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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

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

Nigel Coe - Morgan Stanley, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Jon Davis Wood - Jefferies & Company, Inc., Research Division

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

Scott R. Davis - Barclays Capital, Research Division

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

Jeffrey T. Sprague - Vertical Research Partners Inc.

Jonathan P. Groberg - Macquarie Research

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Danaher (DHR) Q1 2012 Earnings Call April 19, 2012 8:00 AM ET

Operator

Good morning. My name is Agasta, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation First Quarter 2012 Earnings Release Call. Today's call is being recorded. [Operator Instructions] I would like to now 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; and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, our first quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investors section on our website, www.danaher.com, under the heading Financial Information and subheading Quarterly Earnings and will remain available following the call.

The audio portion of the call will be archived in the Investors section of our website later today under the heading Investor Events, and will remain archived until our next quarterly call. A replay of this call will also be available until April 26, 2012. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally, and the confirmation code is 4431956.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the accompanying slide presentation, our earnings release, our first quarter Form 10-Q and other related presentation materials supplementing today's call for additional factors that impacted year-over-year performance. All references in these remarks in the accompanying presentation to earnings, revenues and other company-specific financial metrics relate only to the continuing operation of Danaher's businesses, unless otherwise noted.

I'd 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 a result of new information, future events and developments or otherwise.

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

H. Lawrence Culp

Matt, thanks. Good morning, everyone. The first quarter progressed largely as anticipated against the highest core growth quarter of last year. Sales from the developed markets grew slightly, with the U.S. again noticeably better than Europe, which declined this quarter. China revenues were essentially flat while the rest of the emerging markets grew at a high single-digits rate.

Overall, we were encouraged by a number of factors. Both shipment and orders improved sequentially through the quarter. Organic order growth was about 2 points higher than revenue growth as we built backlog across many of our businesses. This was most noticeable in China, where our book to bill exceeded 1.1.

Also, in a number of markets, sellout by our distribution partners was stronger than our sell-in. We were pleased with the team's execution in the quarter, which led to 85 basis points of year-over-year core operating margin expansion, a 37.5% year-over-year increase in free cash flow and a 19.5% increase in EPS.

We continue to aggressively invest in new product introductions and go-to-market initiatives. During the quarter, we launched a number of exciting products, a few of which we will highlight through the call today.

We remain active and optimistic on the M&A front. As you saw last week, we announced the pending acquisition of X-Rite, a global leader in color measurement. Even after closing X-Rite and 3 other deals in the quarter, we expect to have approximately $5 billion of M&A capacity over the next 2 years.

So with that as a backdrop, let me move to the details of the quarter. Today we reported record first quarter diluted net earnings per share of $0.73, a 19.5% increase as compared to our diluted net EPS last year. Revenues for the quarter increased 31% to $4.3 billion, with core revenues up 1.5%. The impact of acquisitions, primarily the addition of Beckman Coulter, increased revenues by 30.5%, while the negative impact of currency translation reduced sales by about 1 point.

Our gross margin for the first quarter was 51.8%, a 250-basis point sequential improvement from the fourth quarter. Our operating margin in the first quarter decreased 80 basis points year-over-year to 17%.

DBS continues to be a primary driver of our outstanding cash flow performance. First quarter operating cash flow was $651 million, a 50% increase year-over-year. Free cash flow was $534 million, an increase of 37.5% versus the prior year. Our free cash flow to net income conversion ratio was greater than 100%, inclusive of more than $50 million of incremental year-on-year cash spending related to our fourth quarter 2011 restructuring program.

And finally, our tax rate in the first quarter was 25.3%, which was modestly higher than we had forecast. We expect the rates to be closer to 24% for the balance of the year.

So now let me turn to the 5 operating segments. To start with Test & Measurement, revenues there -- core revenues increased 2% for the quarter. Core operating margin for the first quarter increased 195 basis points while reported operating margin increased 190 basis points to 22.6%. Overall, our instruments businesses' core revenue declined mid-single digits in the quarter.

Fluke core revenues were down slightly in the quarter, as growth in the U.S. of our service and installation tools was more than offset by weak demand in Europe and China. During the quarter, we launched the new Ti100 thermal imager platform, designed for industrial and building inspection applications. These imagers feature easy-to-use innovative on-camera tools and plug-and-play connectivity with Fluke's smart new software to collect, edit and analyze thermal images. Initial orders have been quite strong.

Tektronix core sales declined mid-single digits in the quarter with continued softness in Europe and China. In the U.S., we continue to see solid POS, though our sell-in to distribution partners declined year-over-year. We were also encouraged by the sequential improvement we saw in order activity across the business, with book to bill finishing at 1.0 for the quarter, an acceleration from the mid-90s rate last quarter.

The recent launch of TEK's 70000D Series 33-gigahertz oscilloscope is off to a great start, and our MDO4000 mixed domain oscilloscope continues to gain broad industry recognition as a game-changing technology. In the quarter, the MDO4000 received the prestigious ACE Award and the ultimate product in Test & Measurement systems category, the ninth major award recognizing the innovation at the foundation of the MDO4000.

Core revenues from our communications businesses grew at a mid-teens rate in the quarter, led by healthy demand for Tektronix Communications' network management solutions for wireless carriers in North America, as well as our enterprise tools and network security solutions globally. Customers' response to Fluke Networks recently launched OptiView XG and Arbor Networks' Pravail network security system continues to be strong.

Moving to Environmental. Revenues increased 4% in the quarter with core revenues up 2.5%. The segment core operating margin declined modestly in the first quarter, with reported operating margin decreasing 70 basis points to 18.6%.

Water Quality core revenues increased at a low single-digit rate while orders were up mid single digits, due in part to solid demand across most industrial verticals. Municipal spending was stronger than anticipated in the U.S. but remains constrained in China, but project funnels are encouraging there.

Trojan is continuing validation work on its ballast water treatment solution and remains on track to begin shipping systems in earnest later this year. During the quarter, the U.S. Coast Guard issued their highly anticipated Ballast Water Discharge Standard, an important signal to the global community that the U.S. supports international regulation.

ChemTreat continues to outperform based on the strength of their sales footprint and technical capabilities. During the quarter, they had several significant wins including a major U.S.-based manufacturer with over 20 sites. The first quarter marked ChemTreat's seventh straight quarter of double-digit revenue growth, an outstanding achievement.

Gilbarco's -- Gilbarco Veeder-Root's core revenues grew low single digits, led by demand for our dispensers, vapor recovery solutions and automatic tank gauges. Our 2010 acquisition of the L&T dispenser business in India has allowed us to significantly expand our localization initiatives in that region. Recently, Gilbarco launched a new dispenser platform designed and manufactured in India. Customer reception has been extremely favorable, helping drive greater than 20% growth in our dispenser business in the quarter.

Moving to Life Sciences & Diagnostics. Revenues for the quarter increased 146.5%, largely due to the addition of Beckman Coulter. Core revenues were up 2% in the quarter. Core operating margin for the segment was up 25 basis points in the first quarter while our reported operating margin decreased 110 basis points from the prior year to 13.3%, largely as result of the Beckman Coulter acquisition. The Diagnostics businesses got off to a solid start to the year with mid single-digit core growth which, as a reminder, does not include Beckman Coulter.

Radiometer's core sales increased at a high single-digit rate, with broad-based strength across most product categories and geographies. Demand for our ABL80 blood gas analyzer in China was particularly robust, growing more than 20% in the quarter.

Following last years' regulatory approval, customer adoption of AQT in China has been strong, driven in part by the outstanding value proposition presented for our customers. A large Class 3 hospital in China recently purchased an AQT and informed us that they experienced a 66% improvement in turnaround time for cardiac marker results, which allows the hospitals to perform 2.5x the number of cardiac tests versus their central lab. We're obviously thrilled when we hear that sort of customer feedback from core customers.

Leica Biosystems sales increased at a low single-digit rate, with mid-teens in shipments and order growth for advanced staining. The core histology business was flat in the quarter, largely driven by weakness in Europe.

Our Life Sciences businesses experienced flat core growth in the quarter. AB SCIEX core sales grew modestly in the quarter. However, orders were up mid-teens, positioning the business well for strong core growth in the upcoming quarters. Mid single-digit revenue growth in the U.S. and emerging markets was largely offset by weakness in Europe. The team continues to do an excellent job on the margin front as core margins were up over 100 basis points in the quarter.

At the Pittcon conference in February, SCIEX debuted several new products, including the 4500 Series of mass spectrometer, the Eksigent 100 series of analytical flow rate liquid chromatography products and a new micro flow rate instrument. The 4500 delivers 10x better sensitivity compared to competitive systems in the same midrange class and is well suited for applications in high-growth applied markets. The 4500 replaces the 4000 series, which is the best-selling mass spectrometer in company history. The 4500 was just named top new product at Pittcon by Instrument Business Outlook.

Leica Microsystems sales were down slightly in the quarter as solid demand in the life science research and industrial markets in North America and the emerging markets was offset by weakness across Europe.

Beckman Coulter continues to exceed our expectations, as DBS continues to make an impact in many facets of the business. In addition to the progress we've made in terms of quality with the resolution of sodium and glucose, we're also making progress in other customer-facing parts of the business.

As we implement DBS across Beckman, we've been able to increase our on-time new instruments installations in the U.S. by more than 20% and reduced unscheduled service calls by close to 15% since the closing last June. We've also seen a dramatic decrease in past-due schedule maintenance calls, which will be closed in June, numbered over 2,000 and today are below 200 with the line of sight to an even lower number.

As customers see the progress, the improvements are starting to show up in the numbers. Previously, we talked about improvements in the retention and new win rates in November and December of last year. And the first quarter saw a continuation of those trends, resulting in the second consecutive quarter of positive, though modest, revenue growth.

Operating margins in the quarter improved over 400 basis points year-over-year and represented the best Q1 performance since 2006. While there's a lot of work ahead, we are happy with what the team has accomplished in the past 9 months.

Turning to Dental. Segment revenues and core revenues increased 1/2 of 1% in the first quarter. Reported operating margin increased 200 basis points to 12.7%, reflecting the actions we have taken to accelerate their profitability.

Dental consumables' core revenues grew slightly in the quarter, led by sales for our orthodontic solutions and infection prevention products across most major geographies. This was largely offset by softness in our general dentistry consumables where we believe our sell-in to distribution partners was less than our sellout. During the quarter, we introduced several new orthodontic products, including the Damon Clear passive self-ligating bracket solution for the lower arch. Customer reaction here has been extremely positive.

Kerr reached a significant milestone during the quarter with the millionth SonicFill shipment. SonicFill is a first-of-its-kind product that enables clinicians to perform posterior restorations with a fast, easy-to-use and reliable bulk fill technology using a sonic activated handpiece. The technology, developed in conjunction with KaVo team, has been a tremendous success for Kerr and KaVo, exceeding our expectations each step of the way.

KaVo core revenues increased slightly in the quarter, with growth in imaging and equipment in North America and Europe offset by weakness in instruments globally. During the quarter, KaVo received recognition for its LUX 550 (sic) [ 540 ] LED light, which won the most innovative product in the devices and equipment category as voted on by the recent IDS trade show attendees.

Moving to our Industrial Technologies segments -- segment, revenues increased 8.5% for the quarter, with core revenues flat. Our core-operating margin declined 20 basis points in the first quarter with our reported operating margin down 150 basis points to 20.6%. Product Identification core revenues grew slightly in the quarter, led by solid global demand for consumables and Videojet's continuous inkjet printers, primarily in Europe and Latin America.

As I mentioned earlier, last week we announced a merger agreement with X-Rite, headquarters in Grand Rapids, Michigan, X-Rite manufacturers, markets and supports innovative color solutions through measurement systems, software, color standards and services. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close in the second quarter of this year.

The acquisition is expected to be dilutive to EPS by approximately $0.03 in 2012 and $0.04 accretive in 2013. We're excited about the strategic opportunities that lie ahead for Esko and X-Rite, and I look forward to sharing more about this opportunity with you in the coming months.

Our Motion businesses' core revenues declined at a high single-digit rate in the quarter, with softness in the industrial automation technology and renewable energy markets across most major geographies. We are encouraged by recent order trends, as this was the second quarter in a row where our book to bill has exceeded 1.0. As a result, we expect to resume growth in the second half of the year.

So to wrap up, the year started largely as we expected. We were particularly please with the team's execution, which led to excellent core operating margin expansion, cash flow and earnings performance and are encouraged by the momentum with which we exited the first quarter. The sequential improvement within the quarter, solid bookings growth and an attractive acquisition environment, we believe, positions us well for the balance of 2012 and beyond.

We are initiating second quarter diluted EPS from continuing operations guidance of $0.76 to $0.81 for the quarter, which includes approximately $0.01 of anticipated dilution from the pending X-Rite acquisition. The second quarter earnings per share guidance assumes 3% to 5% core revenue growth. We are nearing -- narrowing our full year diluted EPS guidance from $3.20 to $3.35 to $3.25 to $3.35, which includes $0.03 of anticipated dilution from X-Rite.

Matt R. McGrew

Thanks, Larry. That concludes the formal comments. Agasta, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Shannon O'Callaghan of Nomura.

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

Larry, can you fill out the thoughts a little bit on China? You guys have talked about some of the signs you had seen of easing there last -- on the last call. Have you seen things sort of play out through the quarter, and how has that contributed to this overall kind of pickup in orders you've seen through the quarter?

H. Lawrence Culp

Right. Well, I think, Shannon, China was certainly central to a good bit of what we saw improved during the course of the quarter. Our book to bill in China in the first quarter was greater than 1.1. I think that's obviously helpful in terms of our internal metrics. I'd add to that in a number of businesses, Water particularly, we saw strengthening through the quarter in our project funnel, and I think that's part of what gives us the optimism that some of the external data that we see strengthening, like PMI suggested, as we go through the year here, China should get better. So we obviously were pleased with what we saw in China. I wouldn't say by the same token that it was particularly surprising in that regard. And as we look here, I think we'll see strong acceleration in China, and we should see China, I think, in the mid to high single-digit range here straightaway the second quarter.

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

And you said it was flat in 1Q, right?

H. Lawrence Culp

Correct.

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

Okay. And then can you maybe just talk a little bit about the trajectories on TEK instruments versus Motion? So I think TEK was down like mid single digits in the quarter; Motion, high singles. You said TEK is going to improve through the year. I mean, does that go positive already in 2Q? I know Motion doesn't. It stays negative. So can you just talk about, I guess, the different trajectories and improvement in those 2 businesses?

H. Lawrence Culp

Yes. I think they will -- both businesses will improve, in part because obviously the comps will get easier in both businesses. And again, I think we're seeing encouraging trends, both with respect to our internal metrics, i.e., bookings, in addition to some of the external data points, be it PMI, NASDAQ, what have you. That said, I think that it's going to take TEK longer to go positive. I think they'll both be challenged here in the second quarter. I suspect we'll see Motion go positive in the second half. It may well be though, Shannon, I think until the fourth quarter that TEK instruments is positive on the core front.

Operator

Our next question comes from Nigel Coe of Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

Larry, could you just maybe just give a little bit more color on -- in terms of the full year outlook? Can we -- you gave us, obviously, a lot of detail back in December, but the earnings number have come up by $0.05 at the low end. But in terms of your businesses or geographies, can you just maybe just give a bit more context in terms of what you're seeing right now compared to December?

H. Lawrence Culp

Well, I think that what we said in December, again, I think played out, by and large, as anticipated here in the first quarter. I think that as we look forward here, Nigel, again, I think we are encouraged by a number of the bookings trends that we saw, particularly in the U.S. and the emerging markets. We again saw that spread between the U.S. and Europe. This time about 700 basis points. Obviously, we saw Europe soften a bit. One key point with respect to Europe as we look forward is the second quarter is really the last quarter of last year that we'll be working. Hence, what we saw, a mid single-digit growth. So the European comparisons get a little easier, but we're not anticipating any rebound in the underlying market conditions in Europe. That said, I think the U.S. book-to-bill numbers, the sellout -- the sell-in/sellout dynamics, our funnels and the like give us optimism that barring some change in the macro scene, the U.S. will continue to be good and strong for us. If we look at emerging markets x China, we're very pleased with what we saw in the first quarter. We were up high single digits. And again, if that holds as we would suspect it will, that, in combination with improving China, gives us more tailwind out of the emerging markets than we've seen here in the last couple of quarters. So I think all-in, we certainly have a number of dynamics that we're working through. We talked to TEK. We talked to Motion a moment ago. But on balance, with what we've seen in Life Sciences & Diagnostics, very encouraged there. I think when you look at Product Identification, there as well encouraging outlook. Environmental, both within Water and at GVR, I think it's going to be getting better as we go through the year. So barring some sort of cataclysmic macro change, we think we're going to continue to see the acceleration we talked about with you in New York in December.

Nigel Coe - Morgan Stanley, Research Division

Okay, great. And then the sell-in versus sellout dynamics, have we seen that channel destocking? Would you characterize that as now largely complete, or are you still seeing some pressure there?

H. Lawrence Culp

Well, I think that where we saw it, Nigel, probably most pronounced in T&M and in Dental. I would say that it probably, by and large, has run its course, but I wouldn't want to speak for the network distribution partners that we have around the world. I think a number of them, despite good, healthy sell-through in the first quarter, continue to take a conservative posture. That's -- we're going to play the long game here and work with them to make sure they are stocked with products that they need and that we're both generating demand in the marketplace. But in terms of that continuing at the rate that it has here of late, I would find it -- I find that unlikely to be the case.

Nigel Coe - Morgan Stanley, Research Division

Okay, great. And then just one more, if I may. Environmental margins were down year-over-year. Could you just maybe just talk about that? Was that mainly mix?

Daniel L. Comas

Nigel, it's a little bit of mix. But it was really more investment. They had a nice step-up. I mean, overall, across the segment, good step-up in year-on-year gross margin percentage. We have stepped up some investment there. Obviously, the ballast water is part of that as well. The margins were obviously relatively flat year-on-year, but a lot of that was driven by increased investment.

Nigel Coe - Morgan Stanley, Research Division

Does that continue through the year?

Daniel L. Comas

You'll see some improvement, in part because we expect growth -- better core growth through the balance of the year, but that step-up investment will continue.

Operator

Our next question comes from Deane Dray of Citi.

Deane M. Dray - Citigroup Inc, Research Division

On X-Rite, I was hoping you could walk through the value proposition of this business, both from the color brand management but also a bit more on the technologies. If I'm not mistaken, there's some overlaps with, of all businesses, Hach, in the photo spectrometer side.

H. Lawrence Culp

Deane, you're absolutely right. We actually -- we're once in the color business back in the old days with Dr. Lange. Both Lange and Hach used similar spectrophotometric technology to glean the end [ph] results that their instruments produced. So it's a space that we know for a long time. I think that with X-Rite -- or excuse me, with Esko, our perspective on X-Rite really evolved from it being an attractive opportunity won that just made a ton of sense. It was the #1 company atop the Esko funnel. I think from a value perspective for shareholders, I think we'd say that this is an attractive $600 million adjacency to what we do within Product Identification, good underlying growth. I think the company clearly is the market leader here. They have a strong 3 to 4x share lead on competition. Two great brands in both X-Rite and Pantone. I think you see all that play out both in the 60% gross margins and the 20% operating margins. And I think the deal economics are such that we should hit that double-digit return within 3 years, probably do better than that as we have at Esko. So in terms of the space, the company, the deal, we like that. What X-Rite enables us to do is basically help brand managers throughout their entire supply chain, from the time they conceive the packaging for a new soda or a new tube of toothpaste all the way until that packaging is manufactured and sent into the distribution network, to not only manage the packaging of thoughtfully only in a digital frame, but now add to that the key element of color management. So whether you talk to a Unilever, a Proctor, a Coke, they see this as a fundamental challenge and opportunity in their business, not only with respect to cost savings but often have literally scores of versions of a white, a red, a yellow, but also the complexity as their businesses have globalized in keeping those brands' standards up to the global standard. So we're off to a great start with Esko. As you well know, this has been a -- this is a strong grower for us from the get-go, and I think the opportunity to partner with X-Rite is going to be another good addition to Danaher, but also turbo charge what we're doing in Product ID going forward.

Deane M. Dray - Citigroup Inc, Research Division

Great. And then over on the tool side, for Apex Tools, can you comment on operating results? And I know you have to be a bit guarded in how you comment on the -- both the timing, but are you thinking about the opportunities to monetize this asset, and what might the timing be?

Daniel L. Comas

Deane, this is Dan. Off to a good start there. The combined business posted the best-ever gross margins in their history, even on a kind of pro forma basis, very good operating margins as well and actually a little bit slow here in Europe, but continued good progress in the emerging markets. We're not going to comment on external rumors. I think we said from the start, we wanted to -- the teams really get after a lot of the cost savings and the go-to-market opportunities that, that continues, and we'll see what happens over time.

Deane M. Dray - Citigroup Inc, Research Division

But -- is it fair to say that the whole thesis of putting these 2 businesses together is playing out at or above plan?

Daniel L. Comas

I think we and Cooper could not be happy with the team's execution and the benefit we thought we will achieve by putting the units together.

H. Lawrence Culp

And they've been a very constructive partner, Deane.

Operator

Our next question comes from Jon Wood of Jefferies.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

So, Larry, can you just give a bit more color on Beckman? Obviously you had some modest growth there, better than the flat you talked about. Can you parse out kind of the core chemistry in immunoassay businesses from the life science's piece? And any expectation on a troponin refiling or change in expectation? We'd love to hear an update there.

H. Lawrence Culp

Jon, let me try to cover a number of those bases. I think we couldn't be happier, just as a headline, with where we are. As you point out from a performance perspective, the top line is improving, there's no doubt about it. That is in part a function of, I think, what we're doing on the quality and the service front. I'll come to that in a moment. But obviously, we're also seeing, I think, excellent progress on the cost side. The -- in terms of the core, we were at a low single-digit growth number. We were not flat. We'll take that as encouragement. That's 2 quarters in a row now. I think the underlying dynamic there really is in and around the retention and the win rates, which continue to improve. What we saw back last year continued through the course of the first quarter. We were up, I think, on a retention-rate basis of about 700 basis points, say, the last 5 months versus the preceding 5 months. So good traction there just for a whole host of different reasons. The win rates are improving as well. So if you think about that as a trajectory, I think we're -- we couldn't be more pleased with the recovery in the marketplace and in turn, so there is a lag effect to growth in the business. On the cost side, we were really pleased with the way the first quarter played out. If you go back in time, you really have to go back to '06 to see them at 16% at the operating level. That's more than 400 basis points from where we were a year ago. Lots of things coming in as we had anticipated. I think from an integration perspective, the reception to Danaher DBS continues to be thoughtful, strong, just -- as good as it could be. You talked about the Diagnostics and Life Science split. We have split the businesses, as you know, organizationally. We will be -- once we're in the core growth reporting mode, we will report those businesses separately. But to your question as to how the core growth splits, both Dx and Life Sciences were, in essence, both at that low single-digit rate. The organizational evolution is part of that; integration continues. We brought on a new Chief Medical Officer, an important and critical hire. There are a number of other things that we're doing lower down in the organizational chart now that I think bodes well for the future. And you asked about troponin, on the quality and service front, I think we continue to see DBS changing the way that we are doing the work there. Quality clearly is job one. Very pleased with some of the other assays that I mentioned in the prepared remarks that have been cleared, sodium and glucose. Troponin has been slightly slower, but the results have been steady. The progress good. And I would expect that while we're not going to try to provide a realtime update on these filings going forward, we should be in a good place on troponin very soon.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

All right, very comprehensive.

H. Lawrence Culp

Services also, Jon, just if I can just add one final point. What we're doing on the service side, you heard some of the data around: installation performance up 20% from a year ago; unscheduled service calls down 15%; a 90% reduction in past-due maintenance calls. These are all sorts of things that most Danaher businesses take for granted. Huge opportunity for us to possibly impact customers in Beckman by way of DBS. So all in all, a long way still to go here. But 9 months in, we're thrilled.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

All right, great. That was very comprehensive. My follow-up just quickly on SCIEX. Did -- up modestly but bookings up mid-teens. How impactful was the introduction of the 4500 intra-quarter? Meaning, did it impact the shipments of kind of that legacy system? And was that the primary driver to the booking strength kind of in the, say -- let's call it, the second half of March? Or did that not -- did you not start to book actual business from the 4500 in the quarter?

H. Lawrence Culp

Jon, the introduction of the 4500, while exciting, really isn't a material part of that dynamic. I would say that really what we saw was strengthening in the order books at SCIEX through the course of the quarter. Timing's part of the reason you see that book shift delta that we highlighted. And obviously, with a bookings quarter like that in the double digits, it gives us a lot of optimism on top of what we introduced at Pittcon. And hopefully, we've got a few things to show at ASMS that as we go through the year, we should continue to see AB SCIEX be an important growth driver for the segment and for the corporation.

Operator

We'll go next to Steve Tusa of JPMorgan.

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

You guys mentioned automation being weak. You kind of called it out. You don't usually do that in the 10-Q. Could you maybe just give us a little bit of color geographically, and how bad was it in the quarter for Motion?

H. Lawrence Culp

Well, I think that automation -- remember, the machine builders that we service at Motion, both at Kollmorgen and Thomson, have seen build rates in some of the verticals that we serve as we highlighted, Steve, slow. I think the build rates are clearly what's impacting our growth in those segments currently -- or in that segment -- those businesses currently. I think we are heartened by the strengthening in the order book, in the book to bill. But as you well know, that's going to really be a second half positive sector on our core growth in those businesses. So I wouldn't say that it was horrible or disaster, anything like that. But I think coupled with some of the softness that we've seen in China, particularly in some of the clean tech verticals there, that combination had Motion down in the quarter as we described.

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

Right. But that automation stuff, that's separate from the technology you called out. They seem like 2 separate kind of discrete end markets you were talking about.

H. Lawrence Culp

That's correct.

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

Okay. And then the -- just the China pickup. I mean, is this -- it seems kind of interesting that it's -- it kind of turns on a dime here. I mean, you see one good kind of month of lending come out of China. I mean, do you find it kind of strange that the translation from what you see in kind of the macro data converts that quickly to orders, or is there something different going on there? Is it really kind of a loosening, or is it just end of destocking? It just seems to kind of have turned on a dime for you at the end of the quarter, from flat to up 8.

H. Lawrence Culp

Yes. I'm not sure I would characterize China turning on a dime here at quarter's end. We certainly saw slowing through the second half, anticipated a slow but improving start to the year, and I think that's, on balance, what we saw. I think that we would have anticipated in a few places, frankly, the business to have done a little bit better. If I look at Water, for example, encouraged by the funnel build here, but we were down in China in the year or in the quarter against what was not a particularly strong comp. We talked to Motion. That's an important dynamic for us in the quarter in China as well, as is Tektronix.

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

Sure. But I guess but flat to up high single digits in the second quarter seems like a pretty significant turn.

Daniel L. Comas

It is, but part of that is just the calendar. A lot of what -- a lot of the improvement we're expecting in Q2, we booked in March. So I mean, our order growth rate was much better than our shipment growth rate in China in the first quarter. So we go in with a fair amount of backlog. So -- yet, from a shipment perspective, we're thinking flat to maybe mid to high single. But from an order perspective, it's gotten better but that trajectory not quite as steep, if that makes sense.

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

Right. And then just one more quick question. If I do the math on a 3% to 5% organic in the second quarter, I'm getting to something like a 20% incremental margin to get to your EPS numbers. Am I missing something there? And that's x dilution. I've kind of pulled that out. So is there some reason why the incrementals are to going to be -- core incrementals are going to be weaker in the second quarter?

Daniel L. Comas

Steve, I'd have to look at -- I'd look at that. I'd be -- I don't think I'd be surprised if it's that low. And there could be some -- I don't know if there's any acquisition noise in there. There may be again -- some with X-Rite. But I would expect to be more in the 30s, but I'd be happy to look at that with you.

Operator

Our next question comes from Scott Davis of Barclays Capital.

Scott R. Davis - Barclays Capital, Research Division

Guys, I want to get a sense, your long-term core growth rate has always been -- your target at least has been 5% plus. And I went back and looked at the average. I think since '99, it averages kind of 3.1%. Since the last 5 or 6 years, it's 3.5%. I mean, how much should we care about this? I mean, DBS obviously helps a lot of margins, but it doesn't seem to be doing much on core growth. I mean, it's -- you spent a fair amount on R&D. I mean, is this something that becomes an increasing focus as time goes on or just the nature of kind of your business model? You have to bring in assets like Beckman and kind of slow down growth to fix things, and that's just kind of what we should expect is this 3% to 4% rather than a 5% to 6% or something. How do you think about that?

H. Lawrence Culp

Scott, I would, for one, not accept and wouldn't allow anyone on the payroll to accept 3% to 4% core growth through the cycle on a core basis for this portfolio. I mean, we certainly have -- I think, as you look across the business stem to stern, a strong set of businesses. Clearly, new businesses are going to come in. They're not going to be performing at a peak level. But that said, I think we're a mid single-digit-plus grower through the cycle with the businesses that we have. And anything we bring in will be brought in to strengthen our ability to grow, let alone generate margin expansion returns for shareholders. So I would argue that DBS has positive impact on business top and bottom line, on the balance sheet as well. This is a quarter perhaps with the headline number, though it being, I think, what we had talked about for some time, working against the highest growth quarter from a year ago, it's not a headline we relish putting out there. But that said, I think as we look at the underlying trends of the businesses, whether we look at book to bill and backlogs, whether we look at how we're performing in our markets, some of these issues around the channel dynamics at the start of the year, I think we feel very good about the acceleration that we talked about. The comps do get easier. That's an element to be sure. But there's no reason you should lower your expectations. I'm not lowering my expectations with respect to what we can do through the cycle.

Scott R. Davis - Barclays Capital, Research Division

No, that's a very fair answer. Just getting back to your point on the sell-in versus the sellout. It seems like kind of a common theme in this call that your distributors were taking down some inventory. But what if -- why was that exactly? I mean, is it product cycle? Is it -- it was just kind of timing? I mean, how -- what's the common theme there?

H. Lawrence Culp

Well, I think that they're -- I think it's hard to characterize what we saw, Scott, in 2 very different markets, T&M on one hand, Dental in another, with 2 or 3 truly common denominators. I think that said, we saw, I think, in a number of places at the end of last year, despite good sellout, a cautious position on inventory on the part of a number of our partners, all managed businesses, that carried into this year, again, despite some of the strength that we were seeing at that counter and elsewhere on a sell-through basis. I think that corrects itself. It has to. So I'm heartened by the sell-through. The inventory adjustments that we've taken in the short-term perhaps created a little pressure. But I think you take the long view here, we want to be working with partners who are growing at or above market. We want to be their core or their key supply partners, and I think we're in that position. Again, part of the rationale, part of the logic that gives us the confidence to say as we move forward here, we'll benefit from that pickup at that readjustment, if you will, on the top line.

Scott R. Davis - Barclays Capital, Research Division

So just as a quick follow-up, Larry. I mean, when you think about the evolution of Danaher over time, I mean, does it become more important that you compensate managers for core growth kind of going forward given the size of the asset base you have now or not? I mean, I -- not knowing exactly how you compensate everybody. But when you think about it, does that become a greater emphasis over time that, "Hey, look. This is -- these are the assets we have, and we need to grow them. We need to gain share. We need to grow them, and 4% aren't going to get it done." So how do you compensate people to kind of do that, to accelerate that?

H. Lawrence Culp

Scott, big important topic. Let me simply say this. Yes, we have been increasing the weighting of core in our comps gains. And we'll continue to do that, not because we want to be a 5% to 7% versus the 4% to 5%. But the fact of the matter is, these businesses that are part of the Danaher portfolio, the bets that we have made are growth businesses and growth markets, right. So this is not a Danaher of a different time where some might reflect was simply a margin play. I don't think it was true then, but it's certainly not the case today. And we need to make sure that we are growing these businesses in order to perpetuate the leadership positions that they enjoy in their markets. If their market share as good as we think and the businesses are strong and get stronger, we should be delivering numbers more in line with what, I think, your expectations are pretty much in line with my own.

Operator

We'll go next to Steven Winoker of Sanford Bernstein.

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

Larry, can you just maybe start with the math on the $5 billion, given about almost $3 billion of cash, free cash flow, that you're looking at? How are you -- just walk me through me the math on why it's not a bigger number at this point.

Daniel L. Comas

Well, I think we talked about at least capacity of at least $5 billion. That's on top of X-Rite, which is at over $600 million. So that's roughly 2 years of current cash flow, and the math is not any more complicated than that.

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

Okay. And in terms of your willingness to borrow or drive the balance sheet any harder, I mean, we obviously -- you see that in select situations. Have you -- has your thinking changed on that front at all?

Daniel L. Comas

Well, I mean, clearly, we've gotten bigger. Our cash flow has gotten larger. Our ability to borrow more under our current credit rating increases, and we would expect that to continue.

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

Okay, okay. And then back to the core growth question. Just a couple. One clarification. If I just comped on number of days versus a year ago, was that taking off about 1.5% or 1% or 1.5% in terms of how you think about the core growth numbers you just put up?

Daniel L. Comas

Steve, we had the same number of shipping days, both Q1.

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

Okay. So no impact on that front.

Daniel L. Comas

That's right.

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

And then the NPVI number is still hovering 29%, right, or around high 20s?

H. Lawrence Culp

You're talking about vitality new products kind of sales?

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

Yes. And I guess the question there is what -- if you think about this over time as indicative, we're going through quarter after quarter of constant drumbeat of new product introductions. That as year by year goes by, we're -- I'm expecting to see those start to gain a lot more traction. Is that -- are you -- what -- how do you think about that number? And I'm looking for other ways to think about core growth and traction on that from DBS, et cetera, to some of the earlier comments made, and wondering if that's not a decent way to think about it.

H. Lawrence Culp

Well, I think it's one important piece of the puzzle, Steve. But I think there are a whole host of factors, innovation, new products is one. Obviously the success of what we do from a sales marketing and service perspective, another. And what we're able to do out of the factory in terms of quality delivery is a third. That are parts of that mosaic that we are executing well on the right things could allow us to grow at or above market rates. So I wouldn't want to get too fixated on any one input in that regard. I really do think it takes a broad integrated effort to drive the share gains that we see at a place like Videojet or ChemTreat that we've seen over the last several years.

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

And you think 30% is roughly the right number? Or are you not sort of -- even though it's only one metric as you mentioned, you're not sort of thinking that, that thing should be 35% to 40%?

H. Lawrence Culp

I think I we would always like to take numbers like those that you believe in your gut are correlated with growth and share up. But that number -- the right number for certain businesses will be higher than it will be for others, right. You take a business like Leica Micro or Tektronix where product life cycles are a little shorter, maybe the competitive intensity is a bit more than we might see elsewhere, they need to be at a higher number. Likewise, if you look at some of, say, the Water businesses, be it Hach Lange with a high consumable stream or ChemTreat, the new product or the vitality ratio there is not likely to be that high, in part just because of the way you do the math, if you're being honest about it. Obviously, we would be. So I think we try to calibrate those sorts of metrics business by business. So the -- no one business goes off chasing a corporate mandate or trying to clear a corporate bar that isn't appropriate to the context of the market they compete in.

Operator

We'll go next to Jeff Sprague of Vertical Research.

Jeffrey T. Sprague - Vertical Research Partners Inc.

A lot of ground covered. Let me just be quick, 1 or 2 items. U.S. muni, Larry, can you give a little more color on what you're seeing there? And is this kind of -- there's some random projects that have started to hit, or are you actually seeing -- ground swell's maybe too strong a word, but some true pickup on underlying activity?

H. Lawrence Culp

Jeff, I would say it's more underlying activity than big projects per se being let. So we will see that most positively at Hach, again because that's more of a razor blade's model as you know there. Conversely, that will pinch us a bit over time at Trojan as those big projects are slowing.

Jeffrey T. Sprague - Vertical Research Partners Inc.

And your visibility on China muni, I think you said orders picking up. You have pretty good visibility on when those actually get let and move forward, or is it still just kind of order activity and pipeline building?

H. Lawrence Culp

Well, I would say that we have good visibility there, Jeff, with respect to projects. Again, given the selling cycle, given the way the municipalities plan these efforts and when initial planning commences compared to when we actually ship product, there's a good -- there's a bit of time there. The challenge is really applying historical practice and trends to that funnel and trying to anticipate when orders will be let. I think through the back half of last year and even here early in the year, we've just seen certain projects get pushed a bit more than we would have anticipated, more than we have seen historically. So I think that's why we're particularly heartened with the book to bill there. So we're seeing these funnels improve. That's good. Seeing a north of one of book to bill, even better. So that's the way I would describe it. It's certainly better visibility than we have in some other businesses, but it's been a little noisy, say, in the last 6 to 9 months.

Jeffrey T. Sprague - Vertical Research Partners Inc.

And then just finally, maybe for Dan. Price play any role in the organic growth number this quarter?

Daniel L. Comas

There's a little bit over half a point. Q1 is often a little bit light for us in price. I think that will get a little bit better. Again, we're getting pretty good price on consumables, though it's relatively flat on equipment and instruments.

Operator

We'll go next to Jon Groberg with Macquarie Capital.

Jonathan P. Groberg - Macquarie Research

Just a couple of quick ones. First is just a clarification. Larry, you gave organic growth or kind of core growth expectations for 2Q. And I may have missed it, but for the full year, there's no change to your core growth outlook. Is that right?

Daniel L. Comas

That's right.

H. Lawrence Culp

That's right, Jon.

Jonathan P. Groberg - Macquarie Research

Okay. And then, Larry, if I think about Europe, all of the danger that Europe is not one country, right, but if I look at Europe, I'd say it's a little -- if I see the results coming out of your business, it's not exactly what I would expect, things like SCIEX and Leica Microsystems down, PID up. Can you maybe just talk about what's -- what you see happening in Europe and maybe how that's trended over the last few months, just given everything that we read in here over there and maybe your interpretation of what's happening?

H. Lawrence Culp

Well, I was in Europe this week. I'm not sure that having been there recently gives me any truly unique perspective, Jon. I think things are simply sluggish in a whole host of places. We can, I think, understand what happened at Leica and SCIEX again. While softening, we are heartened by some of the leading indicators. But that said, probably the best thing we have going for us right now in Europe is the simple fact that the comparisons get easier as we get into the second half. We say goodbye to these mid single-digit growth quarters that we saw last year, and that will help what we print. But while we're not, I think, unduly pessimistic about Europe, I don’t think we harbor any illusions about the underlying economy, particularly in those places where it's soft, bouncing back dramatically as we go through 2012.

Daniel L. Comas

And, Jon, as you point out, it's not soft across the board. We were talking about the muni business and the Water business in the U.S. Actually, we had a good first quarter in our municipal business in Europe. You mentioned Videojet, still decent growth, Radiometer as well. So we still have some key businesses that are performing reasonably well in Europe. So it's not soft everywhere.

Jonathan P. Groberg - Macquarie Research

So outside of just broadly, you said being sluggish, it's not like you can look over the last 3 or 4 months trends in any particular businesses or orders that are going on that you can draw some conclusion about. You just kind of expect broadly sluggish just across all the businesses.

Daniel L. Comas

Q1 played out very much as we expected, which is consistent sequentially from Q4 kind of the normal seasonality. Some business is soft and some businesses still posting pretty good numbers.

H. Lawrence Culp

But, Jon, to Dan's point, I mean, rest assured, from an operating perspective, whether you cut it by company, whether you cut it by country, it doesn't mean those teams all get to take a pass on '12, right. There are countries where we see particular businesses, Dan highlighted a few good examples, where there are opportunities we should be able to grow. And at a minimum, you're always able to grab share. But when you roll it all up, obviously, Europe is going to be the challenge for us from a geographic perspective this year.

Jonathan P. Groberg - Macquarie Research

Okay. And then just, if I can, quickly on Dental. For first quarter, it looks like all-time high margins and pretty good improvement year-over-year. Is that just -- I know you've been focusing on that. Is that sustainable where we're at or there are some particular onetime items in the quarter? How do you think about the margins there?

Daniel L. Comas

They were not -- Jon, they were not onetime items. We got off to a very good start. We had a very good Q4 that was masked from a reporting perspective because of all the restructuring we did. I just saw that play out nicely in the first quarter and if you look at that segment and you would add back the amortization, we actually grew up from an operating -- through operating profit perspective, we're north of 15% in the quarter. So off to a good start and think we can sustain that.

Operator

We have time for one more question. That will come from Richard Eastman of Robert W. Baird.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

And congrats on the X-Rite acquisition. I think that is going to look very good on Videojet and Esko. Just in terms of the Test & Measurement business, and I guess when I look at the distribution channel itself, are you very comfortable that there's no share gain or loss going on in the distribution channel on the instrument side of Test & Measurement, in particular at TEK, given this -- the sell-in is lower than the sell-through? And Dental, I would think you'd have a better perspective given the channel there is more concentrated, more consolidated. But are you comfortable that there's no share gains or losses in the channel on the instrument side in T&M?

H. Lawrence Culp

Yes. I think if we look at T&M, and when we talk about this dynamic, we're talking about both Fluke and TEK, you're going to have puts and takes in any one month, any one quarter. But I think if we look at the last year or 2 in those businesses, I don't see it. I know some others may suggest otherwise. But I think if we look at those businesses, particularly with the new product momentum that we think we'll generate going through the year, what we're doing to generate brand preference, let alone broad end-user demand, we're doing good work there. And I think as we go through the year, again, barring change in the macro environment, that will present itself more than it has here in the first quarter in our top line numbers. And I think in Dental, the same dynamic applies. I didn't mean to leave them out.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

No, that's fine. And then also just within the T&M business and the instrument piece, is it fair to say -- is the tone of business and the book to bill, was it greater than one in China, and the tone of business strong -- or kind of maybe turning in China versus Europe? Have we seen the bottom in the T&M side?

H. Lawrence Culp

I'm sorry, Rick. You're talking about the T&M in China, have we seen bottom?

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Within the instrument businesses, within the T&M business, so really Tektronix and Fluke. Are we -- have we seen the bottom in Europe? And conversely, is the tone of business turned in China? I'm just trying to distinguish between geographies there?

Daniel L. Comas

Rick, overall, our book to bill was nicely north of one for instrument in the first quarter. I'm not sure I have that broken down geographically. It's obviously encouraging given we had a sub-one in the fourth quarter, to see that go north of one in the first quarter is a good sign.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just, Dan, real quickly. Just one question on CapEx. CapEx in the quarter looked significantly high. Does that back off this year or is that a good numbering?

Daniel L. Comas

That's really the dynamic of Beckman and the leasing model.

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

I see, okay. Okay. So as we see growth there, that number will spike up some?

Daniel L. Comas

Yes.

Operator

And Mr. McGrew, I'd like to turn the conference back to you for any additional or closing remarks.

Matt R. McGrew

Thanks for joining us, everybody. Dan and I are around today for follow-ups.

Operator

That does conclude today's conference. Thank you all for your participation.

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