&A front.

Scott Davis – Barclays Capital

Okay, fair point and I don’t know if Steve Rales is still there available for questions, if he is, I thought to ask one if he is available.

Lawrence Culp

He is here Steve – he is here Scott.

Scott Davis – Barclays Capital

Okay, great and Steve, I mean, 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, so substantially more complicated and quality is definitely a lot higher sure, but how is the mandate for Tom change, how – stepping into a, he is filling the seats of a guy who just had a five-bagger in market cap and 13 years that’s a pretty tough shoes to fill. I mean, how does the mandate for Tom change? How does the Board think about how this company grows from $50 billion of market cap to something that’s acceptable to shareholders in that same timeframe?

Steve Rales

Thank you, Scott. I think the conversations about longer-term strategy and capital allocation are regular subjects to the Board. This is the Board that’s not unfamiliar with either of those. We'll examine the market as we always do. We 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 been into better position from the 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.

Scott Davis – Barclays Capital

Okay, fair point. Thanks, Steve. Congrats Larry and good luck to Tom. Pass it on.

Steve Rales

Thanks, Scott, we’ll do.

Operator

We’ll take our next question from Steve Tusa with J.P. Morgan.

Steve Tusa – J.P. Morgan Securities

Hey, good morning.

Lawrence Culp

Good morning, Steve.

Steve Tusa – J.P. Morgan Securities

Congrats Larry. I echo with Scott’s comments.

Lawrence Culp

Thank you very much.

Steve Tusa – J.P. Morgan Securities

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

Lawrence Culp

Sure, I think that we were pretty pleased from a geographic perspective with the way things played out. Just maybe a word on the U.S. 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 on the diagnostics side all the way to – but we really, we are encouraged by the building strength during the quarter and the way we exited the first quarter and even way we’ve begun April here. Europe, third quarter in a row being positive, admittedly it’s up in low single-digits but that’s too has been encouraging just given the history. Our European leadership conference was held just two weeks ago and the mood there, Steve was buoyant as it’s been in several years. So we are optimistic there particularly with respect to life sciences, the dental side of things and TID our oral health position in Europe. China, clearly lot of headline concerns there. But we are pretty pleased to see double-digit first quarter with a bit better balance between our healthcare businesses which in 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 round. So we are 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 play out for us here in the first three months. But still very much the high growth markets in the pole position. So we like what we saw broadly around the world in the first quarter.

Steve Tusa – J.P. Morgan Securities

And in the April you said, April was, how good as kind of April started and are you kind of assuming that do you know falls off here in the second half and you are consistent guidance for the second quarter, is there a comp issue in the second quarter with some similar organic?

Lawrence Culp

No, I think – we are really talking about a comparable core in the second quarter mindful that it’s still relatively really in the year, obviously a host of concerns out there in terms of the macro theme. 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 and probably helped a little bit given the Japanese tax dynamics. I suspect they wash, while we were thrilled with how strong dental Hach, VideoJet life sciences were relative expectations. We did have a choppy start in T&M, particularly in – and that's a space 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 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 I’m encouraged by the start here in April.

Steve Tusa – J.P. Morgan Securities

And then, one last question. Larry, I know you are probably, this is probably a dumb question, but I guess, in your mindset, are you still of the mind or you may spend some time with your family or this is kind of – do we take this you are kind of done with the large public company digs, I mean, are you going to take and are you kind of retiring? I mean, politics, have you thought about what the next step is at all, should we be surprised to see you resurface at another public company in a few years or it’s probably like you know a tough question answer obviously at this stage?

Lawrence Culp

But thanks for asking it. Steve, you know I am very fortunate given the great run that we had for a long time here that 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, he is a lucky guy to have that opportunity here in a while. My view is, I am going to be full speed up until March 1 and then I am going to be in advisory capacity doing anything and everything that Tom wants me to do including get out of the way. But I am genuine and serious about wanting to do some other things. So while I would say never say never, I think I’ve had a pretty good job here and in this realm, it will be tough to be.

Steve Tusa – J.P. Morgan Securities

Okay, congrats to Tom by the way too.

Lawrence Culp

Thank you, Steve.

Operator

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

Nigel Coe – Morgan Stanley

Yes, thanks good morning. Hate to sound repetitive, but congratulations Larry. And f you decide on politics I think the government could use some DBS methodologies. So, you think about that.

Lawrence Culp

Thanks, thank you Nigel.

Nigel Coe – Morgan Stanley

So, it sounds like March was stronger than Jan, Feb and it doesn’t feel like the weather had a big impact on your organic performance. I am wondering the impacts on consumables with equipment and whether that dynamic had any impact on your margin improvements during the quarter and how that maybe – shake up by segments?

Daniel Comas

Sure, Nigel. This is Dan. Good morning. Consumables were up 4% during the quarter which has been 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 posted in a number of quarters, balance stability it was the first, as Larry alluded to, better breadth in China. It’s 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. Some 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.

Nigel Coe – Morgan Stanley

Okay. And then just going back to the – it’s obviously a pretty healthy debate on capital deployments, PE seems to be pretty active, pushing up multiples to some pretty high levels. A lot of public companies that are out there saying they want to do more M&A. I am just wondering, is the environment tougher to deploy capital and then maybe just turning to that as well, what is the message on dividends? You obviously increased as four folds during the quarter, still a lot low in terms of pay out. But what is the message on dividends?

Lawrence Culp

Nigel, let me speak to M&A, maybe Dan will talk a bit to dividends. I think from an M&A perspective, there is no question that the environment given valuations first in the public market and the spillover effect in the private markets has been more challenging in the last couple of years, I think we have 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 are 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 are 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 that they – 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 cover. 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 strong interest in an asset in its entirety, I think we have great confidence in our ability to carry the debt. Dan?

Daniel Comas

Nigel, on the dividend, it’s like 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 are 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.

Nigel Coe – Morgan Stanley

Okay, thank you very much guys.

Lawrence Culp

You bet, thank you.

Operator

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

Jeffrey Sprague – Vertical Research Partners

Thank you. Good morning everyone. Larry the accolades are going all year, I'll just echo them. We’ll miss you.

Lawrence Culp

Thanks, Jeff.

Jeffrey Sprague – Vertical Research Partners

Good luck. I just want to come back again, maybe, approach M&A again to the question that Steve Rales is still there and to take another one. You have kind of unique position with your involvement with full effect also obviously and they do seem to be able to get that done over there. And I guess it does brings the question, is it simply a law of large number of dynamic that has come to bear as it relates to Danaher? Is there a need eventually to revaluate the portfolio or think of a new leg to open another vector for capital deployment? Do you think a question of size only has the ability to kind of perpetuate the business model?

Steve Rales

Thank you, Jeff. But 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 a very long view and our objective is to continue to try and find the way along with the management to make our businesses better and add value for shareholders. It’s an evolving process. It’s an ambulatory process. We are constantly looking at M&A, there is a certain vicinity if you will to the law of large numbers but we think more about opportunities and making our businesses better. Truthfully, Larry and Dan do a very nice job of communicating the company’s view on M&A, so I would defer to either them on the question.

Lawrence Culp

Jeff, I would just add that, we really don’t think beating a $20 billion revenue based company, a $ 50 billion market cap in anyway get 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 terms stronger, we’ve had more degree to freedom, we’ve had more – 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 the strategic platforms which would be great mid cap companies all by themselves if they were stand alone entities and it’s really that family of mid-cap companies working their market’s funnels around competitors, distribution, technology, bolt-ons that maybe 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. It’s really the group that targets the new space with the larger situations which naturally are going to be less frequent and at times more meaningful decisions this year amount of capital deployed. 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 eight plus billion in capital we intend that will build out our companies.

Jeffrey Sprague – Vertical Research Partners

All right, fair enough. Just a quick one for Dan if I could. You did get a number of small deals currently in the first quarter, can you give us an idea of how many transactions were in there and what the average valuation was?

Daniel Comas

Jeff, we closed five acquisitions in the quarter which was an increase and we are seeing actually an increase around small deals which hopefully will be a positive sign about potentially getting something bigger done. Spend about a $160 million so relatively modest. A mix, some of those are businesses that are relatively low margin today, but it will come in as bolt-ons or 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.

Jeffrey Sprague – Vertical Research Partners

All right, thank you very much and good luck Larry.

Lawrence Culp

Thanks, Jeff. I’ll still be around a while.

Operator

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

Steven Winoker – Sanford Bernstein & Co

Thanks, good morning and obviously, I’ll echo that congratulations Larry, fantastic.

Lawrence Culp

Thank you, Steve.

Steven Winoker – Sanford Bernstein & Co

So, hey, since you are a student of Thomas Jefferson, I can’t help, but recite one of his quotes right delay it’s preferable to err on the capital deployment side, you didn’t say that second part, but, it’s a great quote and I understand that sort of how you are thinking about it. Is that $8 billion still the right number, I should be thinking about?

Daniel Comas

Steve, it’s Dan. I mean, clearly if you look at the balance sheet, the breadth of our, the quantity of our free cash flow, you can pencil out a larger number that until we obviously get some deals done aside, I think we will stick with the $8 billion.

Steven Winoker – Sanford Bernstein & Co

Okay and Dan while I’ve got you, since we are in this period where M&A is a lot smaller in terms of reviewing the portfolio right now, the – where can ROIC go and I am just assuming that there is a continued delay for a little bit of time and how do you see ROIC kind of playing out in that event?

Daniel Comas

Well you’ve been seeing at 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. We’d 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 are getting I think good relative performance on the top-line and good margin expansions along with it and that's obviously increasing our overall returns.

Steven Winoker – Sanford Bernstein & Co

Okay and sir if I could add one more just on the earnings side, the dental strength that you guys had was a surprise to me anyway. What do you really attribute that to? Is it sort of product, market, or what can you identify kind of that and give us a sense for the sustainability, or you just think it’s sort of a lumpy demand and we just have to be like this quarter?

Lawrence Culp

Steve, I think if you look both at the consumables versus technologies divide as well as the 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 from Japan given the VAT increase. But it was once said dental is a mid single-digit grower, strong imaging and digital franchises and technologies, and while they 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 U.S. 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 it for us as we go through the year.

Steven Winoker – Sanford Bernstein & Co

Okay, great. Thank you.

Lawrence Culp

You bet, Steve. Thank you.

Operator

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

Shannon O'Callaghan – Nomura Securities

Good morning guys.

Lawrence Culp

Good morning Shannon.

Shannon O'Callaghan – Nomura Securities

Congrats Larry. Great job and really happy for you. Good luck with the next part of the journey but we will have you around for a while. Hey, you mentioned, speaking it being around for a while, you mentioned wanting to get some things done before you leave, I mean, are there any sort of big things on that checklist that you think you want to make sure you get done before you hand it off?

Lawrence Culp

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

Shannon O'Callaghan – Nomura Securities

Okay, so, it’s mainly M&A focused anything other than that sort of that internal initiatives or other things that you feel like you want to bring to posture now?

Lawrence Culp

Well, I think a lot of our internal initiatives are around the high growth markets, around what we are doing in terms of taking full advantage of the web, what we are doing increasingly at a platform and regional level is work that we won’t finish when Tom hands. This is the work that Tom and I and the rest of the team has 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 we’d expect to continue to be focused. Clearly, getting the team ready as well, as they assume the new and additional responsibilities will be part of – 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.

Shannon O'Callaghan – Nomura Securities

Okay, thanks. And then, you’re seeing 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 going?

Lawrence Culp

Well, I think that we will take this stability that we are seeing in some of the larger tech verticals like computers, communications, semi and alike. The broader distribution business has actually been decent, but again because of the gov dynamics particularly in the U.S. here at the start of the year which we saw – I know some competitors have spoken to, puts us in that flattish zone. We’d like to thin k we see a little bit of an uptick from there but don’t anticipate necessarily a pronounced spring back at Tektronix through 2014, but gradual improvement.

Shannon O'Callaghan – Nomura Securities

Okay, all right thanks a lot guys.

Lawrence Culp

Thank you, Shannon.

Operator

We will take our next question from Julian Mitchell with Credit Suisse

Julian Mitchell – Credit Suisse

Congratulations. I just had a quick question on broader one test and measurement really. If you look at the organic growth in that segment, the last ten quarters, it’s about 0.5%. I just wanted to know something with the portfolio you needed some major work in – or it’s just a function of sluggish macro factors?

Lawrence Culp

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 networks build out that we’ve been a large part of. We think that opportunity that challenge is to keep up with the explosion in bandwidth demand that we are all generating which will be with us for a while. Soft start to the year in network security, but as you know the last couple years, that’s been a strong performer for us and we are optimistic that it will return the type of performance as we go through the year. But on the instrument side, Fluke has had a tough goal of it, particularly in places like China where there is the slowdown in the industrial factor 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 are encouraged by Fluke here putting up another quarter of positive growth. We really like these new products that are coming out and 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 is 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 build on that stability and hopefully get them back to growth as we go through the year.

Julian Mitchell – Credit Suisse

Great, thanks and then life sciences, the last couple of years, each year you had large expansion about 150 BPS each year, Q1 was up 50 BPS, life science is larger, is that kind of the run rate going forward just because I guess most of that savings is now been squeezed out?

Daniel Comas

Julian, we were – core margins are 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 diagnostics, 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. So I think that’s encouraging. That creates a little bit of negative mix just because if the incremental sales of consumables is at higher margins. So I think you will see continued very good margin performance and expansion in the segment.

Julian Mitchell – Credit Suisse

Thanks, Dan and just lastly on the CapEx, I think you talked before about low mid single-digit CapEx increase this year, Q1 was up lot more than that. Do you change the full year or it was just (inaudible)

Daniel Comas

Well, 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 PPV, it’s actually expanding our installed base at Beckman which is obviously a good sign for the business.

Julian Mitchell – Credit Suisse

Great, thank you very much.

Lawrence Culp

Thanks, Julian.

Operator

Ladies and gentlemen, we will take our final question today from Brandon Couillard with Jefferies.

Brandon Couillard – Jefferies

Thanks, good morning.

Lawrence Culp

Good morning, Brandon.

Brandon Couillard – Jefferies

Larry, could you elaborate on 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 U.S. when do you think that we see that translate into a core revenue inflection in the Beckman diagnostics unit?

Lawrence Culp

Well, I think that, we did a bit better from a bookings perspective and again better in bookings than we did in shipments. But 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 it’s significant, because it’s really the combination 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 floor and in turn see that consumable stream. But we think that as we move forward sequentially through the course of the year that we will see a pick up as a result of those as increased wins here in North America, done unlike what we are sitting already in terms of early benefits from the return of the component to our whole suite of analyzers. So it will be gradual, I wish it was more rapid, but we will take the early indicators here of progress and then we can build on the print through the course of 2014.

Brandon Couillard – Jefferies

And then just one for Dan, operating cash flow is a little soft even excluding the discrete factors from last year. What’s your operating cash balance for the year and how quickly would you expect the timing dynamics from the first quarter to normalize?

Daniel Comas

I think, you are seeing on an improvement here in Q2 as Larry alluded to given the stronger shipments in March relative to the first few months that hurt us a little bit from a timing perspective on CapEx but I think that will shortly reverse itself.

Brandon Couillard – Jefferies

Okay, thank you.

Daniel Comas

Thanks, Brandon.

Lawrence Culp

Okay, thanks everybody. We are around all the day for you to take follow-ups.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today’s conference.

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's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts