Good morning. My name is April, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation second quarter 2011 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the star key followed by the digit one on your cellphone keypad. If you would like to withdraw your question, press star two. I would now like to turn the conference over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.
Thanks, April. 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 of 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 Earnings, and will remain available following the call. Because we acquired Beckman Coulter so close to the end of the quarter, we intend to file our second quarter Form 10-Q during the week of July 25th. In the future, we expect to return to our usual practice and file our 10-Q at the same time as we release earnings.
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 July 28th, 2011. The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally. Confirmation code is 4214214. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the accompanying slide presentation, our earnings release, and other related presentation materials supplementing today's call in Danaher's quarterly report, Form 10-Q, 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 may be forward-looking within the meaning of the federal securities law, 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 out in our SEC filing. It is possible that actual results might differ materially from any forward-looking statements that we might make today. These forward-looking statements speak only as of the dates that they are made, and we do not assume any obligation to update any forward-looking statement, whether as a result of new information, future events and developments, or otherwise. With that, I'll turn the call over to Larry.
Matt, thanks, and good morning, everyone. Pleased to report another record quarter for Danaher. We look back here on the first half of 2011. We have gotten off to an excellent start from both a core growth and an operational perspective. Core growth in the second quarter was 7.5%. We feel good about where we are today. Our portfolio of premier brands has never been stronger. Our businesses are performing well. We are well-positioned in our served markets, and the macro drivers propelling our growth remain intact. We continue to be encouraged by the current tone of the businesses, but given the recent economic headlines and macro data points globally, we have been paying particular attention to our leading indicators. We grew at a mid-teens rate in the emerging markets in the quarter, with China growing more than 20%.
We have always taken the long view of the emerging markets, believing that our businesses cannot be leaders globally in the markets they serve without leading in the emerging markets. The developed markets grew mid-single digits in the quarter, with the U.S. a bit stronger than Europe. The Danaher Business System enables us to capture market share through innovation, new product introductions, and go-to-market initiatives. AB SCIEX, Videojet, Fluke, Kollmorgen, ChemTreat, Hach, Tektronix, Communications, and Radiometer are among the businesses where we believe we have taken notable share from competition. During the quarter, we delivered strong operational performance with our core operating margin improving 160 basis points year-over-year with test and measurement, life sciences and diagnostics, and industrial technologies all delivering over 100 basis points of improvement. All the while continuing to invest in growth opportunities and restructuring-related activities for future margin expansion.
So with that as a bit of a backdrop, let me move to the details of the quarter. Today we reported second quarter adjusted diluted net earnings per share from continuing operations, excluding the impact of the acquisition of Beckman Coulter of $0.69, representing a record second quarter for Danaher and a 28% increase as compared to our adjusted EPS last year. Revenues for the quarter increased 15.5% to a record $3.7 billion, with core revenues up 7.5%. The impact of currency translation increased revenues by 5%, while acquisitions more than offset the impact of deconsolidating the Apex revenues, resulting in a net 3% increase of revenues.
Our year-over-year gross margin for the second quarter increased 250 basis points to 52.4%, largely due to leverage from greater sales volumes, productivity improvements, and the higher gross margins of our newer businesses. Overall, our operating margin in the second quarter increased 80 basis points year-over-year to 16.9%, with our core operating margin up 160 basis points. Included in the operating results was $14 million in equity earnings contributed by Apex. Absent the Apex contribution, our operating margin was 16.5%. Operating cash flows from continuing operations for the first half were $1.1 billion, a 26% increase compared to the first half of last year. Free cash flow from continuing operations for the first half of the year was over $1 billion, and our free cash flow from continuing operations to net income ratio was a healthy 121%.
We are now confident free cash flow will exceed $2 billion in 2011, which would be a first for Danaher. During the quarter, we completed three acquisitions, including the previously announced acquisition of Beckman Coulter. Our strong balance sheet and cash flow enabled us to finance the acquisition in a very cost-effective way. We are just three weeks into our acquisition of Beckman Coulter, and we are thrilled to be bringing on this iconic franchise in the diagnostics and life science space. We are excited to get started, and the level of enthusiasm by the Beckman team and their early embrace of DBS has been outstanding. Over time, we will strengthen Beckman's competitiveness through enhanced quality, innovation, and commercial execution.
We will also take full advantage of both the cost reduction opportunities and the strategic synergies in clinical and research applications that we see at Beckman with our life science and diagnostics businesses. Turning to our five operating segments. Test and measurement revenues increased 24.5% for the quarter, with core revenues up 9.5%. Test and measurement's core operating margin for the second quarter increased 120 basis points. Overall operating margin increased 110 basis points to 22.4%. Fluke core revenues grew low double digits in the quarter with solid demand for our industrial products, including our new 190 Series II handheld ScopeMeter and our 810 Vibration Tester. We saw growth in all major geographies, led again by the emerging markets, which grew in excess of 30% during the quarter. We are confident that Fluke is outperforming the market.
At Tektronix, core revenues were up mid-single digits in the quarter, with orders up low double digits. Sales of oscilloscopes and video test equipment were particularly robust in the emerging markets. Tek continues to invest in innovation, and in the second half of this year, we will introduce a new category of mid-range oscilloscopes to address evolving industry and engineering challenges. Additionally, the introduction of a new oscilloscope capable of greater than 30 GHz bandwidth across multiple channels will further enhance our product scope performance portfolio and will help meet electronic designers' needs for more accurate characterization of high-speed serial data beyond currently available platforms. Core revenues from our communications businesses grew at a mid-teens rate, led by healthy demand for our network management solutions in North America. We continue to see good momentum from our LTE offerings, as evidenced by several significant new customer wins during the quarter.
We launched a series of new products across the businesses during the quarter, including Fluke Networks' OptiView XG network analysis tablet, designed for automated network and application analysis in the deployment and troubleshooting of new technologies, as well as Arbor Networks' Pravail Availability Protection system, designed to ensure application availability for data centers and in cloud computing. Environmental segment revenues increased 5% in the quarter, with core revenues declining one-half of 1%. Despite essentially flat core growth and continued growth investments, the segment core operating margin was up 20 basis points in the second quarter. Overall, operating margin increased 10 basis points to 21.7%. Water quality core revenues increased at a high single-digit rate. At Hach-Lange, the demand continued to be healthy for core lab instrumentation, particularly for industrial applications.
During the quarter, we did see a slowdown in demand from our municipal customers, though overall municipal growth was still positive. On a positive note, we were encouraged by Hach's strong order books that saw orders improving sequentially each month through the quarter. Trojan core revenues increased at a mid-single-digit rate in the quarter, driven by robust growth in industrial applications, particularly in the emerging markets. Those of you who were with us in December will recall Jon Clark's presentation on the $1 billion ballast water opportunity, which would require cargo ships to monitor and disinfect ballast water prior to discharge at port. Currently, 28 countries representing 25% of the world's deadweight tonnage have ratified the agreement, and full ratification is widely expected to occur this year. Trojan's land and ship-based testing program is underway, and we are starting to see order activity there.
ChemTreat's core revenues grew low double digits in the quarter, their third consecutive quarter of double-digit core growth, with particularly solid demand from industrial customers in boiler applications. During the quarter, we expanded our water quality group with the acquisition of Adcon Telemetry, a leader in low-power wireless telemetry systems for environmental monitoring and in drinking and wastewater operations. Gilbarco Veeder-Root's second quarter core revenues decreased at a low double-digit rate, due largely to difficult year-over-year comparisons resulting from enhanced industry security standards last year. We continue to see strong demand for dispensers in North America and Europe, and continued double-digit growth at Veeder-Root. Moving to life sciences and diagnostics, revenues for the quarter increased 30.5%, with core revenues up 8%. Our core operating margin was up 390 basis points in the second quarter.
Overall, our operating margin decreased 110 basis points from the prior year to 4.9%, primarily due to acquisition-related transaction costs, change in control charges, and fair value adjustments to inventory and deferred revenue associated with the Beckman Coulter acquisition. Radiometer's core revenues grew at a high single-digit rate quarter, driven by continued success of our ABL90 and ABL80 blood gas analyzers, and consumables across all major geographies, with particular strength in Europe, China, and Japan. The rollout of AQT is progressing well, with over 25 units placed in emerging markets alone during the quarter. Leica Biosystems core revenues increased at a mid-single digit rate in the quarter, driven primarily by healthy demand for our core histology systems in China, Japan, and North America.
During the quarter, we equipped the University of Southern California's new outreach lab with a complete histology system, including BOND-III advanced stainers, core histology instruments, reagents for both advanced and core staining, and our first CEREBRO sample tracking system to help their lab identify and track patient samples through the histology workflow. With this placement, USC will now serve as a key reference site for CEREBRO here in the U.S. Leica Microsystems core revenues grew at a mid-single digit rate in the quarter, driven by strong sales for confocal and surgical microscopes in China and Latin America. Core revenues at AB SCIEX grew at a mid-teens rate in the quarter. Demand was broad-based, with research, applied, and pharma markets all growing in excess of 10%.
We continue to be very pleased with the tremendous success of the TripleTOF 5600, which has exceeded expectations and more importantly, is making a significant impact in the market with customers. At the ASMS show in May, we had over 20 scientists, including many KOLs, present their results at AB SCIEX's user meeting, which speaks to the impact the technology is having on the scientific community. At ASMS as well, we launched SelexION, an innovative differential ion mobility spectrometry technology for quantitative and qualitative analysis for use on the QTRAP 5500 and the TripleTOF 5600 to improve data quality and accelerate sample preparation. As we mentioned at the outset, during the quarter, we closed on the previously announced acquisition of Beckman Coulter. While it's still early, we have been pleased with the customer and associate feedback we have received thus far.
Our initial operating reviews have been positive, and we look forward to sharing further successes with you in the coming months. Turning to dental, segment revenues increased 18% in the second quarter, with core revenues up 6.5%. Our core operating margin was up 25 basis points in the second quarter. Overall, our operating margin was up 10 basis points from the prior period to 10.9%. KaVo core revenues increased at a mid-single digit rate in the quarter. Our imaging products have grown low double digits thus far this year, due in part to the continued success of the DEXIS Platinum intraoral sensor and our recently introduced OP300 hybrid digital imaging system. Demand in North America was robust in the quarter, and we continue to build momentum in the emerging markets where KaVo and Sybron are collaborating more intently and investing together in go-to-market initiatives.
Sybron core revenues grew at a high single-digit rate in the quarter, led by orthodontic solutions and infection prevention products in North America and the emerging markets generally, as well as the absence of inventory destocking that occurred in the prior year period. Customer response to Kerr's recently launched composite filling system, SonicFill, continues to be very positive, helping drive high teens core growth in general dentistry consumables. Moving to Industrial Technologies, revenues increased 32% for the quarter, with core revenues up 14.5%. Our core operating margin increased 190 basis points in the second quarter. Overall, our operating margin was 21.7%, a 100 basis point increase compared to the same period last year. Product identification core revenues were up low double digits in the quarter, with broad-based growth across all major geographies and product categories.
Demand from electronics customers for our parts marking systems was again strong this quarter, and we believe we continue to capture market share. During the quarter, we also launched the 1610DH, a dual-head version of our 1000 series CIJ printer. This high-speed continuous inkjet printer is designed for applications requiring printing in two locations on the same product or on multiple lanes of a web application, and is ideal for food and beverage, pharmaceutical, and building material applications. While still early, we've been pleased with the customer feedback with this new product. Our motion business's core revenues grew at a mid-teens rate in the quarter. The momentum we saw late last year and earlier this year continued as we experienced significant growth in all major geographies and markets.
Kollmorgen's AKM and AKD motors and drives continue to capture share, and we are on track to double AKD drive revenues this year compared to 2010. To wrap up, a good start to 2011. We are obviously excited to have Beckman on board. From what we have seen thus far, DBS is going to have high impact at Beckman, and that gives us a lot of confidence, not only to tackle the challenges in the business, but also in our ability to take advantage of both the growth and cost reduction opportunities. Our businesses continue to perform very much in line with expectations that we laid out in December. With DBS, we have the potential to drive organic growth and margin expansion. With our increased exposure to higher growth emerging markets, we believe we are well-positioned to continue to outperform for the remainder of 2011 and beyond.
We are initiating third quarter 2011 adjusted diluted earnings per share from continuing operations guidance of $0.66- $0.71. We are increasing our full-year adjusted diluted earnings per share from continuing operations guidance from the prior range of $2.65- $2.75, to a new range of $2.75- $2.82. The new full-year range includes approximately $0.05 of accretion related to the acquisition of Beckman Coulter.
Thanks, Larry. That concludes the formal comments. We are now ready for questions.
Thank you. As a reminder, if you would like to ask a question, simply press the star key followed by the digit one. Also, 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 please limit your questions to one question and one follow-up. Once again, star one. We will pause for a moment. We will first hear from Steven Winoker of Sanford Bernstein.
Good morning.
Hey, Steve. Good morning.
Good morning. Glad to see Beckman Coulter finally in the fold. I want to actually, though, lead off with a couple of questions on just the overall impact that you're seeing on a macro basis from the China deceleration and other emerging market concerns overall across the business. I know you mentioned you were up 20%, but are you seeing any signs of weakness at all?
Well, I think you see signs of weakness all the time, Steve, but having been with the China and Indian teams earlier this week, albeit telephonically, I would characterize the general tone and outlook as quite buoyant. We clearly are working against some very tough comps. We've seen some signs in China, for example, of a slow start in a couple of businesses, water being one, on account of the timing around the five-year plan, maybe a bit more so than the tightening. I think some of our businesses are on the outlook for signs of credit tightening, where they deal with smaller customers. But by and large, I think their mood was quite upbeat with respect to the second half. India's obviously dealing with a couple of different issues.
When I say by and large, we expect a little of the froth to come off, but still think as we look at the third quarter, and certainly the second half, the emerging markets will lead the way.
Okay. All right. Well, it's always hard to reconcile that with some of the deceleration in the government's action and interest rates, but okay. That's good to hear. Just on the growth within environmental, the - 25%, obviously that looks from Gilbarco Veeder-Root. Are you expecting that to turn around, or what should we expect going forward there?
Yeah, Steve, I think that that's exactly right. Just to make sure we're all on the same page. We certainly saw Gilbarco play out in the first half very much as we would have anticipated, in large part because of the tough comps on the payment schemes here in the first half. That obviously gets easier for us as the year goes on, and we would expect them to be more of a contributor here as we go forward. As we talked about at your conference not that long ago, obviously we've also seen a little bit of pressure in the muni world at Hach-Lange and to a lesser degree Trojan. So we're watching that carefully. But as we look at the third quarter, I think that when we talk about the guidance for the quarter, I think the environmental segment won't be leading the way here.
We talk about our growth guidance for the quarter, for the second half being in that 6%-8% range as we've talked. I suspect environmental will probably be south of that midpoint, but specifically, I think GVR will begin to improve from here.
Are you expecting additional acquisition-related transaction costs from Beckman, or are we finished in the numbers you took this quarter?
Steve, we will have about $0.14 or $0.15 a share in the second half, primarily related to inventory step-up and deferred revenue. So of that $0.15 that we'll call out in the second half, probably 85%, 90% of that will be non-cash in nature. There'll be a little bit of cash cost to take out the Beckman bonds here in the third quarter, and we expect to be done with all that by the end of the year.
Great. Thanks. I'll hand it off at this point. Thanks.
Thanks, Steve.
Next, we will hear from Deane Dray of Citi Investment Research.
Thank you. Good morning, everyone.
Good morning, Deane.
It sounds like we are getting closer to the time to revenue on this ballast water opportunity, and it does sound like it could be a big deal for an extended period. I have seen much higher estimates for that billion dollars. I know that is the addressable market for Danaher. If you just take us through what you think the gating factors are. From my understanding, the U.S. Coast Guard has to ratify it. That is considered to be the more stringent standards. From a technology standpoint, it sounds like Trojan has to partner with someone. Just give us a sense of where you are in terms of what product will be assembled and available on these ships.
Sure. Well, I think from a regulatory point of view, this is a global initiative. It is not a U.S. effort, as I know you know, Deane. I think that our read of the political landscape, and I do not think we necessarily have a unique perspective here, is that the global agreement will come into force here this year as the folks that are not yet on board are indeed signed up. I think that will really trigger this market in earnest.
In anticipation of that, as you have indicated, we have been investing heavily at Trojan to really take their disinfection technologies, which they deploy in a whole host of, if you will, land-based applications. Primarily, it is waste and drinking water treatment facilities, but also in industrial and commercial applications to these cargo ships to basically help them disinfect the water it uses ballast before it is dumped at port.
That, I think, is a product capability that we have. We can, by and large, do that ourselves. But obviously, we do not really have shipboard capability. So we are partnering there, Deane, really from a sales and service perspective to make sure that the technology and the packaging that we have is well deployed in obviously a very new vertical for us. As I indicated in the prepared remarks, we are in the process of a rigorous test protocol for this disinfection equipment that occurs both on land and in situ on board ships. The order book is beginning to percolate here. Really do not think this is a needle mover for us with respect to revenue in 2011. But I suspect by the next time you see Marv, say, at year-end, we will be talking about 2012 revenue. And we are going to stick to that billion-dollar band.
That is a big number, and it is still very early in this regard. But again, obviously flagging it here, we are very optimistic about this being a meaningful growth driver for Trojan and for the environmental segment going forward.
Great. And just as a follow-up, and also still in the water sector, you called out some softness on the municipal side, and I know this was something that got discussed last quarter. We are not surprised to see it, but what is the nature of the softness? I would trust it is not on the consumable side. Is it more new project-related delays and pushouts?
Deane, I think that's a fair read, particularly in the developed markets. I think China's obviously been a big growth driver for us. I think the team's prediction that the new five-year plan would cause projects to be a little unclear with respect to timing in 2011 has played out. But I think China gets better for us as we move forward, all things being equal. And who knows what's going to happen with respect to some of these municipalities, given some of the political headlines of late. But still good growth. It's all relative here. A little bit of the top has come off at Hach-Lange in the wake of these pressures, but they're still performing very well. And we think they will in the second half of this year.
Great. Thank you.
Thank you, Deane.
Next, we'll hear from Steve Tusa of JP Morgan.
Hey, good morning.
Hey, Steve. Good morning.
Could you just maybe talk about trends at Tektronix? The revenue there was a bit light relative to what I was expecting. Could you maybe talk about what was going on in the order flow there for the quarter?
Sure, Steve. I think what we saw at Tek was a strong finish following a light start to the quarter. I think we were pleased to see, as we indicated in our prepared remarks, orders north of shipments at a double-digit rate. Very encouraged by that. I think as we saw that build through the quarter and even here early in July, Tek would appear to be in good shape. Now, obviously, some of the technology end markets that we serve are showing some signs of softness. We are watching that carefully. But I think given the book-to-bill dynamic there, given the sequential progress through the quarter, and frankly, the new product introductions that we commented on that are coming to market here in the second half, we feel very good about where Tek is right now.
Steve, I would add to that dynamic of orders being better than shipments was also true at Fluke and at Tek Communications as well.
Right.
We had a very good order book across Tek's test and measurements in the second quarter.
What was the book-to-bill at T&M?
The shipment growth in test and measurement was 10%, while order growth was mid-teen, m aybe 104, 105, or something, is my guess.
Okay. Hey, maybe just a high-level question. Are you guys at all thinking about contingencies? I know Danaher always has some sort of hedge and restructuring in there, but have your antenna picked up anything in the last couple of months that kind of changes the behavior, telling your managers to maybe put a little bit more of a contingency in place. How are you looking at that?
Well, I think it's a balance right now, Steve, because again, we had a very strong core growth quarter in the second. I think our outlook for the second half is still quite positive. We don't want to head for the bunkers prematurely. That said, I think we're always in a mode this time of year to make sure that we're taking a sober look at the second half, not only with respect to this year, but also making sure that where the structural opportunities are, that those are being identified, so we can continue our quiet restructuring, and we would anticipate doing that here in the second half. I think you've heard us for a while now say that we're not seeing dramatic impact from the headlines in the businesses. That's good. But we're taking nothing for granted right now.
We're watching things very carefully, and the businesses know to not only watch those leading indicators, but also to be ready in the event that a more dramatic storm comes to shore here.
One more question. Are you guys ready to do you think you have the capacity to do another, I don't know, $5+ billion deal if something comes along in the next couple of months?
Another $5 billion deal in the next couple of months?
Yes.
I think we're on record as saying our second half deal envelope's probably in the $300 million range. That would suggest wrecking the balance sheet beyond recognition, Steve. I don't think we'll be going there anytime.
Okay. The low end of that $5 billion range.
Yeah. I think our appetite for doing a very large deal and having to issue a substantial portion of that deal with our equity is, I think, a very tough putt.
Okay. Especially with a broken ankle. Thanks a lot.
Next one from Jon Wood of Jefferies.
Hey, good morning.
Hey, Jon. Good morning.
Hey. Larry, can you just comment on Beckman, the core outlook there, following what you guys have seen from that business in the second quarter. Is a flat assumption for the year, or the back half of the year, for that matter, still relevant? Then going to the accretion side, for Dan, is that deal going to be accretive in the third quarter?
Jon, I would say that we were pleased with the second quarter performance at Beckman. You look at the last two quarters there, and they've been up low singles, up, call it 2%. Obviously not where we want to be, but I think very much where we thought they would be. We saw the second quarter in line pretty much with the last couple of quarters in that regard. So I think we're comfortable with the state of affairs there. You know that we've tried to keep expectations around revenue very modest here, given that there are some other issues we need to work through. But I think as we look at the second half of 2011, as we look at 2012 right now, we're right where we've been.
Assuming a flattish revenue outlook ahead of the real impact that we're going to have on the top line by improving quality, getting past some of the regulatory challenges. Making sure that we are aggressive from a competitive perspective in terms of how we get out and take care of our customers, let alone what we want to do from a new product perspective over time. So no real change, but we much prefer being here today on the other side of closing because we're able just to operate differently and build on the momentum we had, albeit the planning momentum over the last four or five months.
Jon, in terms of accretion in the back half, our expectation is that all that nickel will come in the fourth quarter. We anticipate pretty substantial quiet restructuring. We do not plan to call it out in the third quarter. We will have additional restructuring and realignment costs in the fourth quarter as well as into 2012. That is all factored in there. But we have a lot of actions we are going after as we speak. There will be a big impact of that in Q3. We think we can absorb that and have it be neutral to EPS, be the right thing for the business to position it, and then start to be accretive in the fourth quarter.
All right. Great. That is very helpful. My follow-up on the Life Science diagnostics core business. Obviously, SCIEX continues to gain momentum here. Larry, can you just comment on your view qualitatively of that mid-teens number. How much of that do you think is a market share phenomenon, and how much do you think is just the mass spec market, if you will?
Jon, I think it is a tough line to draw here on the back of, obviously, a couple of quarters of very good growth. I think we are encouraged by our performance with the 5600 from a new product perspective. I think there are a number of geographies, particularly North America, where we are very pleased with the improved commercial execution of the organization. But clearly, as you know as well as anyone, the market has been upbeat. Pharma has been, I think, better in the first half of this year than anyone might have anticipated. But I think that this business is doing well. We will see where some of the other folks come in here. But I think in the first half of this year, we probably took a little bit of share in certain corners. I was up in Boston with the team yesterday.
I think they are feeling very good about Response at ASMS around some of the add-ons to the 5600. Feeling very good about some prospects for the second half, let alone the new product development pipeline. All in all, it still is only 18 months in with SCIEX, but we really like where we are with this business.
Okay, very good. Thank you.
Thank you, Jon.
Next, we'll hear from John Inch of Bank of America Merrill Lynch.
Thank you. Good morning, everyone.
Morning, John.
Good morning, John.
Morning, guys. Just so I understand the guide, you beat by $0.04 your midpoint this quarter. You are raising by, effectively the year, by all of the Beckman contribution. Is there no sort of spillover from whatever beat in this second quarter to the rest of the year based on your positive commentary? It kind of looks like you have got the third quarter flat, right? So why is there not a little bit more optimism from the second quarter reading through to the rest of the year?
John, I think the headlines, given what they are, obviously have us tempering our thinking here. But I think all in all, as we look at the top line and the BCM here for the second half, let alone the $0.05 from Beckman, I think we feel very good about that guidance. Certainly, as we look at some of the things that we want to make sure we work through beyond the obvious.
whether it's the muni headwinds that we talked about a moment ago. Obviously, Japan from a supply chain perspective is something we said we'd like to see through, though I think the signs there are all positive, and some other items there. I think all in all, we feel very comfortable about where we are in the second half.
John, as you know, we'd like to have some latitude in the second half to pull forward some cost actions we would typically budget for in the process of budgeting for 2012. I think if the top line continues, you may see us take some actions here that otherwise would occur, cost actions that would have otherwise occurred in 2012.
Yeah, that makes sense. I'm just trying to make sure there isn't some implied message of obvious slowing in some aspect of your business, which sounds like that's not what you're suggesting at all.
No.
Okay.
Again, I think we're talking about 6%-8% core for the second half, and that should be, from what we see today, balanced between the third and the fourth.
Larry, what do you think the risks are that Beckman next year possibly puts up organic growth that is negative? Is the over-under kind of equally weighted if you are looking at sort of a flattish outlook, or do you think the balance, the over sort of tips to more positive versus negative?
I think you have a number of swing factors there, John. But I would take a balanced view there given where we are. Which is why-
I am sorry, what is it?
I would say we take a balanced view as to the over-under on that flattish outlook, which-
In other words, if it's okay, in other words, if it's negative, it's not going to be negative by much is the point you're making.
That'd be our current view, yes.
What's your outlook, Larry, still for the cost side as you've kind of gotten into Beckman? Is there any sort of the cost synergy baked into the $0.05 this year, or does just more of that kick in next year?
The cost synergy effort really works against us this year, as Dan highlighted, because we're going to be putting some of that investment into the business ahead of pulling out that $250 million of cost that we've talked about. I think, John, we are very confident given the planning that has been underway for many months now, that we can safely reduce their cost structure by that amount and do that, and when I say safely, what I'm referring to, and have that come out without impairing the business's ability to grow, to improve quality, to invest in innovation, and the like. So I'm highly confident that as we move forward, we're going to find other opportunities. I think for today, we're going to stay with that $250 million cost out number.
Yeah, no, that makes sense. Just lastly, can I ask you about industrial? Obviously, you sort of saw how the quarter progressed from a macro perspective, right? It looks like there had been a bit of pre-buying in March, systematically. I am not talking about Danaher, I am talking about overall economy. May was obviously a little softer, and June seems to have been a bit better. What happened within your industrial businesses? Not maybe specifically defined to industrial tech, but just as you look at sort of your industrial production-related types of businesses, what happened in the quarter and what is your outlook? I mean, the 14.5% is obviously very strong, so it suggests that there was not much of a trend, but maybe what was going on under the surface.
Yeah. I think it was strong, and certainly as we look at the third quarter, I would say that industrial tech, the segment, probably going to be on the high end of that 6%-8% growth range. They will certainly be above the midpoint. Your question is, I think, properly framed. If we just look at the industrial landscape, not limited to our industrial tech businesses, I think what we saw, whether it was at Thomson, where we sell through distribution, be it the Fluke industrial business, POS was by and large pretty good. I think the distribution, by and large, was fairly upbeat. I think as the quarter wore on, things were stable, things were solid. Where we did see, I think, a little bit of softness, John, was more in the OEM side of the business.
That is another one of these second half areas that we are going to have to watch. Certainly at Kollmorgen, we saw that, and that was primarily in our technology end market. So no surprise there. But obviously something we want to watch given the supply chains and the build rate risk factors that we would have in our limited OEM-facing businesses.
Right. But was that trend throughout the quarter, or did it kind of see a blip in May and get some sort of a bounce back in June? It sounds trite, but people are very concerned about monthly progression here, that's all.
Yeah, no. Nobody more than me and Dan here, so we understand the question. I would say that it was bumpy as we went through May and June. It's really hard to discern an exact trend. We certainly didn't see a dramatic fall-off in our leading indicators. But we did see a softening order, but maybe a little softer than we would even anticipate. Again, that's why we want to make sure we're on our toes here come the second half.
Right. Thank you very much.
You bet, John. Thank you.
Our next question comes from Shannon O'Callaghan with Nomura Securities.
Morning, guys.
Good morning, Shannon.
Hey, so Larry, on the FDA issues, just kind of troponin and sodium and glucose, things like that, how are you feeling about them in terms of an update and what you're thinking for the second half?
Well, I think that from a regulatory perspective, Shannon, we feel very good about the progress the business is making. Obviously, troponin is probably the single assay under question that gets the most attention. Certainly plenty of work ahead of us in that regard. No new news this morning in that regard. But again, I would just remind maybe the broader group that the regulatory challenge at Beckman Coulter is not strictly one borne of three specific assays where they have had issues historically. It also incorporates a broader quality system effort that has been, I think, well documented. That is going to be a significant undertaking. I think we are pleased with the progress that the company has made. We have had, obviously, a lot of visibility not only on the plans, but the progress, but we are knee-deep in that with them now.
That is our number one priority here in the short term. Obviously, it will be in the long term as well. But I am very encouraged by the trajectory that the Beckman team is on in that regard. But again, a lot of work to do. I think more broadly, the integration planning has gone exceptionally well, Shannon. The transition team is probably, on a full-time equivalent basis, almost 25 people strong from a Danaher view in terms of our folks spending virtually all of their time at Beckman. We have made some organizational changes there. We have begun to exit the public company structure and in turn, the public company costs that go with that. We have split the business formally into two halves, a diagnostic and a life sciences business, to provide appropriate focus around each of those businesses.
We have made a few changes as a result of those two moves which have included the insertion of a Danaher CFO, as well as one of our group execs as, in essence, the chief transition officer for the business. Tom Joyce continues to oversee all of this. Bob Hurley, the Beckman CEO, is a full partner in that effort with Tom. We are feeling very good about the outlook. Again, lots of long days and weeks ahead, to be sure.
Yeah. Good luck with that. Hey, on dental, what do you think about the margins there, I guess, as you look into the rest of the year into 2012, and what is happening there from either a mix or cost standpoint as we look from this kind of 2Q run rate?
Right. Well, they need to be much higher. Let's make no mistake about that. I think what you saw in the second quarter, Shannon, was really a function of a couple of things. Certainly, this plant that we're taking out has impacted the margins as we would've anticipated. Call that quiet restructuring. We certainly have stepped up the growth spending there largely around the second half ramp for the new imaging products that I referenced, as well as in light of the traction that we have in the emerging markets with the collaboration between KaVo and Sybron, long overdue, but now well underway. I think the third issue there was really some of the negative mix we had in certain product categories that certainly didn't help. The team understands that they ought to be a 15%+ OP business.
They have a roadmap that they are executing in that regard, and we would anticipate nothing less from that business.
We'd expect a meaningful sequential improvement off those operating margins Q2 to Q3 here.
As we saw in the second quarter, right? Because they were up 100 basis points sequentially from the first.
Okay. But getting to the 15%+ , is that going to take a little more time into next year?
Yeah, that won't happen this year, Shannon. Sorry if I suggested that.
No, you didn't. I just concluded it. Just wanted to make sure I was hearing it right.
Yeah.
Go ahead.
No, I think the path to 15%+ at Dental is a multi-year effort. Obviously, more of the work resides at Pelton than it does at Sybron. But that progress continues, and they need to deliver more of it, obviously, given where they are versus that target. But we are confident we will do that.
Okay, great. Thanks, guys.
Thanks, Shannon.
As a reminder, we ask that you please limit yourself to one question and one follow-up question due to time constraints. Next, we will hear from Jeffrey Sprague of Vertical Research.
Thank you. Good morning, everyone.
Good morning, Jeff.
Morning. Can we just spend a little more time on understanding how the FDA issues play out for you? One element of my question is, obviously there is substantial costs involved with making this right and getting on the right track with the FDA. Is that cost push that is required fully already embedded in Beckman's cost base? Or is there another step up that needs to happen now as you guys take the reins to really make sure this gets fixed?
Jeff, I would say that the effort that has been underway is a considerable one here for the better part of a year. As a result, you are certainly seeing an increased spend in RA/QA type activities across the company. I do not think that we see a dramatic step up from here relative to what they need to do. It really is more just executing on the plan that has been laid out, that has been staffed, that has been funded over a multi-year period to make sure we are as good as any company with respect to fulfilling our regulatory obligations, not only to regulators, but obviously in turn to our customers.
I assume there is some significant outside help and expertise involved in doing this currently.
That is exactly right, Jeff.
Larry, can you give us a sense then, perhaps it is embedded in the 250, but once this is set right, so to speak, the effort never ends, but once we are past the fire drill, what kind of costs come back out on the FDA correction?
Jeff, our planning assumption is that cost does not come out. Maybe it does, but that 250 savings is not, none of that includes the benefit of reducing their quality costs.
Right.
Maybe that is conservative, but I think it is a good planning assumption.
Right. But in actuality, there is some meaningful nut there that likely comes out.
Jeff, I don't think that is what we are saying. I think what we are saying is we have assumed a level of spend there that takes a number of different forms that we think is important. While a lot of that activity may be in what you might think of as remediation mode, that will transition into maintenance mode as we move forward. Again, I think we see tremendous cost reductions at Beckman. We see a strong margin expansion potential. But first things first, quality and RA/QA top that list. We are not assuming any reductions there.
Is there anything that we should be looking at from the outside looking in to gauge how this is going? Or should we expect it just comes in your regular quarterly updates of the acquisition integration and the like?
Yeah. We would anticipate, Jeff, I think, using these calls to give you as much of an update as we can as we move forward. It will be hard to report a Danaher quarter from here on out without a significant amount of time on Beckman. We will also obviously be talking about Beckman at different conferences and the like as part of our normal IR rounds.
Right. Just one unrelated follow-up. Product ID orders, can you give us a little color there on how that is looking into the back half?
As we think about the back half here, again, with the 6%-8% range for core, I think we would anticipate that industrial will be above that with Product ID playing a significant role, albeit without the new acquisition, Esko, being in that calculation. They are off to an outstanding start, by the way. So we have a strong outlook here in the second half for-
Jeff, they have a lot of momentum. They did have a very strong second half last year. So from a reported basis, their core numbers probably are not going to be quite as high as they were in the first half, but that does not really. Sequentially, there is just still a lot of strength in the business right now.
Yep.
Great. Thanks a lot, guys.
Thank you, Jeff.
Mark Douglass of Longbow Research.
Hi, good morning, gentlemen.
Currency had a bigger impact on the top line versus expectations and probably what you were guiding. What are you expecting for the rest of the year, and what was the impact on EPS or net income in the quarter?
Mark, I do not think it was bigger than our guidance. When we issued earnings in the third week of April, the euro was 145, and that actually averaged a little bit less than that for the balance of the quarter. So it was not a surprise to us, given where the euro was when we announced earnings and gave guidance in April. It obviously was a benefit of about 5%. I think it will be slightly less, maybe 3-4 points here in the back half, assuming the euro stays in the low 140s. Clearly, there has been some volatility there, but within that range.
Okay. I guess I was thinking 2% for the year, but likely a little more than that.
Yeah.
Okay. Just lastly on the Fluke Networks, Tek communication, and Tekcom. Things in comm, at least for the equipment space service providers, seems to have gotten more negative more recently. What is your outlook for the comm space right now going forward? Has it changed materially?
I think what we saw in the second quarter was very encouraging. Again, as I think Dan indicated, across T&M and certainly in the comms group, a positive book- to- bill, good strength. Some of the comps that are out there that you may be referring to aren't necessarily the best comps. We don't have a lot of exposure in certain verticals, particularly around financial services and with the federal government here in the U.S., that some other folks do. Our exposure tends to be more with the other carriers, certainly on the mobile side, where we're seeing very strong growth with Tek comms. Much of Ethernet is really an enterprise play, where we've seen, with our portfolio, very good performance.
That coupled with good emerging market exposure is why I think those businesses have fared very well relative to some other companies that may be comps but really aren't competitors.
Okay, that's helpful. Thank you.
You bet. Thank you.
Next we'll hear from Richard Eastman of Robert W. Baird.
Larry, can you speak to, maybe just a minute or two, you talked a little bit about industrial. Maybe orders were a little bit bumpy during the quarter. But if you look at kind of order trends and maybe tone of business in Europe specifically, across maybe IT and then also the Test and Measurement business, any discernible slowdown or change in inflection in the tone of business in Europe during the quarter?
Good morning, Rick. I think the short answer is yes. Certainly as we look at the geographies, the emerging markets led the developed markets, and the U.S. was ahead of Europe. It was really the first time we saw that differentiated performance out of Europe. I would say it was by and large broad-based. It certainly didn't necessarily get better as the quarter wore on and the angst and the like from the headlines grew.
Rick, I would add, the business in Europe that probably held up the best in the second quarter was Test and Measurement. But as Larry alluded to, we did see some weakness in the other industrial businesses, a little bit of med tech as well in Europe.
Okay. If we think geographically and we're thinking about this core 6%-8%, obviously emerging above that, U.S. maybe towards the 6 number, and then Europe stays positive, but low singles. I mean, if we try to split this geographically.
I think that's about how it played out in the second quarter, and it's probably not a bad sort of rough planning assumption.
Okay. Then just another general question. When I look at the T&M piece of the business and also the industrial tech piece of the business, given the very significant core growth rates that we saw in both businesses, I was a little bit curious. The incremental margin in both businesses was kind of in the 27% range, maybe a little bit below 30. Is there a considered effort there maybe to kick up any quiet restructuring, or should that incremental have been a little bit bigger on that type of core growth?
Rick, there's a little bit of noise in both of those incrementals because of both the Keithley acquisition and the one-time charges there and the recent ETCO acquisition in industrial tech. If you look across Danaher, obviously you don't have quite this visibility, but if you strip out acquisitions and also currency, our fall-through across the businesses were closer to 40%.
It was. Okay.
That was true in test and measurement. Industrial tech was a little bit lower because of motion. We are seeing some significant inflation in areas like magnets and the rare earth issue in China where some of the magnets we are buying are literally 10x the price we paid at the beginning of the year. They are getting a fair amount of price. They are still doing well. Their margins are consistent with where they were in the first quarter, but we are not seeing the kind of seasonal improvement we typically see in margins. That is really motion. That is not the other pieces. It is not product ID, but that is one area where inflation is hitting us very hard.
Okay. The core fall-through for all of Danaher or for those two pieces was closer to 40?
All of Danaher was closer to 40. Test and measurement was right in there. Industrial tech was lower because of the dynamics I just talked about with motion.
Right. Okay. Very good. Thank you.
Thank you, Rick.
Ladies and gentlemen, due to time constraints, our final question for today will come from Jason Feldman of UBS.
Good morning.
Hey, Jason. Good morning.
At AB SCIEX, the TripleTOF has been very successful, and by all accounts, you have gained a fair amount of share. At ASMS, there were a couple of new product introductions from some of your competitors. Do you still see runway from a market share perspective, or is it time to think about the next generation of products at some point in the not-so-distant future?
Jason, I think we see a lot of runway. We have not yet been shipping the 5600 for four quarters yet. That coupled with all the KOL support, I think we feel good about that. But it is always time to think about the next generation of products. Again, I was up with the team. We did an R&D review yesterday. This is always the part of a new acquisition integration that takes longer to affect. But I think we are very encouraged about what you will see AB SCIEX roll out over the next several years by themselves.
Obviously, over time, you are going to see some of those synergies I referred to at the outset come into play there as well. We are thrilled about what they have done here in the first half and just have a very upbeat outlook as we think about that business going forward.
Okay. Lastly, on Beckman, I think you have been very clear from the very beginning about how that will initially dilute your overall organic growth rate. I understand that the immediate concern is the cost synergies and the integration and the focus on those issues. How long does it take, you think, before you are really able to give focus to working on structurally improving their underlying core growth rate, whether it is sales synergies with other businesses or improved innovation? Is that a 2013 kind of phenomena or some other point?
Jason, our efforts thus far, both in planning and here in the last couple of weeks with respect to execution, have been focused, again, first and foremost on quality, and I would say second on growth. So we are already spending a lot of time in a whole host of ways trying to help the top line, both in the near term and the long term. But I think what we have tried to suggest is that despite that activity, given the context, a flattish revenue outlook is probably the sober frame for the rest of this year and through next year. I think our hope and intent is that come 2013 and beyond, you will begin to see the impact of Danaher and DBS on Beckman's core growth. I think the nature of the work is just more straightforward.
As Dan highlighted, you will see that impact with respect to cost out far sooner. That pairing, that timing of those activities is, I think, by and large, typical and certainly appropriate for this situation.
Great. Thank you very much.
You bet, Jason.
Mr. McGrew, at this time, I will turn the conference back over to you for any additional or closing comments.
Thanks, everyone. Dan and I are going to be around all day for follow-ups.
That does conclude today's conference. Thank you all for your participation.