Danaher Management Discusses Q1 2013 Results - Earnings Call Transcript

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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

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, LLC

Nigel Coe - Morgan Stanley, Research Division

Deane M. Dray - Citigroup Inc, Research Division

Jonathan P. Groberg - Macquarie Research

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

Ross Muken - ISI Group Inc., Research Division

Operator

Good morning. My name is Lisa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation First Quarter 2013 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.

Matt R. McGrew

Good morning, everyone, and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer; 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 Investor section of our website, www.danaher.com, under the heading Financial Information and will remain available following the call. 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 25, 2013. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally and the confirmation code is 5544079.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the supplemental materials and our first quarter Form 10-Q for additional factors that impacted year-over-year performance. All references in these remarks and 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 the subject to a number of risks and uncertainties, including those set forth in our SEC filings. It is possible that 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, whether a result of new information, future events or developments or otherwise.

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

H. Lawrence Culp

Matt, thanks, and good morning, everyone. Before we start, I'd like to take a moment to let our associates, our friends and the people of Boston know that they are in our thoughts in the wake of this week's most tragic and unfortunate news.

We entered the quarter with modest expectations regarding global growth and that played out largely as we anticipated with our core revenue growth coming in at 1%. From a geographic perspective, high-growth markets, which represent 24% of our business, grew to high single-digit rate in the quarter. China was up low double-digits led again by our Dental and Life Sciences & Diagnostics businesses, which grew in excess of 20%. Also encouraging was the double-digit growth we saw in our Water Quality and Product Identification businesses in China. In contrast, sales in the U.S. were flat, which was slightly below our outlook, while Western Europe, as expected, was down low single-digits.

Despite this low-growth environment, the Danaher Business System continues to help us drive share gains, margin and cash flow. In the quarter, DBS growth tools helped accelerate new product introductions across many of our businesses, and coupled with our go-to-market initiatives, we believe drove share gains at Kerr, Videojet, ChemTreat, Tektronix Communications, Esko and Radiometer. We were encouraged by our strong gross margin performance, up 50 basis points or $90 million year-over-year to 52.3%, which allowed us to sustain our core growth investments in both new product development and sales and marketing.

We remain active and optimistic on the M&A front. We announced the signing of over $300 million of new acquisitions during the quarter. With our strong free cash flow, ample balance sheet capacity and the proceeds from the recent sale of the Apex Tools JV, we now expect to have about $8 billion available for capital deployment over the next 2 years. So with that as a backdrop, let me move to the details of the quarter.

Today, we reported first quarter adjusted diluted net earnings per share of $0.75, up 2.5% relative to the comparable amount in the first quarter of last year and representing another record first quarter for Danaher. Excluding the impact on prior year earnings of the Apex JV, net earnings per share increased 6%. Revenues for the quarter increased 3% to $4.4 billion with core revenues up 1%. Acquisitions increased revenues by 3%, which was partially offset by negative currency translation of 1%. Our gross margin for the first quarter increased 50 basis points year-over-year to 52.3%. Our reported operating margin in the first quarter was 16.4% with core margins up 20 basis points.

First quarter operating cash flow was $637 million, with free cash flow from continuing operations of $520 million. We expect full year free cash flow to exceed $3 billion. Our free cash flow to net income conversion ratio, excluding the gain on the sale of the Apex JV and the impact from $40 million of cash payments related to our fourth quarter restructuring, was greater than 100%.

Turning to our 5 operating segments. Test & Measurement revenues increased 1% for the quarter while core revenues were flat. While core margins were down 25 basis points year-on-year, segment margin saw a significant sequential improvement over the prior 2 quarters. Fluke core revenues grew at low single-digit rate, their first quarter of positive core growth since the fourth quarter 2011. Mid-single-digit growth in North American industrial end markets and high single-digit growth in high-growth markets was partially offset by softness in Europe and in other North American markets.

Last quarter, we highlighted Fluke's launch of the VT02 visual thermometer, which may you have heard about as it was featured in March in a broad nationwide range of radio campaign. Using DBS growth tools, Fluke identified a white space opportunity in an adjacent product category and developed this innovative entry price point temperature measurement tool with an integrated visual heat map to meet customer needs. We've been encouraged by the sales ramp of the VT02 in both the U.S. and Europe.

At Tektronix, core revenues declined at a low double-digit rate with continued weakness across many end markets. Despite difficult market conditions, we continue to innovate and increase the breadth of our product portfolio at Tektronix. During the quarter, we launched a multiphase PA4000 Power Analyzer, which will be used by engineers on [indiscernible] for the development of high-efficiency electrical products, such as motors for hybrid vehicles, electric vehicles and household appliances. This innovative new product is Tektronix's initial entry into this adjacent high-growth segment.

Core revenues from our Communications businesses grew at a low double-digit rate in the quarter driven by demand for both our enterprise tools and network security solutions globally. Tektronix Communications' low-teens growth was driven by demand for its mobile carrier network management solutions in North America and China. Arbor Networks network security solutions remain in very high demand as DdoS attack have increased in both frequency and size. Both sales and orders increased greater than 25% in the quarter as we won several new service provider accounts in high-growth markets and saw strong growth in our U.S. enterprise business.

Environmental segment revenues increased 4.5% in the quarter, with core revenues up 1%. Core operating margins expanded 45 basis points with reported operating margin flat at 18.6%. Water Quality core revenues grew at a low single-digit rate in the quarter. Hach Lange core revenues grew low single-digits with double-digit growth in China and the Middle East offsetting flat demand in the developed markets. Healthy North American industrial activity, particularly in beverage and power, was partially offset by weaker U.S. municipal demand.

ChemTreat marked their 11th straight quarter of double-digit core revenue growth. Latin American core revenues were up mid-teens in the quarter as expansion efforts into the Mexican market continued to gain traction, including several large wins in the quarter with industrial accounts. Over the last 4 years, the Mexican business has grown over 300% driven by the best-in-class, go-to market initiatives.

Gilbarco Veeder-Root's first quarter core revenues were essentially flat in both the developed and high-growth markets with strong growth in Russia and India, offset by difficult comparison from prior year regulatory changes. We saw solid growth in our payment business in the quarter, with shipments on several large-scale rollouts throughout Asia. New payment technologies and innovations at retail service stations and convenience stores is an attractive growth driver for GVR. Highlighting this during the quarter, GVR announced a partnership with PayPal to develop digital payment and other mobile solutions for customers worldwide. Using GVR's Passport POS, customers will be able to pay using their PayPal account with their mobile devices, eliminating the need to carry cash or credit cards.

Moving to Life Sciences & Diagnostics. Revenues for the quarter increased 1.5% with core revenues up 2.5%. Segment core operating margins increased slightly, while our reported operating margin decreased 60 basis points from the prior year period to 12.7%. Our Diagnostics businesses saw a good start to the year with mid-single-digit core growth.

At Beckman Coulter, core sales increased at a low single-digit rate despite the impact of 1 less day in the quarter with growth in all major product categories. This marks the fourth straight quarter of low single-digit or better core growth at Beckman, with high-growth markets continuing to drive this performance. Beckman's best-in-class automation capabilities, an increase in the cadence of new product development and the significant quality and service improvements we've seen over the last 18 months position them well for continued growth. We anticipate low single-digit growth for the rest of this year and expect to be on track for mid-single-digit growth in 2014.

During the quarter, we launched 2 new products, the DxH 600 hematology system and the Power Express total lab automation system. The DxH 600 extends the hematology portfolio to better address the needs of larger-volume clinical labs. Power Express continues to enhance Beckman's leadership in clinical automation by enabling labs to connect multiple analyzers easily to improve workflow, increase efficiency and reduce cost.

Radiometer's core sales increased at a high single-digit rate in the quarter with growth in most major geographies and particular strength in China and the Middle East, which were both up over 30% in the quarter. Our AQT line was up 40% in the quarter, and we hit a milestone with our 1,000th instrument placement since launch. Last week, we closed a previously announced acquisition of HemoCue, a leader on hemoglobin and glucose point-of-care testing.

Leica Biosystems sales increased at a low single-digit rate in the quarter, led by double-digit core histology growth. Advanced staining revenues decreased mid-single-digits as solid demand in North America and China was more than offset by a decline in Western Europe, where we are transitioning from a distribution to a direct-sales model in parts of that region.

Our Life Sciences businesses core revenues increased low single-digits in the quarter. AB SCIEX core sales grew mid-single-digits, led by the applied and pharma markets. We've been pleased with a very strong uptake of our new 6500 Triple Quad and QTRAP systems since their launch late last year. During the quarter, AB SCIEX announced a multiyear collaboration agreement with the Institute for Systems Biology in Seattle for the development of new methods in technologies and proteomics research using mass spectrometry. This research, led by 2012 National Medal of Science award winner Dr. Leroy Hood, will help develop a new approach to medical care by redefining biomarker research and complementary genomics through qualitative swap proteomics analysis using the AB SCIEX 5600 TripleTOF. We are pleased to support both the ISB and Dr. Hood in this groundbreaking research.

Leica Microsystems core sales declined low single-digits with strong sales in Life Sciences, offset by weakness in industrial and medical markets. The recently launched SP8 modular confocal laser scanning microscope continues to be well received globally and was a strong contributor to growth in the Life Science market during the quarter.

Turning now to Dental. Our segment revenues grew 3% in the quarter with core revenues up 2.5%. Core operating margin increased 20 basis points, while reported operating margin expanded 40 basis points to 13.1%. Dental consumables core revenues grew low single digits in the quarter led by our sales for general dentistry consumables and infection prevention products across most major geographies. In addition, our implant business was up mid-teens.

During the quarter, Ormco launched the Lythos Digital Impression System. Lythos allows an orthodontist to have a complete digital orthodontic workflow, beginning with the scanning of the patient's mouth through the creation of a 3D treatment plan to the custom design and manufacture of the orthodontic appliance.

KaVo core revenues increased mid-single-digits with robust demand for instruments and imaging products. KaVo launched 6 new products in the quarter at 2 of the largest trade shows in the industry, the Chicago Midwinter Dental Meeting and the International Dental Show in Germany. New products included the i-CAT Flex [ph], which allows for a full 3D scan at a lower radiation dose than a panoramic X-ray. In addition, Instrumentarium launched a CR reader, an easy-use, cost-effective phosphor plate imaging reader. We also introduced an innovative Twisted File Adaptive endodontic product, which self-adjusts between a rotary and reciprocating motion, providing the clinician with exceptional control during root canals.

Moving to our Industrial Technologies segment. Revenues increased 7% for the quarter while core revenues declined 1.5%. Our core operating margins expanded 105 basis points in the first quarter, while our reported operating margin increased 30 basis points to 20.9%. Our Motion businesses core revenues declined at a high single-digit rate in the quarter with the same weakness in most major geographies. Our sales into U.S. distribution were particularly soft.

Product Identification core revenues were up mid-single-digits with growth across all major geographies. Videojet enjoyed high single-digit growth in service and mid-single-digit growth in both equipment and consumables in the first quarter. During the quarter, we began shipping both the both the 1550 and the 1650 next-generation CIJ printers, which are targeted primarily at customers in the food and beverage markets, where predictability of uptime and avoidance of errors is critical. Initial customer feedback has been extremely positive on these new products, and we expect the placements will continue to increase through the balance of the year.

At Esko, core revenue increased more than 10% in the quarter, led by exceptional performance in high-growth markets, including Latin America and China. DBS continues to have a significant impact in driving growth at Esko. Using dynamic resource allocation to fund internally go-to-market investments in high-growth markets, Esko has more than doubled the feet-on-the-street in Latin America and China since our acquisition in 2011. Over the same period, sales in those geographies have grown in excess of 35%.

Revenues at X-Rite grew at a mid-single-digit rate in the first quarter compared to a year ago when it was a standalone company. X-Rite becomes part of our reported core number later this quarter. While still early, we're excited about X-Rite's contribution to the PID platform and the new collaboration and go-to-market opportunities that they bring. An example of this collaboration is the PantoneLIVE, where we recently launched 2 Illustrator plug-ins that were codeveloped with Esko. These plug-ins provide brand owners with instant access to essential brand color standards, as well as the PantoneLIVE Color Libraries directly from within their development software. Reception of PantoneLIVE in the marketplace has exceeded our expectations, with orders tripling sequentially from the fourth quarter.

So to wrap up, the year started largely as we expected. DBS has helped drive share gains, margins and cash flow in this low-growth environment. We believe our solid recurring revenue base, the structural cost actions executed in 2012 and the significant amount of capital available to deploy position us well for the balance of this year and beyond. We are initiating second quarter adjusted diluted net earnings per share guidance of $0.80 to $0.85, which assumes 1% to 2% core growth. We are also reaffirming our full year 2013 adjusted diluted net earnings per share guidance of $3.32 to $3.47.

Matt R. McGrew

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Steve Tusa with JPMorgan.

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

Just starting off with the Life Sciences & Diagnostics margin. It was about 100 bps lighter than, I guess, we were expecting. Can you just talk about, a, kind of what the margin looks like at Beckman, and then if there was anything else that drove that weakness?

H. Lawrence Culp

Yes. I think with respect to the -- what you're seeing there, Steve, is we knew given some of the investments in the segment that we were making, particularly on the sales and marketing and R&D side that margins were going to be tight in LS&D. That said -- and I say that both with respect to the Life Sciences & Diagnostics businesses as well as at Dental. We had a couple of big trade shows in Dental, for example, that we had to work through. But that said, clearly, the revenue picture in LS&D, particularly in LS, was softer in the end than we anticipated. And that certainly put some of the pressure on the margins that you see. But also in addition to the revenue, I think it's important to point out that we had a couple of not necessarily one-time but I think special situations in the quarter on the expense side that we think mitigate as we go forward. One was this conversion at Leica Bio with respect to the distribution to direct sales model. We had an opportunity to move forward in that regard. I think that made sense strategically. That didn't help us from a cost perspective and practically from a volume perspective as we worked through that late in the quarter. In addition, as the regulatory front evolved over the quarter with a number of the Diagnostics businesses, we had an opportunity to accelerate some of our spending ahead of submissions. And we thought again positioning ourselves to get those new products approved made sense, so we went ahead and did that.

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

So can you -- I mean, I guess, R&D for the company was up 40 basis points year-over-year. I mean, 6.7% is a really big number. Can you let us know, I you disclose it in your Ks, but maybe in LS&D, what was -- I would assume it was up a little bit more in than the 40 basis points.

Daniel L. Comas

It was. And it also -- given some of this distribution transition we're going through, some of the sales and marketing was also higher. We think that all sort of begin to even out here in Q2, so you'll see, I think, more normalized margins in LSD in Q2.

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

And can you give any kind of magnitude, Dan, around what the R&D was up as a percentage of sales in LSD?

Daniel L. Comas

We were up combined over 100 basis points between R&D and sales and marketing as a percent of revenues year-on-year.

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

Okay. That makes -- and then when you talk about these regulatory filings, I mean, is this just greater-than-expected spending than you would have initially thought as you fix the business? Or is this like -- are these like -- is this more proactive with new products?

H. Lawrence Culp

Yes. Steve, it's probably somewhere in between. I mean, it really is about what we do and when we do it. So some of it is strictly timing. And at the same time, as we work through the plans for those submissions with the regulatory body sometimes, we'll -- as time marches on, you get a better sense of the scope and the work required. So we thought accelerating some of that spend wasn't frankly an opportunity, despite the pressure that you allude to here. And again I think the stronger those submissions are, the sooner they're in, the better off we are relative to getting those products out and launched in time.

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

Just one last question. It's probably a pretty stupid question, but I'll ask it anyway. I guess, with the day sales, with a comp on the -- a tougher comp on the weather, a lot of noise going on out there and some pretty terrible reports coming out so far. On a scale of 1 to 10, if 1 is 2009 and kind of 10 is the ideal operating environment, what do you think -- how do you describe kind of the current environment you're operating in? It's just kind of hard to tell how bad the trend is here. I'm just curious as to your high-level take on that.

H. Lawrence Culp

Yes. Steve, I would say that we came into the quarter knowing that we were going to be missing a day. I think we came into the quarter knowing that Good Friday would be the last day of the quarter. So all of that was knowable. What we saw through the quarter was frankly that our consumables business, which as you know represents about 40% of our overall sales, was very much in line with our expectations. And if you adjust for the day that we missed and put aside all the end of March noise, I think we were good. I think where we fell a little bit short here with respect to the quarter was really in equipment, right? I mean, at 60% we thought we'd be up a couple of hundred basis points, and that's where we got squeezed, particularly in the U.S. as we saw some business soften in March when we thought we would finish strongly. I wouldn't say it's bad. I think we saw the normal uptick in March, just wasn't pronounced in equipment again in the U.S. principally around some of the higher-ticket products. We've mentioned TEK. I think we've mentioned Motion as well in the distribution. So in the grand scheme of things, I don't think we're -- we're not necessarily excited about the macro numbers that came out here the last 3 or 4 weeks. But that said, we missed the top end of the core range by about, what, $30 million. If we'd hit that, I don't think we would be talking about some of the OP and EPS shortfalls here. But that's the way it played out. I think at this point, our sense is that while it's early and we don't have everything that we'll have in time, the shortfalls, again largely a macro dynamic. March didn't finish as strongly as we would have anticipated. But on a relative basis, business-by-businesses, we think we're doing pretty well. I think as we look at April, things would come back in a couple of pockets in the wake of some of that end of March softness. But again probably too early to read too much into that. Certainly, too early to read much into first couple of weeks of April relative to the equipment side of the business because while things get pushed to the right at times, it may just be a couple of weeks. Sometimes those customer decisions may take longer.

Operator

[Operator Instructions] Our next question comes from Scott Davis with Barclays Capital.

Scott R. Davis - Barclays Capital, Research Division

A couple of things. I mean, first, the big pullback you saw in Motion was a little bit of a surprise when you have that big of a negative. I mean, were the timing issues there that customers just wanted to destock? I mean, I think you mentioned some weakness in distribution, U.S. technology. Is that something that's going to restart here in 2Q? Or do we have some greater underlying weakness here that's more sustainable?

H. Lawrence Culp

Well, I think that's -- it's a bit of a mixed bag, Scott, as we read it today. I mean, you mentioned distribution and TEK. I mean, I think those are 2 different markets for us clearly, where we go to market through distribution. We saw sell-out as well as our own sell-in. Certainly, the TEK OEMs that we deal with tend to be customers we deal with directly. And we certainly saw pockets in TEK that were soft. I think our view is that as we look at the second quarter, if you wanted to pick a segment, that's likely to be down, it will be Industrial Technologies. It will be down largely on the back of Motion softness. Certainly, not softness in Product Identification, which we think will continue to be one of our better-performing businesses here in the near term.

Scott R. Davis - Barclays Capital, Research Division

Okay. I want to move to 2 other quick things. I mean, the medical businesses have been strong a couple of quarters in a row here in China. Are you seeing that broadening out at all to the other businesses, like Fluke, for example, and the more shorter-cycle businesses?

H. Lawrence Culp

Yes. We certainly saw, I think, a broadening of the strength in China. Again the first quarter is a little hard to read sequentially, given the timing of the new year there. But that said, I think we were pleased with the overall print in China, both at depth and its breadth. And as we have worked through our reviews of late with our teams there, I think by and large, there are a few exceptions where guys aren't feeling good about the year, it's really more a matter of this point of calibrating what sort of growth to expect there. But they'll definitely, I think, be one of our better high-growth markets here and the rest of the way.

Daniel L. Comas

I'd say, Scott, on the industrial side, it was instead of all being down or flat, it was mixed. So I guess, that's a little bit encouraging. PID and water had good real good start to the year in China. But I'd contrast that [indiscernible] a little bit of a positive sign, but I would say that T&M and Motion didn't -- their numbers were down and sequentially did not feel any better. So uneven but a couple of pockets a little better.

Scott R. Davis - Barclays Capital, Research Division

Sure. And then just last question on price. When we have this type of a slow macro environment and it's been largely probably 7 of the last 10 years has been pretty good pricing environment, now we're seeing some weakness in commodities. I mean, what's the outlook for price from here?

H. Lawrence Culp

Well, I think the price outlook in and around a point of price as we move forward ought to be something that we should achieve. I think on a price cost equation, Scott, in general, pretty pleased. And clearly, having the gross margin up 50 basis points here, $90 million in dollar terms year-on-year, I would suggest we're executing pretty well, not only on the price cost side but also in terms of productivity, our Danaher wide procurement activities, as well as frankly bringing new products to market with higher gross margins, which give us the benefit of the mix up. So if there's one thing I think we're particularly comfortable with is that effect. And clearly, we'll get, I think, additional impact from the 2012 restructuring in the gross margin mix as we move through the year.

Operator

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

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

Just you mentioned $8 billion of capital available for deployment over the next 2 years. I think that's up from $5-plus billion that you used to discuss. Can you maybe talk about, given the current environment, how your -- where you're thinking about deploying the additional capital? And you obviously mentioned a one positive comment in the release. But give us maybe more of a flavor for how this might transpire.

H. Lawrence Culp

Steve, the $8 billion figure in contrast to the prior frame is really a function, I think, of being on the other side of Apex. Certainly, a look here at our cash position, which is strong, and our view of our cash flow now being $3-plus billion on an annual basis. And it's really it's just that simple. I think strategically as we think about capital deployment, our strategy is in no way changed. I think our view certainly continues to have a bias toward inorganic growth to supplement what we do organically. And we'd like to do that across the entire Danaher portfolio. So as you look today at the way Dan and I and the teams are working together, we're working, I think, funnels that are active across all of our growth platforms. Clearly, we're keen to put that capital work in that fashion.

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

And the acquisition that you just did, the $300 million one you announced in, I guess, February was in Life Sciences. I mean, how is the industrial pipeline looking or the non-Life Sciences pipeline looking?

Daniel L. Comas

Steve, I would say we're, one, encouraged by the number of discussions we're having. And I would say it's noticeably better than it was in the second half of '12, probably a little bit of a challenge maybe up to the last couple of weeks. Given equity markets, I do think some of this more choppy economic data of late, maybe including our own on the margins, could be helpful here in getting maybe some things across the finish line.

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

Okay. And then on the top line or the implications for the second half, I think EPS implied, given your guide, is somewhere north of 10%, 11%. And top line, given your 1% to 2% in the second quarter, and this quarter at 1%, implies a very significant acceleration in the second half. How much are you thinking -- and that's obviously despite deceleration on many, many fronts across the portfolio. How are you thinking about that being as opposed to just comp-based versus meaningful material underlying acceleration, all of these major growth investments that you've been making for some time now? Give us maybe some flavor for how you're thinking and talking about it and what's giving you that perspective.

H. Lawrence Culp

Well, I don't think, Steve, that as we look into the second quarter, let alone the second half, that we're here pounding the table that things are going to get better in a hurry. I think what we're trying to do here with the second quarter outlook is give you a sense of our view out the window as to our operating environment and the way that we're going to perform. If you look at the first quarter, clearly we came in, in the midpoint of the range on the bottom, a little short of the range on the top. I think that midpoint mindset, if you will, probably is what's most relevant as you think about the second quarter, let alone the full year. I think to come in at the high end of this range would require the U.S. to get a little bit better than at least some of the most recent data points would suggest. And probably, the strength in China would have to pick up a bit more so than the encouraging news that we've seen. And we probably would need to have Europe to be stabilized rather than being down a couple of ticks as it has been of late. I'm not suggesting that is our scenario. But as we look forward in this lower-growth environment, I think that midpoint mindset is probably what is most useful right now.

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

And I guess on that, I'm just looking for, given the many investments that you've been making in the top -- to drive the top line, if you -- to what extent externally can you sort of look at the payoff you're getting on those top line investments? And I know it's very hard to separate it from a tough macro. But what evidence are you seeing?

H. Lawrence Culp

Well, I think in terms -- we look at those investments one by one by one, right, at the operating company level. So when we see the Dental team in China rapidly accelerating their growth and profitably so, it's an easy calculation to see those feet-on-the-street investments. When you see an uptick in R&D at VideoJet and in turn the flood of new products that have come out over the last couple of years and in turn the profitable growth of returns and the market share gains at VJ, you know you're getting a return there. So not that every investment that you make is going to pay off, but I think by and large, where we are investing, we see that return not only in terms of the top line and the intended share gains, but frankly also on the gross margins.

Operator

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

Jeffrey T. Sprague - Vertical Research Partners, LLC

Just on Life Sciences and in general, first, just as you think about what next. I mean, one of the things that strikes me and certainly not being an expert in the area is perhaps the moves of Thermo and others are kind of fortifying kind of a distribution footprint that maybe you can't replicate. Do you view that as kind of a strategic issue to contend with? And just what is your view on kind of how maybe the channels are evolving?

H. Lawrence Culp

Well, Jeff, that's probably a longer conversation than we might be do justice to this morning. But I think in Life Sciences in particular, we have a number of distributor partnerships around the world, including Thermo. But that said, the vast majority of what we sell in Life Sciences, and I'm specifically talking to the research side and the applied side of that portfolio -- that segment, not the diagnostics, we sell on a direct basis. I mean, these are not gloves and beakers that sell for 2 or 3 digits at a pop. I mean, we're talking about high-end, highly engineered, customized equipment that researchers, scientists spec out and really pushes on with respect to innovation. So those tend not to be distribution-oriented. Hence, any moves of consolidation you see there, I don't think have a direct bearing on our competitiveness going forward.

Jeffrey T. Sprague - Vertical Research Partners, LLC

Okay. Great. And I was just wondering what you just said to Steve on the outlook was helpful. But just thinking about the second quarter, I mean, you are basically guiding second quarter flat year-over-year but a little bit better revenue growth in Q2 than Q1, maybe some of this LS&D spending normalizes, perhaps some restructuring savings come through. What is working kind of against maybe those positives that pulled us at a roughly flat EPS result in Q2?

Daniel L. Comas

Jeff, part of it was in the quarter last year. We reported $0.84 last year, but we did call out $0.03 that's kind of one-time item. In addition, we had the Apex earnings. So absent those one-time items and absent Apex, clearly we're probably more like $0.79. So again not talking a lot of increase, but obviously $0.80, $0.85 on a normalized basis is up a little bit versus what we really operationally we had last year.

Operator

Our next question comes from Nigel Coe with Morgan Stanley.

Nigel Coe - Morgan Stanley, Research Division

So Larry, you mentioned a midpoint mindset, I believe. And I just wanted to clarify, is that more a core growth mindset? Or should we apply that to EPS as well?

H. Lawrence Culp

I think with respect to the quarter, perhaps the year, both.

Nigel Coe - Morgan Stanley, Research Division

Okay. And then just taking a step back. You've given some good color on the trading conditions in 1Q. But taking a step back to 4Q, obviously we have that unusual strength. And I'm just wondering how much pull-forward do you think there was from 1Q into 4Q.

H. Lawrence Culp

Yes. I'm not sure that our view would be materially different today than it was back in the fourth quarter. Again some of what we saw might have been a pushout from the third into the fourth. So I think what we're trying to do, Nigel, business-by-business, is really take stock of the trends through that, if you will, at that 3-quarter period. But undoubtedly, we did see some softness in the quarter, I think, because of at least in Life Sciences and in Dental, some of the pull-forward. Was that 50 basis points? Was it a full point? Frankly, we haven't spent a ton of time there, let alone trying to figure out how much a day plus the Good Friday spring break dynamics at quarter end cost us in consumables. It is what it is.

Nigel Coe - Morgan Stanley, Research Division

Right. I know it's tough to try and organize [ph]. And then just you had mentioned $8 billion of surplus capital to redeploy. And if I go over the last 6 years and you're obviously back one, which was your usual size, I think you deployed about $9 billion sort of the last 6 years. And I'm just wondering to deploy that sort of quantity of capital, do we need to take a big swing on the acquisition front?

H. Lawrence Culp

I don't think we see that $8 billion opportunity to deploy capital as something that requires the same check to be written. Again I think as we look at that capacity, we really think about that as a backstop for all of these growth platforms that we have. So we've got 7 or 8 businesses here, all with their acquisition maps and funnels, and then working that accordingly. So I think our preference would be, if you're looking at $8 billion to divvy up $1 billion to $2 billion across those businesses. And I think they all have funnels that would represent or present those sorts of opportunities. Now certainly, if something of size came along that makes sense for us, we would look at it. But as you well know, if you look back over that time period, the bigger deals tend to come infrequently.

Operator

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

Deane M. Dray - Citigroup Inc, Research Division

Larry, on investment [ph], you talked about that you've got 4 consecutive quarters at low single-digit growth, nice and steady, but there's an expectation now that it ramps to mid-single-digits in 2014. So just talk a bit about what the drivers there. Is that a new product cycle?

H. Lawrence Culp

Well, I think the view all along was that we'd have to pay off some of those inheritance tax. But by '14, we should be able to move into that mid-single-digit growth range. I really think it's nothing more than the cumulative effect of both the fixes, the quality, the service, in addition to the implementation of DBS, not only to drive cost out, but really to lay in the daily management to help drive better execution, both in sales and marketing and in new product development. As we move forward, as you see in this quarter with the launch of the DxH 600, the Power Express, we're going to get a better lift from those products. Certainly, as we get behind, we put behind some of the regulatory issues that we've had, that's going to be helpful. So I just think we've got momentum building at Beckman, momentum on a global basis, and that bodes well for that business.

Deane M. Dray - Citigroup Inc, Research Division

Great. And then I guess, it shouldn't be surprising that you called out Arbor because lots of headline news about cyber attacks. Can you just refresh us Arbor's go-to-market strategy, how much of their product and software is off the shelf, how much of it is a customized solution and maybe the mix between government customers versus enterprise?

H. Lawrence Culp

Deane, we're well-positioned certainly in cyber security with Arbor much as we are in mobile, around the mobile explosion that the carriers are enjoying. And that's on the Tektronix Communications side. At Arbor, I don't have the exact mix in front of us. I think we're more weighted toward carriers than we are enterprise. But the enterprise initiative has been clearly an important part of what we've done here in the last 2 years, and that's where we're enjoying some of the outsized growth right now as financial institutions and others wrestle with these DdoS attacks. That said, from a -- in terms of government, I just don't have that number offhand. It's -- I think it's a relatively modest portion of the business, but it is represented in the customer set.

Deane M. Dray - Citigroup Inc, Research Division

And would this be a business that would be one of those looking for M&A opportunities?

H. Lawrence Culp

Oh, I think all of the businesses out there have their aspirations. Clearly, in security, we need to be smart about both the strategic fit of anything that we might do there, let alone valuations, of course.

Operator

We'll take our next question from Jon Groberg with Macquarie.

Jonathan P. Groberg - Macquarie Research

So Larry, first on the Tektronix business instruments, sounded like it turned down again to down low double-digits, if I heard you right, from I think it seemed like maybe it was starting to improve a little bit last quarter. Can you maybe talk about what happened there and what the outlook is? And also maybe in the context of that business, I think that's a pretty high gross margin business. So kind of how -- what drove the gross margins sequentially given the weakness there?

H. Lawrence Culp

Jon, you're right. We certainly saw continued softness at Tek. And as I think both Dan and I have alluded to here, that was pretty broad-based. Certainly, in the first quarter here, I think we saw that particularly here in the U.S. I think what we saw at TEK was really just a continued push right in our funnels in a whole host of areas. Certainly, a number of the customers that we serve on the development side in the Tek end markets are reworking their capital budgets for this year, a little unclear as to how that plays out. As you know, this business tends to track PMI a good bit on a couple of quarter lag basis. So I think we're optimistic that we get Tek stabilized later this year. But that said, it's going to certainly be a headwind for us all in the first half. Fortunately, we've got some offsets working for us in comms and at Fluke on a segment basis.

Daniel L. Comas

And Jon, on the margin side, the gross margin side, across the company, as Larry alluded to, we've had really good performance. Given Tek Instruments, as you know, is a very high gross margin business, gross margins were down year-on-year in Test & Measurement because of that. But in the other 4 segments, they were each up 50 to 75 basis points. Again that's a combination of some of the price/cost dynamics, the restructuring, bringing out new products. We were really pleased at Dental, we were up almost 100 basis points year-on-year in terms of gross margin. And it obviously means good execution on the cost side, but as importantly, some of these new products coming in at much better gross margins.

Jonathan P. Groberg - Macquarie Research

Okay. That's very helpful. Yes, very impressive gross margin. And then if I can, just 1 follow-up kind of on the Life Science side. And some of these smaller businesses, I know you mentioned advanced staining was down, if I heard you correctly. Actually, Roche had a really tough quarter in advanced staining, too. So can you maybe -- I know there's some reimbursement and other things going on there. Can you maybe talk about your outlook for that business for the year? And then on some of these legacy Beckman Life Science businesses that actually are more distribution-related to one of the previous questions, does it make sense to maybe look to divest some of those businesses, I'm curious?

H. Lawrence Culp

Sure. Let me take those in order. I think we continue to have a very buoyant outlook for Leica Biosystems. Unfortunately, cancer is an issue around the world, and we're hopefully part of the solution there. You referenced the negative control guidance in the U.S. We think that probably had a little bit of impact for us in the quarter. But I think the major issue that we alluded to at Leica Biosystems was really this distribution change. In parts of Europe, we're going from a distribution model to a direct model. That creates near-term noise. As you work through that, I think it's the right strategic move to make. It will help us grow faster in Europe long-term. But clearly, we saw revenue and cost issues in the quarter as we work through that. But that will settle out, we'll be in a better place. With respect to Beckman Coulter Life Sciences portfolio, they had a nice quarter. We have a business there that I think is improving. I was with them during the quarter. We installed some new leadership, promoted Jennifer Hunnicutt [ph] into the President's role there, one of our outstanding general managers. I think we're optimistic, Jon, about that portfolio, it's clearly, if you will, the forgotten part of the Beckman Coulter. There are a number of synergies with the rest of our group. And while you're right, a number of those products go to market to distribution, they don't go to market exclusively through distribution. And I think to the extent that we innovate, we build that brand, we're going to be able to certainly compete anywhere in the world either on a direct or a distributed basis.

Operator

Our next question comes from Shannon O'Callaghan with Nomura.

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

So Larry, back in the third quarter, equipment disappointed and consumables hung in. It was kind of a similar dynamic and it was also, I think, mainly U.S.-based. And then that dynamic basically reversed in the fourth quarter, so you guys ended up missing it in the third quarter on that and beating it in the fourth on that. Is there a reason why you don't think we might have a similar just choppiness but shift quarter-to-quarter this time as a reason something keeps you more cautious about 2Q and not expecting that kind of a, I guess, catch-up that happened 3Q to 4Q?

H. Lawrence Culp

Yes. I mean, if you're reading anything in our language or tone in that regard, it may be a function of the March macro data that came out. Let alone the fact that no fun being short even of a tight 1.5% to [ph] top line range. I think that said, again as we look at the second quarter, there'll be some things that certainly help us, having the benefit of that extra day, if you will, being on the other side of the holidays, et cetera. But I think we're going to be, as we typically are, cautious, hopefully smartly so, relative to the outlook here. I think we -- again we look at the quarter, acknowledge some of the noise but don't want to point to that. On a relative basis, we think we're doing well. And that's ultimately what's going to matter. As we move forward here, we continue to do that and make sure that we've got our investment envelope properly tuned to the environment. Clearly, little numbers matter a lot when you're talking about a couple of hundred basis points on the equipment side that can move around as it clearly has here the last couple of quarters. But that said, I think again we're going to move forward here with a strong competitive position, thinking that the range that we've offered up this morning, again the midpoint perhaps being the most likely scenario for the second quarter and the second half.

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

Okay. Yes, I mean, it does seem like maybe it's a function of the lower growth environment that your equipment sales are choppier than they used to be, I guess, right?

H. Lawrence Culp

Well, again I think a couple of hundred basis points in growth is really the swing factor here. And it's been a noisy operating environment, as we've dealt with some of these external issues. But that said, the environment is what it is, right? So we're going to move forward.

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

Yes. No, I hear you. And then just quickly on China, I mean, so Med Tech remained strong, the industrial stuff, I guess, is mixed instead of all down. I mean, is there anything that's kind of taking a leg down or gotten notably worse in the quarter in China?

H. Lawrence Culp

I don't think so. We've been wrestling with these issues that Dan alluded to at T&M, particularly Tek more so than Fluke, and at Motion for some time. So it's continued to be soft. But I don't think we would characterize it as legging down in anyway.

Operator

Our next question comes from Ross Muken with ISI Group.

Ross Muken - ISI Group Inc., Research Division

So where if anywhere in the business did you see any impact from sort of the sequester? And how do you sort of think about that as it relates to kind of what trend you saw in March versus April? And is there any degree you can give any anecdotal conversations you've had with either customers or peers to sort of understand how that's kind of also as an overlay influencing maybe the CapEx environment?

H. Lawrence Culp

I think certainly part of the softness that we saw in the U.S. and was probably most pronounced at Leica Micro, Ross, could be attributed to just some of the noise in and around the sequester. And again it wasn't as if budgets were being slashed, projects canceled and the like. Things were just getting pushed right because of, I think, a degree of uncertainty that seemed to play out. I think we certainly saw at SCIEX some softness in the academic realm as well. And it's really with those businesses that we probably have most of our sequester exposure in Life Science. We have pockets here and there of other government exposure which could play out Tek and Motion, for example, being areas where we have that exposure. But it would be principally in LS. And again I think it's a noise factor for us right now as opposed to any part of a clear stepdown as we look out for the rest of the year, at least at this point.

Ross Muken - ISI Group Inc., Research Division

On the capital deployment front, it's been, I think, I have to check the figures for Q1, but I think it's been a fairly quiet M&A period overall for the market, x maybe in my space, the deal this week. But I guess, as you're thinking about that environment, it seems like from your characterization, it's pretty active behind the scenes. And so I guess, as you look at sort of what you've been involved there and what you've looked at that hasn't come to market, is it price? Is it timing? Is it uncertainty? And then have you seen the mix of buyers you're competing against change, e.g. is private equity a much bigger component of the process now versus where they were 12 or 24 months ago? And how are you sort of thinking about that as a changing dynamic?

Daniel L. Comas

I mean, clearly, given the better leverage markets, again what's happened in the last couple of weeks probably dampening that a little bit, we're seeing private equity more in different situations. Where we have a strong point of view about what we can do with the margin, which is I said 3 out of 4 times, let's say, private equity is probably not going to be able to displace someone like ourselves. In terms of the activity, I think the way you'd characterize it and I would think that's something we hear from not only what we're seeing but we hear from kind of bankers is the behind-the-scene discussion levels are definitely up versus where they were 6 months ago, and I think that's encouraging. Now why things don't happen, it's all over the place, it's sometimes price, it's sometimes transition issues, it's uncertainty. But normally, when we tend to see an increase in the number of discussions we're having about mid to large situations, historically that tends to roll out into some acquisitions.

H. Lawrence Culp

Ross, I would just add to Dan's comments that if you think about situations that we've looked at where we've ultimately decided to let things go, the strategic fit, the strategic rationale is really important for us. It's got to make sense in terms of the broader strategy. And particularly, in this low-rate environment, we're still, I think, primarily focused on those returns on capital as opposed to accretion. And that really has been, I think, the frame we've used over time to deploy capital. Sometimes it's led us to be quite busy and bunched up, and other times, maybe a little quieter than folks expect. But with our portfolio taking a long view through the cycle, we've tended to, I think, by and large, make good bets that have generated good returns for shareholders. I think we continue to hold that view as we look forward.

Ross Muken - ISI Group Inc., Research Division

Absolutely. And maybe just one quick last one on that. I mean, to your point on return on capital versus accretion makes total sense. I mean, given your view on the year and stocks off another couple of percent today, how are you guys thinking about sort of share repurchases? And I know you bought a bit at the end of last year and then stopped. And so I'm just trying to get a sense for sort of your sensitivity and feeling on sort of the intrinsic value and your sort of openness if we go through another soft patch to maybe reconsider again sort of reentering the market.

Daniel L. Comas

Well, I think you characterized it well. We're always looking at it. We look at it opportunistically and from what sort of return sort of payback and buying back our own stock. Again having said that, given what we potentially see on the M&A side, it's right now in secondary consideration but still something that's part of our accounting.

Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

H. Lawrence Culp

Thanks, Lisa. Dan and I would be around all day, everybody, for follow-ups. Thanks for joining.

Operator

And that concludes today's teleconference. Thank you for your participation.

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