Hello, everyone. My name is Charlonne, and I will be your conference facilitator. Good day, and welcome to the Danaher Corporation Fourth Quarter 2012 Earnings Results. Today's conference is being recorded. All lines are in a listen-only mode. Following today's presentation, there will be a question and answer session. To ask a question, please press the star key followed by the digit one on your touch tone telephone. At this time, I'd like to turn the conference over to Matt McGrew, Vice President of Investor Relations. Please go ahead, sir.
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, and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call, which we refer to as the supplemental materials, are all available in the Investors section of our website, www.danaher.com, under the heading Financial Information, and will remain available following the call. As our year-end Form 10-K has not yet been filed, we have included as part of the earnings release, the fourth quarter and full year income statements, year-end balance sheet, and year-end cash flow statement.
In addition, we have included data in the release reflecting our business segments results to facilitate your analysis. The audio portion of this call will be archived on 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 February 5th, 2013. The replay is 888-203-1112 in the U.S. and 719-457-0820 internationally, and the confirmation code is 2149164. 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 annual report on Form 10-K when it is filed 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 business, unless otherwise noted.
I'd also like to note that we'll be making some statements during the call that are forward-looking statements within the meaning of the Federal Securities Laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. It's possible that actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, whether a result of new information, future events and developments, or otherwise. With that, I'll turn the call over to Larry.
Matt, thanks. Good morning, everyone. We were pleased by the solid finish to 2012, which was broad-based across most of our businesses. Core revenues grew 3.5% in the fourth quarter, with incremental strength most pronounced in Life Sciences & Diagnostics , Product Identification , and Dental. Additionally, the team's application of the Danaher Business System led to good earnings growth, core margin expansion, and outstanding cash flow performance, including a record $3 billion of free cash flow generation in the year. From a geographic perspective, high-growth markets grew low double -digits with particular strength in Latin America and the Middle East. China delivered high single-digit growth in the fourth quarter, again led by Life Sciences & Diagnostics and Dental. In the U.S., year-end demand helped drive low single-digit growth in the quarter. Western Europe was modestly negative.
Of note, revenues from the high-growth markets grew to more than 25% of our total revenues in 2012. While approximately 1/3 of this revenue is generated in China, we have also built an increasingly large presence in Latin America with more than $750 million of annual sales, and the Middle East and Africa with about $500 million in sales. We are proud that we've been able to replicate our success in China in other key growth markets. High-growth market revenues now surpass those from Western Europe and are a strong base for future growth and serve as a hedge against the uncertain economic outlook in Europe. In 2012, we strengthened the Danaher portfolio, spending $1.8 billion on 14 acquisitions, most notably X-Rite and IRIS.
Over the next two years, we have ample balance sheet capacity to deploy on acquisitions with a continued focus on our strategic growth platforms, which now account for more than 90% of total revenues. With that as a backdrop, let me move to the details of the quarter. Today, we reported fourth quarter diluted net earnings per share of $0.89, representing a record fourth quarter for Danaher and a 12.5% increase as compared to our diluted net EPS last year. Included in these results is a $0.02 per share benefit from a mark-to-market gain from the change in value of a currency swap agreement. For the full year, diluted net EPS increased 16.5% to $3.23, which includes more than $120 million of second half restructuring. Revenues for the quarter increased 5.5% to $4.9 billion, with core revenues up 3.5%.
Acquisitions increased revenues by 3%, partially offset by the negative impact of FX, which decreased revenues by 1%. Our full year 2012 revenues were up 13.5% year-over-year to $18.3 billion, with core revenues up 2.5%. Our year-over-year gross margin for the fourth quarter increased 190 basis points to 51.2%, while our operating margin in the fourth quarter increased 80 basis points to 17.3%. For the full year, our gross margin was 51.6%, and our operating margin was 17.3%. If we exclude the impact of the Apex JV, our full-year operating margin was 17%. DBS continues to be the primary driver of our outstanding cash flow performance. 2012 operating cash flow was $3.5 billion, a 28% increase compared to 2011.
Free cash flow from continuing operations was a record $3 billion, and our free cash flow from continuing operations to net income ratio was 132%, representing the 21st year in a row where we delivered free cash in excess of net income. During the quarter, we announced the acquisition of five businesses with aggregate annual revenues of approximately $250 million, and which are expected to strengthen our Environmental, Dental, and Life Sciences & Diagnostics segments. in 2012, we also repurchased approximately 12.5 million shares of company stock at an average price of about $52 per share. Turning to our five operating segments, Test & Measurement revenues increased 1% for the quarter, with core revenues down 2%. For the full year, revenues declined one half of 1%, with core revenues down 1.5%.
Test & Measurement’s reported operating margin was down 280 basis points to 18.7% due to both core revenue declines and higher year-over-year restructuring spending. Fluke core revenues decreased at a low single-digit rate in the quarter, marking an improvement from the double-digit declines we saw earlier in the year. Bookings turned positive this quarter, and we believe this momentum could lead to positive core revenue growth in the first quarter. Fluke recently launched several new products, including the VT02 Visual IR Thermometer, an innovative entry price point temperature measurement tool with an integrated visual heat map. At Tektronix, core revenues declined at a high single-digit rate, a modest improvement from the mid-teens decline experienced in the third quarter. Sales improved sequentially in North America, although demand in Europe, Japan, and China remains weak. Despite market softness, we continue to receive industry recognition for our innovative new technologies.
In the quarter, Electronics Design Network named Tek's THS3000 handheld oscilloscope series, and Keithley's 2657A high voltage high power system SourceMeter to their 100 hot products of 2012 list. Core revenues from our communications businesses grew low single- digits in the quarter, led by healthy demand for our enterprise tools and network security solutions in most major geographies. Accelerated product development via DBS at Fluke Networks yielded nearly 50% product vitality in 2012, with 35 new product introductions during the year. We believe we are gaining market share as a result of this robust portfolio of fiber, Wi-Fi, and enterprise troubleshooting tools and systems. Sales at Tek Communications network management solutions declined in the quarter, primarily due to difficult prior year comparisons. We expect this business to return to growth here in the first quarter.
During the fourth quarter, Tektronix Communications launched its deep packet classification solution that enables operators to protect against revenue drain and identify new opportunities for growth by deepening their understanding of per-subscriber network utilization. Environmental segment revenues increased 5.5% in the quarter, with core revenues increasing 3%. For 2012, revenues increased 4%, with core revenues up 3.5%. The segment core operating margin was up 150 basis points in the quarter, with reported operating margin increasing 110 basis points to 23%. Water quality core revenues increased at a low single-digit rate. At Hach Lange, sales of our core lab instrumentation used in industrial applications were particularly good due in part to the recent launch of the DR3900 spectrophotometer and the HQD benchtop meter. Hach Lange again drove double-digit revenue growth in Latin America this quarter and exceeded $100 million in revenue throughout the region for the full year.
ChemTreat continued its growth streak with the fourth quarter marking its 10th straight quarter of double-digit core revenue growth. In 2012, revenues eclipsing $350 million, up from just over $200 million when we acquired the company in 2007. Gilbarco Veeder-Root's fourth quarter core revenues grew mid-single -digits, led by healthy dispenser sales in North America. In Mexico, we believe we are capturing significant market share, shipping nearly 5,000 dispensers to that country in 2012 to help customers comply with recent regulatory changes. During the quarter, Gilbarco announced the pending acquisition of Automated Fuel Systems Group, a leading provider of fuel management solutions to government, fleet, and mining customers in South Africa. The acquisition is subject to customary closing conditions and is expected to close in the first quarter. We also announced the acquisition of Navman Wireless, Danaher's first acquisition in the attractive fleet and asset management adjacency.
Navman's solutions enable fleet owners and operators to track and monitor their assets real time, achieve savings on fuel and maintenance, and manage operator workflows. Customers here include local business fleets, off-road users in construction and mining, schools and municipalities, and long-haul transporters. Moving to Life Sciences & Diagnostics , revenues for the quarter increased 6.5%. Core revenues were up 7% in the quarter, and for the full year, revenues increased 40%, with core revenues up 4.5%. Our segment core operating margin was up 160 basis points in the fourth quarter, while our reported operating margin increased 120 basis points from the prior year to 14.2%. The Diagnostics businesses continued their strong performance, with mid-single-digit core growth in the fourth quarter. At Beckman Coulter Diagnostics, core sales grew at a mid-single-digit rate, our best quarterly performance since acquiring the business.
Sales were robust in the high-growth markets, particularly China, where continued government investment in healthcare infrastructure as part of the national healthcare reform has resulted in increased demand for our clinical chemistry and immunoassay analyzers, as well as our automation solutions. We remain bullish on the high-growth markets and believe that we will continue to benefit from our expanding installed base of instruments. We continue to be impressed by the Beckman team's use of DBS, with noticeable improvements in quality and service contributing to improved customer satisfaction and leading to increased profitability. Radiometer's core sales increased at a low teens rate, led by solid growth of both our core blood gas instruments and AQT immunoassay analyzers. AQT's installed base now exceeds 1,000, with the number of tests per day per instrument increasing more than 20% over the past year.
Leica Biosystems sales increased at a low double-digit rate, with advanced standing and core histology sales up mid-teens and high single -digits, respectively. Growth was balanced geographically, with North America, Europe, and China all contributing during the quarter. We closed the previously announced acquisition of Aperio Technologies, a leader in digital pathology. The combination of Aperio and Leica Biosystems is expected to build upon our existing digital pathology innovation and go-to-market capabilities to foster better outcomes for physicians and patients alike. We also closed the previously announced acquisition of IRIS International, a leading manufacturer of automated in vitro urinalysis diagnostic systems and consumables. IRIS' well-respected brand and market position provides an attractive entry point into this fast-growing IVD segment. Our Life Science s businesses core revenues increased high single -digits in the quarter.
AB SCIEX core revenues and core sales grew low double -digits in the quarter, with particular strength in China and North America, led by the ramp in sales of our new SCIEX Triple Quad 6500 System launched earlier this year. During the quarter, we also opened a new application support and training center in India to assist our customers in this important growth market. Both AB SCIEX's TripleTOF 5600 and Beckman Coulter's MoFlo Astrios cell sorter were part of a groundbreaking research initiative performed by Dr. Yamanaka at Kyoto University in Japan, who was recently awarded the 2012 Nobel Prize in the field of medicine. Dr. Yamanaka's work aimed to reprogram adult cells into so-called induced pluripotent stem cells that can be used to cure certain diseases. This is obviously an outstanding achievement for Dr. Yamanaka, and we are proud to support his research.
Leica Microsystems core sales increased at a mid-teens rate in the quarter, with strong demand for our SP8 confocal microscope in most major geographies. We began shipping the SP8 modular confocal laser scanning microscope earlier this year and are encouraged by the sales ramp-up in the past couple of months. Turning to Dental, segment revenues increased 3.5% in the quarter, with core revenues up 4%. For the full year, core revenues grew 3.5%. Operating margin increased 430 basis points to 15.2% in the quarter. We are particularly pleased with Dental's margin performance this year, with OP margin increasing from less than 12% in 2011 to 14.5% in 2012. Dental consumables core revenues grew at a mid-single-digit rate in the quarter, led by robust global sales for our orthodontic solutions, general dentistry consumables, and infection prevention products.
KaVo core revenues grew at a low single-digit rate, led by double-digit growth in North America. We've seen solid demand for our imaging products in the U.S., with record quarterly unit shipments of our i-CAT 3D cone beam imaging solution. While Europe remains weak, we are pleased by the success of our recently launched ESTETICA E30 mid-price point treatment unit, with more than 500 units shipped in the second half of 2012. Our Dental businesses picked up an impressive 17 Townie Choice Awards, as voted on by dentists and dental practitioners in the December Dentaltown magazine. Townies recognize the most reliable products, and their peer-recommended products and services across the Dental industry are often leading indicators of potential growth. During the quarter, we acquired Aribex, a leading provider of portable and handheld imaging systems.
Handheld and portable imagers are among the fastest-growing segments in the intraoral imaging systems market, with Aribex well positioned to capitalize on this growth as a result of its patents, intellectual property, and a robust product pipeline. Moving to our Industrial Technology segments, revenues increased 10% for the quarter, with core revenues up 2.5%. For the full year, revenues grew 6%, with core revenues up 1.5%. Our core operating margin increased 90 basis points in the fourth quarter, while our reported operating margin was flat at 18.1%, due primarily to the impact of recently acquired businesses. Product Identification core revenues grew high single -digits in the quarter, led by solid demand for Videojet's continuous inkjet printers in all major geographies.
During the quarter, we launched four new products, including the 1550 and 1650 next-generation CIJ printers introduced at Pack Expo in October, and a CIJ printer designed and produced in and for China to target pipe marking applications there. Videojet has seen great success with localized products in the Asian market, introducing five new key printers over the past few years for that region. Esko's core revenues grew at a mid-single-digit rate in the quarter, with good balance globally. At our analyst meeting in December, we showcased Esko's next-generation packaging management software, Suite 12, that targets consumer packaged good brand owners. Customer response thus far to Suite 12 has been very good. Revenues at X-Rite, our largest acquisition of the year, grew at a high single -digit rate in the fourth quarter compared to a year ago when it was a standalone company.
If you picked up The Wall Street Journal in early December, you likely saw Pantone's 2013 Color of the Year announcement, Emerald green. Response to the announcement was nothing short of extraordinary, with extensive TV and print media coverage as well as blogs, Twitter, and Facebook all talking up Pantone's pick. In Motion, we saw core revenue growth at a low single-digit rate in the quarter due in part to an easy prior year comparison. Our core industrial automation and engineered solutions businesses continue to be weak. We are encouraged by the sequential improvement we've seen at Kollmorgen and by the pickup in order activity, which turned positive for the first time in over a year this quarter. However, we believe Motion core revenues will continue to decline year-over-year during the first half of 2013.
To wrap up, the fourth quarter finished obviously strongly, contributing to a solid year at Danaher. Our teams executed well amidst economic uncertainty with record free cash flow, superior earnings growth, and operating margin expansion throughout the year. The structural cost actions undertaken in the fourth quarter position us well for further margin expansion and will allow us to fund growth opportunities where they present themselves. Financially, we're well-positioned to take advantage of what we believe will be an attractive acquisition environment in 2013.
Given that we now expect to close the pending divestiture of Apex Tool Group within the next two weeks, and thus we'll have no earnings contribution either in the quarter or the full year from Apex, we are updating our full-year 2013 adjusted diluted net earnings per share guidance to $3.32-$3.47 from a previous GAAP diluted net EPS range of $3.40-$3.55. We are initiating first quarter adjusted net EPS guidance of $0.72-$0.77. The adjusted guidance excludes the anticipated gain on the disposition of Apex, as well as any benefit related to the retroactive reinstatement of certain federal tax provisions contained in the American Taxpayer Relief Act of 2012. We anticipate low single-digit core growth here in the first quarter.
Thanks, Larry. Charlonne, that is the conclusion of the formal comments. We are ready for questions.
Thank you. If you would like to ask a question, please signal by pressing the star key, followed by the digit one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that you limit yourself to one question and one follow-up question. Again, please press the star key followed by the digit one. We will have our first question from Scott Davis with Barclays.
Hi. Good morning, guys.
Morning, Scott.
Morning, Scott.
I have never heard anybody get so excited about a Color of the Year contest or Pantone's. I must have missed that journal edition. Anyways,
We will get a copy out to you today, Scott.
Congratulations on that. Guys, there is a little bit of a disconnect when you think back to your investor day in mid-December. You were pretty cautious overall, even including Life Science s, and you came in with a pretty strong volume. Now you are getting a little bit more cautious for 1Q as far as core growth you are giving it. Was there a pull forward at all in that last couple weeks of December in Life Science s or anything, and related to book-to-bill, that would give you some concern about the start to the first quarter?
Scott, I don't think in terms of the big picture, there's really any change six weeks on here from what we said in New York in mid-December. Clearly, we finished more strongly than we had anticipated, even then when we were together. I don't think we're at a point here where we'd extrapolate too much too soon from that strong finish. Clearly, we saw the new products that we launched mid-year in Life Sciences & Diagnostics , particularly in Life Science s at SCIEX and Leica Micro, finished quite strongly, both in terms of the underlying order book, but also the product we were getting out the door.
I think we would also acknowledge that in Dental, another business that led the way here for us in the fourth quarter, they probably saw a bit of a surge in demand at the end of the year, in part just because of all the uncertainty around tax policy in general and the Section 179 depreciation dynamic particularly. I think if you look at the exceptionally strong finish we saw in North America in Dental equipment, particularly around imaging, it's hard not to attribute some of that to the uncertainty around the tax situation. I think we saw a nice pickup, particularly in the U.S. It looked more like a sprint to the finish as opposed to anything we're going to call structural at this point in some of the industrial businesses.
Again, we mentioned Fluke going positive in the fourth quarter. PID was quite good. I think if you look at Life Sciences & Diagnostics , for example, I think that second half core growth of 3% probably a little bit more indicative of what we're looking at going forward, pretty much in line with that 2%-5% guide we gave you in New York. I think Dental, again, we'd say maybe it's a point of core that we'd adjust downward to try to look at the run rates given what we saw here in North America. Again, I think we're pleased with the finish, but we think it's premature to try to cast that strength too far at this point, given what we have seen.
Scott, the other dynamic we have in the first quarter, we have one less business day, and it probably doesn't impact much the 60% of the business that's equipment and instruments. But as we look back, it definitely impacts the 40% that's consumables, and that alone probably impacts the first quarter by half a point to a point.
Sure, yeah. No, that's helpful. Just as a follow-up, guys, we've seen a real pickup in China and medical spend, I think, consistently across most of the companies that we cover. What's your experience here? The sustainability. There was a history in some of these markets that the government would have big spend cycles for a quarter or two and then not spend for another couple of quarters. Is there something this time around that might lead us to believe that this is more of a sustainably higher level of spend that is a new trend given government initiatives? How do you guys over there think about that?
Scott, I was in China two weeks ago, and we spent a fair bit of time on this subject. I think it's interesting, if you just look at our own trends through the course of last year, we really saw quite the bifurcation between our industrial businesses and our healthcare businesses, both LS&D and Dental. We were basically up 20% for the full year, and we saw that strength throughout the year on the healthcare side of the portfolio. We were down nearly double -digit in the first half on the industrial side, and our improved overall numbers in China were a function of industrial basically getting to a flat level in the second half.
I think when we look at what's happened in Life Sciences & Diagnostics , we are clearly the beneficiary of a multi-year build-out with respect to the healthcare delivery, particularly in the West, but also increased utilization. I think that will continue. That program clearly stood up when others didn't during the government transition here of late. I think on the Life Scienc e side, we're clearly benefiting, as others are, from the government's effort to build out an indigenous research and development base. I'd say the Dental market is still in its infancy, and our own execution there has gotten quite good the last couple of years.
But it was an area where we had clearly under-invested and thus underperformed. I think we see that as part of a long-term trend, just given the demographics in China. Our sense is that this is not a quarter or two, but healthcare is important for a whole host of different reasons over there, and we're well-positioned. I think on the industrial side, what our folks were pointing to was, again, stability, some sequential strengthening, but probably a point of view that things get better through the course of the year as we have more certainty as to who's in some of the lower-level jobs as the new regime takes shape.
Once those decisions are made, we'll see hopefully an initiation of more spending than we've seen. Clearly, in infrastructure, we're keen to see some of that. I think given some of the recent headlines around the environment, we'd be well-positioned if that were an area where we saw increased interest, particularly obviously on the water side. I think our view on China for 2013 is good. Again, longer term, I just don't see these healthcare trends that we're seeing in our own numbers, Scott, tailing off. We just don't.
Okay. That's really helpful. I'll pass it on. Thanks, guys.
Thanks, Scott.
We'll go next to Jon Wood, Jefferies.
Hey, good morning.
Good morning, Jon.
Hey, Larry. So Beckman Diagnostics, like to touch on that. Looks like that business actually above market for the first time in quite some time in the fourth quarter. You spoke to some of the high-growth market trends, but can you speak to the developed world, what you're seeing in that business, particularly in the U.S.? Then just comment, why is a low single-digit number still relevant vis-a-vis that fourth quarter trend?
Yeah. Well, I think, Jon, the outlook, as you suggest for this year, is still low single -digit as opposed to mid-single. We were at low singles through the first three quarters and really thought that's where we would be in the fourth quarter. I would say that clearly from a geographic perspective, the growth we're seeing at Beckman is really a function of, if you will, stability in the West with strength in the high-growth markets. I think we still have work ahead of us as we pay off some of the inheritance tax here in the U.S., again, encouraged by retention and win rates in that regard. But that's a multi-year effort to get what is fundamentally a business where the consumables drive the growth, and that's a function of the installed base.
It's just going to take us a while to do that, though again, we were very encouraged by the fourth quarter with respect to the new AU series. I think with respect to Europe, I don't think we're really expecting the European market to contribute to growth. But stability there, even if it's of a low single -digit grind down, if we're executing better, as I think we will in 2013, that's not as much of a drag on us as it has been the last couple of years. So maybe we're conservative with respect to what we're capable of delivering in this market in the West. But I think at least here in 2013, the general mix will be similar to what we've seen. We can do better. Obviously, we'd love to do that, but really see that mid-single digit growth more in 2014 than this year.
Got it. That's good color. I know you're going to refrain from committing on the FDA front, but anything in your correspondence with them that would suggest that troponin submission is further out than we may think, or has the feedback from that organization been just, again, procedural at this point? I guess I'm looking for any color you're willing to share on where we are on the troponin situation in the U.S.
Jon, I appreciate the way you frame that because as you know our practice has been to, I think, respect the sanctity of the dialogue with the agency and not be too public with the details. I would characterize the conversation as constructive, productive, and ongoing. We've, I think, publicly tried to avoid being too specific about where this conversation takes us and the timeframe in which we get to final resolution. I think we continue to be optimistic that we will have that product on the market in the future.
Again, it's tough to put a finger on the calendar as to exactly when, but we're no less convinced that that will happen in time as we work through the topic with the agency. Again, I would reiterate that while that is an open switch here in the U.S., it continues to be a product in the market in many other places around the world. And with so many of the other improvements that we're making at Beckman in the U.S. that customers can see in terms of quality, in terms of service, other new product introductions, the way our call patterns are set up.
There's just so many positive effects from the implementation of DBS that even without the troponin assay in our arsenal today, you're seeing those improvements in retention rates and win rates. I understand the focus. It's a very fair question. But customers weigh a lot of different things when they're making a decision. And increasingly, many of those other things are in Beckman's favor. And obviously, when troponin's back on the market, that will just be one more check on our side of the ledger, but we are not there today.
Understood. Appreciate the comments.
We will go next to Shannon O'Callaghan with Nomura.
Morning, guys.
Morning, Shannon.
Morning, Shannon.
Hey, Larry, could you give a little more color on the positive bookings turn at Fluke? I mean, in terms of geography or end market or any other color?
Yeah, I would say that really what we saw, Shannon, probably more than anything, was a little bit better performance here in the U.S. I think Europe continues to be a bit of a struggle for us. I think the high-growth markets, again, broadly speaking, have continued to be really the highlight for us at Fluke. We got a little bit of a benefit, I think, as we wound down the year, as we saw some of the inventory adjustments in China really come to a close. We're not expecting, as you know, a big pop back in T&M generally. Fluke will be an important part of that, but we'd like to think that T&M is up in line with the corporation in 2013, and I think Fluke will be an important part of that on the instrument side to be sure.
Okay, and then in Motion, you said the bookings there turned positive, I think. I do not know if it was for all of Motion or just Kollmorgen. Why do you expect that the core revenue growth to still be negative in the first half of 2013?
We have some tough one-off comparisons there in the Motion businesses, Shannon. Again, I think given some of the underlying demand trends that we see, I think it is going to be sluggish there through the first half. Where we have vertical exposure, particularly in tech and certainly in some of the renewables, we had a very tough 2012. We still have some business that will create a little bit of a year-on-year comparison challenge for us here in the first half as well.
Hopefully, clearly with the guide that we gave you last month, we think Industrial Tech will really be probably in the five hole relative to performance on the core side in 2013. Unfortunately, in part, or in large part because of what we will see in motion. The obvious contrast there is product ID, which finished strongly, and I think is really going to be one of our outperformers here in 2013.
Okay, no underlying real change in the trend in motion then?
I don't think so. I think in terms of the industrial capital equipment markets that we serve, they have been challenging. They've been challenging here to a degree, certainly in Europe and in China. I think that continues here for a couple of quarters as we see it.
Okay, great. Thanks, guys.
We'll go next to Jeff Sprague, Vertical Research Partners.
Thank you. Good morning, everyone.
Good morning, Jeff.
Hey, Larry. I was wondering if you could address deals a little bit, and really the essence of my question is just the environment and valuations. Obviously, the stock market is maybe frothy, maybe it's not, but we've been on a nice run. It sounds like you see things in the pipeline, but how do you balance that against valuations and the ability to get things done on reasonable terms?
Jeff, I think we are optimistic about getting things done in 2013. I think that's a function of the pipeline to be sure. It's a pipeline, again, rarely dominated by public companies. I don't want to suggest that public company valuations are irrelevant to us. I'm hopeful that we do some public company deals this year. But a fair bit of what we do is often on the private side, be it with families or independent owners, and at times PE, but PE is really not a big source for us, let alone a real competitor. I think one of the dynamics that really works to our favor is our breadth of scope and where we would like to build out. Clearly in all five of our segments, we've got areas where we clearly would like to put capital to work.
When certain segments might be bid up, our discipline stays intact. We'll move into some other areas and be a bit more active there. Through a cycle, I think you've seen a pretty good distribution of the deployment of capital. I think in terms of how we work through that, ultimately the backstop is the discipline that I think we've demonstrated over a long period of time. Strong focus, obviously, on the strategic quality of the business, operationally, our ability to add value. But when the math doesn't work, when we can't generate positive returns, cash on cash returns for our shareholders, I think Dan and I are very comfortable letting things go. I think it's as simple as that.
Can you give us a sense, if you have the numbers, even roughly, maybe Dan has them, $1.8 billion spent in 2012 on 14 deals, the aggregate valuation on that basket and how it stacks up relative to history?
It is probably in the zone of, X-Rite would be the biggest one, and that was sub 10 x EBITDA. IRIS was probably overall, I would say about 10 x EBITDA, maybe 10x - 11x. I would say on that $1.8 billion of spend, and it is the benefit of doing bolt-ons and that is really an adjacency deal, a lot of margin expansion opportunity across that revenue base.
Right.
I think that is a 10x, 11 x that we can get to sort of 8x without any revenue growth. That is obviously the benefit of when we are doing these kind of bolt-on and adjacency type deals. I feel pretty good about the valuation overall. It did not feel like we really had to stretch for any of those deals and all sort of in that zone where we think we will exceed a 10% return within three years.
Right. Just a follow-up on healthcare, Larry Culp, you hit a lot of it with your comments a moment ago on Beckman Coulter. Just overall, as the calendar rolled over, is there a measurable sense of different momentum, whether it is a positive because of the alleviation of the uncertainty of who is president or a negative because of uncertainty about device tax? Is there, just across the whole fleet, if you will, in the U.S., anything to discern here early on?
No. Again, I think what we saw in terms of the acceleration at year-end perhaps was born of a bit of uncertainty, some of which has been addressed clearly on the tax side. I don't think anyone is really taking too much for granted here. Clearly, the medical device excise tax is something that we're going to have to work through, as are others, not only in Diagnostics but also in Dental. Really doesn't impact the Life Science space, the research space, directly. So I think it's hard to discern anything that's material or structural that's different.
Particularly here in D.C., I think folks know that while there was some clarity in terms of who was going to be president and in the short term, clarity around fiscal policy. In many respects, that can was kicked down the road, and they're going to be open questions still to be addressed through the course of the year. I think by and large, where we play in terms of research tools, our new product cycles position us well to get our unfair share of the spend there.
Clearly, on the Dental side, an improved stock market, just a little bit of a better tone in the U.S. should help patient traffic. We can execute well there. I think on the Diagnostic side, again, given our starting point at Beckman, we can make a good bit of our own luck there. If you look at Radiometer and Leica Bio as any indicator of that potential, while we've never said we'll be a high single, low double-digit grower at Beckman Dx, we do think in the short term, we can offset any headwinds that might be out there.
Great. Thanks for the color.
You bet, Jeff.
As a reminder, it is star one for questions. We do ask that you limit yourself to one question and one follow-up. We will go next to Steven Winoker with Sanford Bernstein.
Morning, Steve.
Okay, good morning. Just first question, can you give a little clarity on the 100 basis points of additional SG&A as a percentage of revenue this year versus last? Just maybe dive into that, tear it apart.
Steve, I'd have to look at that offline. I suspect part of that is the full-year impact of Beckman. Last year, we only had Beckman for six months, and I think if we normalize that, you probably would've seen some SG&A leverage.
Okay.
I think it's a little apples to oranges given the Beckman full year versus six months a year ago.
Yeah, that'd be great if we could do that offline then. I'd like to just make sure on a pro forma basis to understand what's happening on the G&A part.
Yep.
But overall, G&A, are you investing globally in any additional initiatives beyond expectation, or where you were, or?
Well, I think the attitude, Steve, is still to be lean and tight from a G&A perspective. But certainly, as we have gotten bigger and the high-growth markets have become more important, we have been reshaping what constitutes, if you will, the Danaher overhead piece so we have more capability on the ground in places like China from a Danaher perspective. Jonathan Clark, as you know, one of our group executives, member of the Danaher leadership team, is now in China as the president of Danaher China, really to make sure that we are doing more as Danaher China in that regard. I think similarly, as these platforms have really taken on critical mass, there are things we are going to be able to do in Life Science s, in Dental, much as we have in water and in T&M as a platform.
Again, we want to keep the G&A lean, but I think we are also going to be putting and trying to achieve more strategically and in terms of harvesting synergies at a platform level. Again, we want to avoid bureaucracy, we want to avoid undue costs, but I think these regional and platform-level efforts have really paid some early dividends for us, and that is probably what is most top of mind for me and Dan as we look at not only the level of the G&A spend, but the nature and shape of it.
Okay. Just on the growth side, a little more specifically, where are you in terms of the regulatory approvals for ballast water, the IMO and Coast Guard? How are you thinking about that product on the approval path process?
Well, a little like other regulatory approvals, while the strategic intent and the spend level is unchanged, the timeframe there relative to our certifications is a bit more unpredictable, Steve. But clearly, the internal testing that we have talked about at Trojan is underway. I think we are hopeful that some of that, the validation work, in essence, is completed here in the first half of 2013. We did get our first installation late last year. Pleased with that. But it has been a bit unpredictable, which is why we really have not weighed in a lot in terms of 2013 contribution at Trojan from ballast water.
Right. Okay, great. Thanks, guys.
Thanks, Steve.
Next, Ross Muken with ISI Group.
Thank you. Can you talk about maybe some of the new product momentum you're seeing in some of the key businesses, whether it's on the Life Science side or also in the T&M business?
Ross, I am sorry, I did not catch the first part of your question.
Sorry.
Could you repeat it, please?
In terms of new product momentum, new launches, key things to look out for over the course of the year in terms of contributing to growth outside just the macro.
Yeah, I think we, again, are clearly in Life Science s, particularly in a very strong new product position. I think at SCIEX with the 4500, the 6500, you are seeing strong traction. That is something to watch. That is not a one-quarter dynamic. I think similarly at Leica Micro, we are in a good place. The SP8 will continue to be an important growth driver for us as we ramp there. That is really the way I would think about Life Science s. Again, Diagnostics, as you well know, is a little bit tougher to term. But I think as we ramp the AU series, the new clinical chem family at Beckman, we are going to be in particularly good shape.
But as you go to the shows this spring, ASMS and the like, I think you are going to see SCIEX, Leica, Beckman, all continue to launch really a steady bucket of new product introductions. I think in T&M, again, I think at Fluke, particularly in thermography, we are encouraged by the early response to this new VT02 Visual IR Thermometer. There are other products that we plan to get out in 2013, really on the back of some of the technology that was brought in last year.
I think at T&M, particularly on the scope side, we are in a good place. We have talked about some of the awards that we have seen with the launches that are still due to ramp through the course of 2012, and there is more to come in that regard. Clearly, innovation is important in both of those segments. We will continue to invest in R&D, spend a lot of time deploying the DBS tools to accelerate those product launches and drive as much commercialization success as we can.
Great. Maybe just one other quick one. I am looking at sort of indication on the stock this morning. It is off a couple bucks. I am looking at my inbox. People are obviously talking about the guidance commentary. I think in general, it is very consistent with what you talked about at JP Morgan not long ago. As we think about the progression over the year, really is it just we are early in the year, a function of where we are just starting to maybe turn a bit on the cycle and we are not sure where we are? What are you looking for on either the macro front or just within the business in terms of getting more comfortable with maybe a more constructive outlook, in terms of core growth for the business for the year?
Ross, again, I think you are spot on. We are trying this morning not to say anything that is fundamentally different than what we said in New York in mid-December, or what we said at the JP Morgan conference earlier this month. I think we are pleased certainly with a stronger finish to the year. I think we are acknowledging some of that might have been a pull forward from 2013. But all things being equal, we think we are looking at a challenged growth environment in the West. One that is getting better, and one that could continue to improve sequentially through the course of the year. But it is still going to be a high-growth market story for us, as it will be for most companies.
In terms of increasing our guidance in any form, I think six weeks on is just, again, premature. But we will certainly, as our practice, literally look at everything. How China is ramping, not only in terms of what we are shipping, but order books, other leading indicators. Looking at POS in T&M, particularly on the instrument side, will be another important marker for us. But I think that the way we are going to operate in this environment is really no different than the way we have operated before in terms of recognizing the macro reality and the challenges that are out there, and trying to make as much of our own luck as we possibly can. But again, there is no change here from what we said earlier this month, let alone the middle of last month.
I think we are pleased with the restructuring we got done here in the fourth quarter, as Larry alluded to, over $120 million. I think we are going to track well to those savings here in 2013. One of the challenges that we had was the Test & Measurement segment margins, particularly in the second half, which were down like 300 basis points year-on-year. That is going to get better here. Both because growth is getting a little better there, but also because that segment had a disproportionate amount of the restructuring here. I think we are feeling better about how T&M is shaping up here early in the year.
Great. Thanks, guys.
Thank you, Ross.
We will go next to Julian Mitchell, Credit Suisse.
Thanks a lot. I guess just firstly, when you think about the gross margin, you have had three years in a row now where it is been above 50%. It is up the last couple of years. You have done a bunch of restructuring. When you think longer term, do you think that kind of mid-50s run rate is achievable, obviously depending on timing of and size of deals?
Julian, I think we do have gross margin expansion potential here. As Dan just highlighted a moment ago, clearly one of our higher gross margin businesses, certainly one of our higher VCM businesses, T&M, had a tough 2012, and they are back in a more normal trajectory. That is accretive in that regard. Clearly, as we drive the install bases of these new products in LS&D, we get good gross margin sales in the short term, but over time, as that install base grows and the higher margin consumables course through those instruments, that helps us as well.
You are right, we have done a lot of restructuring the last few years. We do not have a lot teed up here in the next 90-120 days, but there is always structural costs still to come as well. I would not put a target out there because as you alluded to, the next acquisition may come in in a way that helps or hurts the gross margin temporarily. I do not think we have in any way pinned the gross margin number on the ceiling here just yet.
Got it. Thanks. Just in terms of your own plans around R&D and CapEx, R&D to sales is sort of flattish at about 6% in the quarter in the last couple of years. Is that a good run rate going forward? On CapEx, that was up by about 5%, I think, in Q4. How are you feeling about your CapEx plans for the year ahead?
Julian, we certainly focus on the R&D figure more so than we do the CapEx. I think CapEx is probably going to be in, what, $550-ish million range this year, just to give you a number there. I do not think, again, from an R&D perspective, when you look at where we finished and where we are likely to be, 6%-6.5% in that band, that we are really managing R&D with those ratios foremost in our minds. I think what we are trying to do is make sure that strategically we know what we need to be doing to drive growth, investing in both technology and new product development, and then positioning ourselves to fund those programs within businesses across the portfolio that represent the best opportunities for us.
If that means we ought to spend a little bit more, or we could spend a little bit less, we will do that. I do not think we are of the school that you really want to just manage R&D through that ratio because you can end up, I think, spending money that you do not necessarily need. But clearly, part of what we did with the restructuring, as we alluded to through the course of last year, was to set ourselves up this year to increase any growth funding, be it R&D, be it on the sales and marketing side as well, perhaps, that might be warranted as opportunities come forward.
Great. Thanks.
You bet, Julian.
Due to time constraints, we will have our last question from Deane Dray, Citi Research.
Deane?
Yes. Thank you. Good morning, everyone.
Morning.
We are coming down to the wire on Apex. Can you just remind us the after-tax proceeds, the gain, and then the use of the proceeds? I know you have baked in some buybacks already, but just those are the targets for 2013.
Sure, Deane. Our half of JV, we expect gross proceeds of about $800 million. After-tax proceeds of a little bit over, I think, $650 million. We will report a gain of about $0.19 a share here in the first quarter. Given we have purchased about 12.5 million shares of stock here in the second half of last year in the low 50s, I think our expectation is aligned share is targeted towards M&A here in 2013.
Great. Larry, in terms of the water side of Danaher, the two businesses that I would like to touch on, one is on ChemTreat, a very quiet success story, 10 quarters of double -digits. Just remind us what the strategy there has been, because a lot of people thought this is a chemicals business, but it is more of a solutions business. You have grown this gain share over this time period, and are you targeting specific end markets that are more attractive? That is the first question. The second one on Trojan, some pushouts in the third quarter, did not sound like that repeated in the fourth quarter. Just give us an update on that too, please.
Sure. You bet. I think that at ChemTreat, the story in many respects is a simple one. This is a business, largely a domestic business, that has just done over time, before we were involved, but clearly, over the last 10 quarters, an exceptional job of taking very good care of their customers. You are right, they transact typically through the supply of water treatment chemicals. What customers really buy, though, is the expertise, the service, and the quality of the support that their local ChemTreat team provide.
I think being in a position where we have been able to build that team over time, continue to enhance the overall service and quality levels in the business, has really been just a daily execution story, much more so than any grand strategy. Again, our hats are off to the team at ChemTreat. They have been outstanding partners with us, and we are really proud of the results they have delivered. Trojan has been another very strong story for us, going through, I think, a couple of tough quarters here to be sure, as we have seen some of the bigger projects roll off around the world, and as the municipal market, particularly around some of the bigger ticket capital programs, tighten up here.
I think as we look forward at Trojan, we continue to be convinced around the UV disinfection opportunity, Trojan's positioned in it. As you know, Deane, better than I think anybody, the ballast water opportunity is out there. I think it is going to come. Just a matter of getting the timing down. There is some uncertainty in the short term, but I think longer term, again, that is going to be a meaningful opportunity for Trojan on top of what they do today for their municipal and their industrial customers.
Great. Thank you.
Thanks, Deane.
At this time, I will turn the conference back over to Mr. McGrew to offer any additional or closing remarks.
Thanks for joining us, everybody. Dan and I are around here in the morning for follow-ups.
That concludes today's conference. Thank you for your participation.