Danaher (DHR) Q4 2013 Earnings Call January 28, 2014 8:00 AM ET
Matt R. McGrew - Vice President of Investor Relations
H. Lawrence Culp - Chief Executive Officer, President, Director, Member of Finance Committee and Member of Executive Committee
Daniel L. Comas - Chief Financial Officer and Executive Vice President
Nigel Coe - Morgan Stanley, Research Division
Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division
Jeffrey T. Sprague - Vertical Research Partners, LLC
Charles Stephen Tusa - JP Morgan Chase & Co, Research Division
Shannon O'Callaghan - Nomura Securities Co. Ltd., Research Division
Julian Mitchell - Crédit Suisse AG, Research Division
Deane M. Dray - Citigroup Inc, Research Division
Isaac Ro - Goldman Sachs Group Inc., Research Division
Andrew Obin - BofA Merrill Lynch, Research Division
Charles D. Brady - BMO Capital Markets U.S.
Good morning. My name is Marquita, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Fourth Quarter 2013 Earnings Results Conference Call. [Operator Instructions]
I would now like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.
Matt R. McGrew
Good morning, everyone, and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer; Dan Comas, our Executive Vice President and Chief Financial Officer; and Matt Gugino [ph], our Director of Investor Relations.
I'd like to point out that our earnings release, a slide presentation supplementing today's call and the SEC Regulation G information 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, fourth quarter and full year income statements, year-end balance sheet and full year cash flow statement and data reflecting our business segments.
The audio portion of this call will be archived on the Investors section of our website later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until Tuesday, February 4. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally, and the access code is 5113533.
During the presentation, we'll 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. Unless otherwise noted, all references in these remarks and supplemental materials to earnings, revenues and other company-specific financial metrics relate to the fourth quarter of 2013 and relate only to the continuing operation of Danaher's business, and all references to period-to-period increases or decreases in financial metrics are year-over-year.
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 as a result of new information, future events and developments or otherwise.
With that, I'd like to turn the call over to Larry.
H. Lawrence Culp
Matt, thanks. Good morning, everyone. 2013 was a good year for Danaher. For the full year, revenue increased 4.5% to $19.1 billion, with core revenues up 2.5%. Using the Danaher Business System or DBS, our team delivered solid core revenue growth, operating margin expansion and excellent cash flow performance for the year. In addition, our new product development and go-to-market investments drove relative outperformance in many of our businesses. In 2013, we believe we increased our market share positions at Hach, ChemTreat, Gilbarco, AB SCIEX, Leica Biosystems, Kerr, Implant Direct and Videojet. Our focus and commitment to long-term growth investments position us well for 2014 and beyond.
Turning to the fourth quarter. Revenue increased 3.5% organically. All segments grew at or above expectations, led by our Communications, Water Quality, Diagnostics, Dental Technologies and Product ID businesses, each delivering mid-single-digit core growth or better. From a geographic perspective, high-growth markets improved notably from the third quarter and grew at a high-single-digit rate. In China, sales increased high-single digits, with continued strength in Dental, Water Quality, Life Sciences & Diagnostics. High-growth markets now represent more than 25% or approximately $5 billion of our annual revenue, up from $2.7 billion just 3 years ago. In the developed markets, the U.S. grew low-single digits and western Europe was slightly positive for the second quarter in a row.
In 2013, we generated $3 billion of free cash flow, and our free-cash-flow-to-net-income ratio was 113%. This represents the 22nd consecutive year in which we delivered free cash flow in excess of net income. We also strengthened our businesses through acquisitions and deployed approximately $1 billion on 14 strategic bolt-ons in 2013 despite the tougher M&A landscape. Given the breadth and depth of our strategic platforms, we remain confident in our ability to deploy our $8 billion of available M&A capacity in a strategic yet disciplined way.
We continue to deliver solid margin performance even while funding long-term growth investments. Our gross margin was 51.5% and almost 52% excluding productivity and efficiency initiatives in the quarter. For the full year, our gross margin was 52.1% and our operating margin was 17.1%.
In the fourth quarter, our core operating margin increased 100 basis points while our reported operating margin declined 40 basis points to 16.9%, in part due to the impairment of certain intangible assets in our communications platform. Absent this charge, our reported operating margin would have been 17.5%.
We reported fourth quarter adjusted diluted net EPS of $0.96, inclusive of approximately $100 million of productivity and efficiency investments, which we believe will provide about $75 million of savings in 2014. For the full year, adjusted diluted net EPS was $3.42.
Turning to our 5 operating segments. Test & Measurement revenues increased 4%, with core revenues up 4.5%. For the full year, revenues increased 1% while core revenues grew 1.5%. Core operating margin expanded 150 basis points, while reported operating margin decreased 210 basis points to 16.6% due primarily to the previously mentioned impairment charge. Core revenue in Instruments increased slightly.
Fluke core revenues grew at a low-single-digit rate, an improvement from the first 3 quarters of the year, with demand strongest in the high-growth markets. Of note, Latin America grew in excess of 25% due in part to our increased commercial investments there. Also contributing to the step-up in growth was the successful launch of our Ti400 thermal imager, a wireless high-performance infrared camera with laser autofocus capability that enables service engineers to quickly detect temperature measurements up to 1,200 degrees Celsius and communicate results back to their laptops or smartphones for further analysis. Products introduced in the last 2 years are helping increase vitality at Fluke and accounted for nearly 1/4 of Fluke's fourth quarter revenues.
At Tektronix, core revenues declined slightly as strength in Western Europe was offset by weakness in U.S. government and computer verticals. In December, Electronic Products magazine named our PA4000 Power Analyzer its 2013 Product of the Year. The PA4000 is the only T&M instrument so recognized, and is an advanced power-testing tool that helps electrical engineers perform critical current measurements with precision and accuracy.
Core revenues in our Communications platform increased low-double digits, with broad-based growth across most of our product categories. Sales of Tektronix Communications network management solutions increased more than 20%, driven by demand for mobile service providers in the U.S., Asia and Latin America.
Arbor Networks ended the year with record bookings, driven by its Pravail enterprise security solutions and the recent launch of Arbor Cloud, an integrated on-premise and cloud-based DDoS protection service. During the first quarter, Arbor will extend into the advanced persistent threat market, leveraging the security analytics technology of Packetloop, a company we acquired last year.
Close [ph] at Fluke Networks' recently released TruView network, an application performance monitoring software, grew significantly as enterprise customers looked for faster, more efficient ways to monitor network performance and troubleshoot problems. After a slow start to the year, we were encouraged by Fluke Networks' mid-single-digit revenue growth in the second half.
During the quarter, Tektronix Communications acquired Newfield Wireless. Newfield's software provides mobile service providers with a visual representation of their network's performance, including call detail, traffic hotspots and usage data. This technology, combined with Tek Comm's network management expertise, will enable providers to optimize their networks and maximize their subscribers' mobile experiences.
Turning to our Environmental segment, revenues increased 10%, with core revenues up 3.5%. For 2013, revenues increased 8.5% while core revenues were also up 3.5%. Core operating margin improved 80 basis points, with reported operating margin down 50 basis points to 22.5% due primarily to the dilutive effect of recent acquisitions.
Our Water Quality platform's core revenues grew at a mid-single-digit rate, with a double-digit increase in high-growth markets and solid demand in the North American industrial market. Hach had its best quarter of the year, delivering growth in all regions and major product lines. The business again grew at a double-digit rate in China due in part to heightened government investment in conservation and municipal water quality projects.
ChemTreat had another outstanding quarter, and it continues to gain share as our best-in-class field engineers deliver exceptional service and demonstrate the value of our solutions to customers. As we highlighted at our Investor Meeting in December, development of our sales team in Latin America remains a key priority for ChemTreat, where we have doubled revenues in the past 3 years and grew more than 30% in the fourth quarter alone.
Gilbarco Veeder-Root's core revenues increased at a low-single-digit rate, driven by payment, point-of-sale and environmental solutions. During the quarter, we introduced Insite360, a cloud-based platform that allows retailers to remotely configure and monitor their dispensers, inventory and point-of-sale systems from any PC or mobile device. Insite360 helps retailers identify theft, detect environmental issues and prevent fuel runouts in real-time, thus improving the economics and risk profiles of their businesses.
Earlier this month, we acquired Outcast Media, a leader in digital out-of-home advertising for the retail petroleum market. Outcast enhances our point-of-sale product offerings and combined with Gilbarco Veeder-Root's Applause TV, will help advance promotion delivery designed to grow convenience store sales and enhance drivers' fueling experiences.
Moving to Life Sciences & Diagnostics, revenues increased 5.5%, with core revenues up 3.5%. For the full year, revenues increased 5.5%, with core revenues up 4%. Our reported operating margin increased 250 basis points to 16.7%. Using DBS, we have been able to improve margins while also expanding our long-term growth investments. During the year, we increased spending on commercial and innovation initiatives by approximately $120 million.
In our Diagnostics platform, core revenues grew mid-single digits for the fourth quarter in a row. Beckman Coulter Diagnostics' core sales grew at a low-single-digit rate, with strength in immunoassay and clinical automation, particularly in high-growth markets. Clinical automation sales were up double digits as Beckman's best-in-class automation capabilities help customers improve workflow, increase efficiency and reduce labor cost. In China, we grew revenues approximately 20%, driven by a combination of our expanding installed base and continued government investment in health care infrastructure.
2013 was an important year of several milestones at Beckman as we resolved many of our remaining regulatory challenges, including FDA clearance for troponin on all of our immunoassay and integrated chemistry systems, while continuing to improve quality and delivery. Though it's still early, we are beginning to see the impact of the troponin clearance, as both our retention and competitive win rates have improved since September.
During the quarter, we introduced a new Vitamin D assay in Europe and Australia for our immunoassay platforms and also obtained U.S. FDA clearance for the next-generation beta HTT assay, which is used as an early pregnancy test. Today, we're positioned better than ever to focus on retaining and winning new customers and to more actively increase growth investments in the business.
Radiometer's core sales were up high-single digits, with growth in most major product lines and geographies. High-growth markets grew mid-teen, with China leading the way. Our instrument installed base continues to grow, with placements of our AQT point-of-care immunoassay analyzer increasing more than 50% and our blood gas instruments up high-single digits in 2013. We believe this momentum positions us well for outperformance in 2014 and beyond, as we benefit from incremental consumables revenue.
Leica Biosystems saw broad-based growth, with sales up high-single digits. All major geographies grew at a mid-single-digit rate or better, with strength in Japan and the Middle East. Advanced staining revenues increased approximately 20% while core histology sales grew at a mid-single-digit rate. We had a record year in the advanced staining franchise, with net instrument placements increasing at a mid-teens rate and believe we are still increasing market share.
Core revenues in our Life Sciences platform grew at a low-single-digit rate, led by the high-growth markets. Sales were up more than 20% in the Middle East and double digits in Latin America and Western Europe. AB SCIEX core sales grew low-single digits, with strength in proteomics and applied markets. AB SCIEX continues to broaden its global reach, opening a new R&D center in Singapore during the quarter, AB SCIEX's first outside of North America. The center brings development and manufacturing closer together while providing localized support for our Asia Pacific customers. In addition, AB SCIEX opened a new technical support and regional office in Dubai to better serve customers there in the Middle East.
As expected, Leica Microsystems' core sales declined at a low-single-digit rate, primarily as a result of a difficult prior year comparison due to the highly successful launch of the SP8 modular confocal microscope last year. Orders grew double digits in the quarter, with confocal microscopes up more than 20%. We are confident that Leica will return to growth here in the first quarter.
Turning to Dental, revenues for the quarter and full year increased 3.5% while core revenues increased 3%. Operating margin decreased 150 basis points to 13.7% due in part to the negative impact of sales mix as our technology businesses grew faster than our higher-margin consumables businesses. Spending on productivity initiatives and on targeted growth investments for new products set to launch in 2014, including 25 new introductions next month at the Chicago Midwinter show, also negatively impacted margins in the quarter. For the full year, operating margin was 14.6%.
Dental consumables' core revenues increased at a low-single-digit rate as demand for implants was partially offset by a decline in professional consumables. We continue to have tremendous success with our digital dentistry initiative. Since its launch in June of last year, we have sold more than 300 Lythos Digital Impression Systems, which, in turn, helped drive record order growth in our Insignia orthodontic case starts during the year. Insignia's digital treatment planning tailors custom-fabricated brackets, wires and aligners to each aspect of tooth movement, thereby decreasing office visits and treatment time while improving the patient experience and clinical outcomes.
Dental technology's core revenues grew mid-single digits as double-digit core growth in North America and China was partially offset by weakness in Western Europe. Our new digital imaging solutions continue to be well received in the market, particularly our new i-CAT FLX 3D digital imager. Since the launch in the second quarter of last year, we've sold more than 200 units, the equivalent of more than 1 per day. Additionally, KaVo's DIAGNOcam, a handheld radiation-free digital imaging scanner, won the German innovation prize for most innovative equipment product in dentistry in a survey of more than 4,000 German doctors.
Moving to our Industrial Technology segment, revenues increased 5.5%, with core revenues up 3%. For the full year, revenues grew 3.5% while core revenues declined 0.5%. Our core operating margin increased 20 basis points, while reported operating margin declined 80 basis points to 17.3% due primarily to increased spending on productivity initiatives and the impact of recently acquired businesses.
Motion core revenues decreased at a mid-single-digit rate as growth in industrial automation and North American distribution was more than offset by a decline in our defense and engineered solutions verticals. We are encouraged by the sequential improvement we saw in orders, which turned positive in the fourth quarter, for the first time in a year. However, we anticipate core sales will remain negative in the first quarter of 2014 as Motion exits some lower-margin businesses.
Core revenues in our Product Identification platform grew mid-single digits, led by high-single-digit growth in our core marking and coding businesses. Videojet had its best quarter of the year, with strength in all major geographic regions. Consumables revenue grew at a double-digit rate as our marketing initiatives and successful product introductions over the past several years have helped expand our installed base. In Esko and X-Rite, our innovation investments are helping accelerate growth, with new products representing nearly 20% of total revenue in 2013.
One of the most exciting new product introductions is PantoneLIVE, a cloud-based color management solution that helps brand owners accurately communicate color specifications across their entire supply chain, improving the consistency of their brand image. During the quarter, Asda, one of the largest supercenter chains in the U.K., became the first retailer to implement PantoneLIVE.
So to wrap up, as we anticipated when we were with many of you last month in New York, we had a strong finish to the fourth quarter, contributing to a solid year for Danaher. Our team's commitment to and application of the Danaher Business System drove relative top line outperformance, solid core margin expansion and excellent cash flow throughout the year. We believe the investments we have made to drive long-term growth and productivity, combined with our robust balance sheet and optimism on the acquisition front, leave us well positioned to outperform in 2014.
We are initiating first quarter diluted EPS guidance of $0.76 to $0.80 and reaffirming our full year guidance of $3.60 to $3.75. We anticipate approximately 3% core revenue growth in the first quarter, which will be impacted by 1 less selling day than the first quarter of 2013.
Matt R. McGrew
Thanks, Larry. That concludes the formal comments. Marquita, I think we are ready for questions.
Earnings Call Part 2: