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.
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 25th, 2013.
The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally. The confirmation code is 5,544,079. During the presentation, we'll describe certain of the more significant factors that impacted year-over-year performance. Please refer to the supplemental materials in our first quarter Form 10-Q for additional factors that impacted year-over-year performance. All references in these remarks and 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 of 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.
Matt, thanks. 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 at a high single-digit rate in the quarter. China was up low double digits, led again by our Dental and Life Sciences and 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 continued 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 two years. 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 its Apex JV and the impact from $40 million of cash payments related to our fourth quarter restructuring, was greater than 100%. Turning to our five operating segments, Test and Measurement revenues increased 1% for the quarter, while core revenues were flat. While core margins were down 25 basis points year-on-year, segment margins saw a significant sequential improvement over the prior two quarters.
Fluke core revenues grew at a low-single-digit rate, their first quarter of positive core growth since the fourth quarter of 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 you may have heard about as it was featured in March in a broad nationwide range 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 the multi-phase PA4000 power analyzer, which will be used by engineers on the bench 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 attacks 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 US 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 rate in the quarter. Hocklander 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 US 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 four years, the Mexican business has grown over 300%, driven by their 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 a 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 and 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 one less day in the quarter, with growth in all major product categories. This marks the fourth straight quarter of low double digits 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 two 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 the previously announced acquisition of HemoCue, a leader in 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 business' 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 the 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 multi-year collaboration agreement with the Institute for Systems Biology in Seattle for the development of new methods and technologies in 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 SWATH proteomics analysis using the AB SCIEX 5600 TripleTOF. We're 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, our 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, 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 six new products in the quarter at two of the largest trade shows in the industry, the Chicago Midwinter Dental Meeting and the International Dental Show in Germany. New products include the i-CAT Flex, 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-to-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 Technology 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 business' core revenues declined at a high-single-digit rate in the quarter, with sustained 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 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 it's still early, we're excited about X-Rite's contribution to the PID platform and the new collaboration and go-to-market opportunities they bring. An example of this collaboration is the PantoneLIVE, where we recently launched two Illustrator plugins that were co-developed with Esko. These plugins 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. 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 a 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-$0.85, which assumes 1%-2% core growth.
We are also reaffirming our full-year 2013 adjusted diluted net earnings per share guidance of $3.32-$3.47.
Thanks, Larry. That concludes the formal comments. Lisa, we're ready for questions.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute option is turned off to allow your signal to reach our equipment. Again, everyone, please limit yourself to one question and one follow-up question to allow everyone an opportunity to ask their question. Again, that is star one. We'll pause for a moment. We'll take our first question from Steve Tusa with J.P. Morgan.
Hey, good morning.
Good morning, Steve.
Just starting off with the Life Sciences & Diagnostics margin was about 100 basis points lighter than I guess we were expecting. Can you just talk about, A, what the margin was like at Beckman, and then if there was anything else that drove that weakness?
Yeah. I think with respect to what you're seeing there, Steve, is we knew, given some of the investments in the segments that we were making, particularly on the sales and marketing and R&D side, margins were going to be tight in LS&D. That said, and I say that both with respect to the Life Sciences and 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. That said, clearly the revenue picture in LS&D, particularly in LS, was softer in the end than we anticipated. That certainly put some of the pressure on the margins that you see.
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 Biosystems with respect to the distribution to direct sales model. We had an opportunity to move forward in that regard. I think that makes sense strategically. That didn't help us from a cost perspective and frankly 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 diagnostic businesses, we had an opportunity to accelerate some of our spending ahead of submissions. We thought, again, positioning ourselves to get those new products approved made sense. We went ahead and did that.
I guess R&D for the company was up 40 basis points year-over-year.
Right.
6.7% is a really big number. Can you let us know, I know you could disclose it in your K's, but maybe in LS&D, I would assume it was up a little bit more than the 40 basis points?
It was. It also, given some of this distribution transition we're going through, some of the sales and marketing was also higher. We think that'll sort of begin to even out here in Q2, so you'll see, I think, more normalized margins in LS&D in Q2.
Can you give any kind of magnitude, Dan, around what the R&D was up as a % of sales in LSD?
We were up combined over 100 basis points between R&D and sales and marketing as a % of revenues year-on-year.
Okay. When you talk about these regulatory filings, is this just greater than expected spending than you would have initially thought as you fixed the business? Is this more proactive with new products?
Steve, it's probably somewhere in between. It really is about what we do and when we do it. Some of it's strictly timing.
Yeah.
At the same time, as we work through the plans for those submissions with regulatory bodies, sometimes as time marches on, you get a better sense of the scope and the work required. We thought accelerating some of that spend was frankly an opportunity, despite the pressure that you allude to here. 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.
Great. 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 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 one to 10, if one is 2009 and kind of 10 is the ideal operating environment, how would you describe the current environment you're operating in? It's just hard to tell how bad the trend is here. I'm just curious as to your high-level take on that.
Yeah, 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. 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. If you adjust for the day that we missed, 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.
At 60%, we thought we'd be up a couple hundred basis points. That's where we got squeezed, particularly in the U.S., because we saw some business soften in March when we thought we would finish more strongly. I wouldn't say it's bad. I think we saw the normal uptick in March. It just wasn't pronounced in equipment, again, in the U.S. principally, around some of the higher ticket products. We mentioned tech, I think we mentioned motion as well into distribution. In the grand scheme of things, we're not necessarily excited about the macro numbers that came out here the last three or four weeks. 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 the EPS shortfalls here. That's the way it played out.
I think at this point, our sense is, while it's early, and we don't have everything that we'll have in time, the shortfall is, again, largely a macro dynamic. March just didn't finish as strongly as we would've anticipated. On a relative basis, business by business, we think we're doing pretty well. I think as we look at April, things have come back in a couple of pockets, in the wake of some of that end-of-March softness. Again, probably too early to read too much into that. Certainly too early to read much into the 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.
Thank you. As a reminder, everyone, that is star one to ask a question, and please limit yourself to one question and one follow-up question. Our next question comes from Scott Davis with Barclays Capital.
Hi. Good morning, guys.
Morning, Scott.
A couple things. First, the big pullback you saw in Motion was a little bit of a surprise when you had that big of a negative. Were the timing issues there that customers just wanted to destock? I think you mentioned some weakness in distribution, U.S. technology. Is that something that's going to restart here in 2Q? We have some greater underlying weakness here that's more sustainable?
Well, I think it's a bit of a mixed bag, Scott, as we read it today. You mentioned distribution and tech. I think those are two different markets for us. Clearly, where we go to market through distribution, we saw soft sell-out as well as our own sell-in. Certainly the tech OEMs that we deal with tend to be customers we deal with directly, and we certainly saw pockets in tech 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, and it'll 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.
Okay. I want to move to two other quick things. The medical businesses have been strong couple quarters in a row here in China. Are you seeing that broadening out at all to the other businesses like, for example, in the more shorter cycle businesses?
Yeah, we certainly saw, I think, a broadening of the strength in China. Again, the first quarter's a little hard to read sequentially given the timing of the New Year there. That said, we're pleased with the overall print in China, both its depth and its breadth. 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 at this point of calibrating what sort of growth to expect there. They'll definitely, I think, be one of our better high-growth markets here in the rest of the way.
I'd say, Scott, on the industrial side, instead of all being down or flat, it was mixed. I guess that's a little bit encouraging. PID and water had real good starts to the year in China. I contrast that, in fact, a little bit of a positive sign, but I would say that T&M and motion, their numbers were down, and sequentially did not feel any better.
Okay.
Still on the.
A couple pockets a little better.
Sure. Just last question on price. When we have this type of a slow macro environment, and it's been largely, probably seven of the last 10 years, it's been a pretty good price environment. Now we're seeing some weakness in commodities. What's the outlook for price from here?
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 the price-cost equation, Scott, in general, pretty pleased. 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. If there's one thing I think we're particularly comfortable with, it's that effect. Clearly we'll get, I think, additional impact from the 2012 restructuring in the gross margin mix as we move through the year.
Very helpful. Thanks. Good luck, guys.
Thanks, Guy.
We'll take our next question from Steven Winoker with Sanford Bernstein.
Thanks, and good morning.
Good morning, Steve.
You mentioned $8 billion of capital available for deployment over the next two years. I think that's up from 5+ that you used to discuss. Can you maybe talk about, given the current environment, where you're thinking about deploying the additional capital? You obviously mentioned one positive comment in the release, but give us maybe more of a flavor for how this might transpire.
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+ billion on an annual basis. It's really just that simple. I think strategically, as we think about capital deployment, our strategy is in no way changed. I think our view certainly continued 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. As you look today, it's the way Dan and I and the teams are working together. We're working funnels that are active across all of our growth platforms. Clearly, we're keen to put that capital to work in that fashion.
The acquisition, the $300 million one that you announced in, I guess, February, was in Life Sciences. How's the Industrial pipeline looking or the non-Life Sciences pipeline looking?
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 2012, 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 margin could be helpful here in getting maybe some things across the finish line.
Okay. On the top line or the implications for the second half, I think EPS implied, given your guide, is somewhere north of 10%-11%. In top line, given your 1%-2% in the second quarter and this quarter at 1%, implies a very significant acceleration in the second half. That's obviously despite deceleration on 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.
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 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. Probably the strength in China would have to pick up a bit more so than the encouraging news that we've seen. We probably would need to have Europe at least stabilized rather than being down a couple 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, again, that midpoint mindset's probably what is most useful right now.
I guess on that, I'm just looking for, given the many investments that you've been making to drive the top line, to what extent internally can you look at the payoff you're getting on those top-line investments? I know it's very hard to separate it from a tough macro, but what evidence are you seeing?
Well, I think we look at those investments one by one by one at the operating company level. 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, the returns, and the market share gains at Videojet, you know you're getting a return there. Not that every investment that you make is going to pay off, but I think by and large, where we're investing, we see that return not only in terms of the top line and the attendant share gains, but frankly also in the gross margins.
Okay, thank you.
Thanks, Steve.
We'll take our next question from Jeff Sprague with Vertical Research.
Thank you. Good morning, gentlemen.
Morning.
Just on Life Sciences in general. First, as you think about what next, 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 a kind of a strategic issue to contend with? Just what is your view on kind of how maybe the channels are evolving?
Well, Jeff, that's probably a longer conversation than we might do justice to this morning. I think in Life Sciences in particular, we have a number of distributor partnerships around the world, including Thermo. 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 segment, not the Diagnostics, we sell on a direct basis. These are not gloves and beakers that sell for two or three digits at a pop. We're talking about high-end, highly engineered, customized equipment that researchers, scientists spec out and really push us on with respect to innovation. Those tend not to be distribution-oriented. Hence any moves or consolidation that you see there, I don't think have a direct bearing on our competitiveness going forward.
Okay, great. I was just wondering, what you just said to Steve on the outlook was helpful. Just thinking about the second quarter, when you are basically guiding the 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 to hold us at a roughly flat EPS result in Q2?
Jeff, part of it was in the quarter last year. We reported $0.84 last year, but we did call out $0.03 of kind of one-time items. In addition, we had the Apex earnings. Absent those one-time items and absent Apex equivalent, we're probably more like $0.79. 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 had last year.
Right. Okay, great. Thank you very much.
You bet, Jeff. Thank you.
Our next question comes from Nigel Coe with Morgan Stanley.
Yeah, thanks. Good morning.
Good morning, Nigel.
Yeah. 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?
I think with respect to the quarter, perhaps the year, both.
Okay. Just taking a step back, you're giving some good color on the trading conditions in 1Q, but take a step back to 4Q. Obviously, we had that unusual strength, and I'm just wondering how much pull forward do you think there was from 1Q into 4Q?
Yeah, 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 push-out from the third into the fourth. I think what we're trying to do, Nigel, business by business, is really take stock of the trends through, if you will, that three-quarter period. 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.
Right. It's tough to try and decide.
Yeah.
Yeah. You mentioned $8 billion of surplus capital to redeploy. If I go over the last six years and you obviously buy back Beckman, which is an unusual size, I think you've deployed about nine over the last six years. I'm just wondering, to deploy that sort of quantity of capital, do we need to take a big swing on the acquisition front?
I don't think we see that eight billion dollar opportunity to deploy capital as something that requires a single 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. We've got seven or eight businesses here, all with their acquisition maps and funnels, and they're working that accordingly. I think our preference would be, if you're looking at $8 billion, to divvy that up $1 billion-$2 billion across those businesses. I think they all have funnels that would represent or present those sorts of opportunities. Now, certainly, if something of size came along that made sense for us, we would look at it. As you well know, if you look back over that time period, the bigger deals tend to come infrequently.
Right. Okay. Thanks, Larry.
Thank you, Nigel.
We'll take our next question from Deane Dray with Citi Research.
Thank you. Good morning, everyone.
Hey, Larry, on Beckman.
Dean.
You talked about you've got four 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. Just talk a bit about what the driver is there. Is that a new product cycle?
Well, I think the view all along was that we'd have to pay off some of this inheritance tax, but by 2014, we should be able to move into that mid-single-digit growth range. Deane, I really think it's nothing more than the cumulative effect of both the fixes to quality, to 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 Xpress, we're going to get a better lift from those products. Certainly, as we put behind some of the regulatory issues that we've had, that's going to be helpful.
I just think we've got momentum building at Beckman, momentum on a global basis, and that bodes well for that business.
Great. I guess it shouldn't be surprising that you called out Arbor because lots of headline news about cyber attacks. If you could 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? Maybe the mix between government customers versus enterprise.
Deane, we're well positioned, certainly in cybersecurity with Arbor, much as we are in mobile around the mobile explosion that the carriers are enjoying. That's on the Tektronix Communications side. At Arbor, I don't have the exact mix in front of us. 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 the last two years. 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, in terms of government, I just don't have that number offhand. I think it's a relatively modest portion of the business, but it is represented in the customer set.
Would this be a business that would be one of those looking for M&A opportunities?
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.
Great. Thank you.
Thanks, Deane.
We'll take our next question from Jon Groberg with Macquarie.
Great. Thanks, Amelia, and for the question. Larry, first on the Tektronix business instrument, sounds like it turned down again to down low double digits, if I heard you right. 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? Also maybe in the context of that business, I think that's a pretty high gross margin business. What drove the gross margins sequentially given the weakness there?
Jon, you're right. We certainly saw a 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 tech end markets are reworking their capital budgets for this year. We're unclear as to how that plays out. As you know, this business tends to track PMI a good bit on a couple quarter lag basis. I think we're optimistic that we get Tek stabilized later this year. That said, it's going to certainly be a headwind for us all in in the first half.
Fortunately, we've got some offsets working for us in Comms and at Fluke on a segment basis.
Jon, on the margin side, the gross margin side across the company, as Larry alluded to, we've had a really good performance given Tektronix, as you know, is a very high gross margin business. Gross margins were down year-over-year in Test and Measurement because of that. In the other four segments, they were each up 50 basis points-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-over-year in terms of gross margin. Obviously, good execution on the cost side, but as importantly, some of these new products coming in at much better gross margin.
Okay, that's helpful. Yeah, very impressive gross margin. If I can, just one follow-up on the Life Science side. In some of these smaller businesses, so I know you mentioned advanced staining was down, if I heard you correctly. Actually, Roche had a really tough quarter in advanced staining, too. 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? 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? Thanks.
Sure. Thanks, Jon. 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. 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'll help us grow faster in Europe long-term. Clearly, we saw revenue and cost issues in the quarter as we work through that. That will settle out. We'll be in a better place.
With respect to the 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 Honeycutt 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 Beckman Coulter. There are a number of synergies with the rest of our group. While you're right, a number of those products go to market through distribution, they don't go to market exclusively through distribution. 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.
Great. Thanks a lot.
You bet. Thank you.
Our next question comes from Shannon O'Callaghan with Nomura.
Good morning, guys.
Morning, Shannon.
Shannon.
Hey, Larry, back in the third quarter, equipment disappointed and consumables hung in. It was kind of similar dynamic, and it was also, I think, mainly U.S.-based. That dynamic basically reversed in the fourth quarter. You guys ended up missing it in the third quarter on that and beating in the fourth quarter 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? Is there a reason, something keeps you more cautious about 2Q and not expecting that kind of, I guess, catch-up that happened 3Q-4Q?
Yeah. If you're reading anything into 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%-2% 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. I think we're gonna be, as we typically are, cautious, hopefully smartly so, relative to the outlook here. I think, 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 gonna 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 hundred basis points on the equipment side that can move around as it clearly has here the last couple of quarters. That said, I think, again, we are gonna 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.
Okay. Yeah, it does seem like maybe it's a function of the low-growth environment, but your equipment sales are choppier than they used to be, I guess, right?
Well, again, I think 200 basis points in growth is really the swing factor here. It's been a noisy operating environment, particularly as we've dealt with some of these external issues. That said, the environment is what it is, right? We're gonna move forward.
Yeah, no, I hear you. Just quickly on China. MedTech remains strong. The industrial stuff, I guess, is mixed instead of all down. Is there anything that's kind of taken a leg down or gotten notably worse in the quarter in China?
I don't think so. We've been wrestling with these issues that Dan alluded to at T&M, particularly tech, 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 any way.
Okay. All right. Thanks a lot.
You bet, Shannon.
Our next question comes from Ross Muken with ISI Group.
Hi, good morning, guys. Good morning, Ross.
Where, if anywhere, in the business did you see any impact from sort of the sequester? How do you sort of think about that as it relates to kind of what trend you saw in March versus April? To 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.
I think certainly, part of the softness that we saw in the U.S., and was probably most pronounced at Leica Microsystems, Ross, could be attributed to just some of the noise in and around the Sequester. 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. 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. Tektronix and Motion, for example, being areas where we have that exposure. It would be principally in LS.
Again, I think it's a noise factor for us right now as opposed to any part of a clear step-down as we look out for the rest of the year, at least at this point.
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, ex maybe in my space, the deal this week. I guess as you're thinking about that environment, it seems like from your characterization, it's pretty active behind the scenes. I guess as you look at sort of what you've been involved in and what you've looked at that hasn't come to market, is it price? Is it timing? Is it uncertainty? Have you seen the mix of buyers you're competing against changed, e.g., is private equity a much bigger component of the process now versus where they were 12 or 24 months ago? How are you sort of thinking about that as a changing dynamic?
I mean, clearly, given the better leveraged 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 margins, which is, I'd say three out of four times, I'd say private equity's probably not going to be able to displace someone like ourselves. In terms of the activity, I think the way you 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-scenes discussion levels are definitely up versus where they were six 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.
Normally, when we tend to see an increase in the number of discussions we're having about mid to larger situations, historically, that tends to roll out into some acquisitions.
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. Particularly in this low-rate environment, we're still, I think, primarily focused on those returns on capital as opposed to accretion. 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 would expect. With our portfolio, taking the 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.
Absolutely. Maybe just one quick last one on that. To your point on return on capital, et cetera, versus accretion, makes total sense. Given your view on the year and stock's off another couple % today, how are you guys thinking about sort of share repurchases? I know you bought a bit at the end of last year and then stopped. I'm just trying to get a sense for sort of your sensitivity and feeling on sort of intrinsic value and your sort of openness if we go through another soft patch to maybe reconsider again, sort of reentering the market.
Well, I think you characterize it well. We're always looking at it. We look at it opportunistically in terms of what sort of return, sort of payback in buying back our own stock. Again, having said that, given what we potentially see on the M&A side, it's right now a secondary consideration, but still something that's part of our calculus.
Great. Thanks, guys.
Thanks, Ross.
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.
Thanks, Lisa. Dan and I will be around all day, everybody, for follow-ups. Thanks for joining.
Thanks.
That concludes today's teleconference. Thank you for your participation.