Danaher Corp (DHR) 2012 Q2 法說會逐字稿

Good morning, my name is Debbie, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Danaher Corporation second-quarter 2012 earnings results conference.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions) Just a reminder, today's conference is being recorded.

Now I would like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations.

Mr. McGrew, you may begin your conference.

Good morning everyone, and thanks for joining us.

On the call today are Larry Culp, our President and Chief Executive Officer, and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, our second-quarter Form 10-Q, and the reconciling other information required by SEC Regulations G relating to any non-GAAP financial measures provided during are all available on the investor section of our website, www.Danaher.com, under the heading "financial information" and sub-heading "quarterly earnings", and will remain available following the call.

The audio portion of this call will be archived in the investor section of our website later today under the heading "investor events" and will remain available until our next quarterly call.

A replay of this call will also be available until Thursday, July 26.

The replay number is 888-203-1112 in the US, and 719-457-0820 internationally, and the access code is 130-4801.

During the presentation, we'll describe certain of the more significant factors that impacted year-over-year performance.

Please refer to the earnings release or 10-Q and other materials previously referenced for additional factors that impacted year-over-year performance.

In these remarks, and the accompanying presentation, all references to earnings, revenues and other Company-specific financial metrics relate only to the continuing operation of Danaher's businesses, unless otherwise noted.

We will also make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future.

It's possible that actual results might differ materially from those projected at any forward-looking statements, and additional information concerning factors could cause actual results to differ materially from those in the forward-looking statements is set forth in our SEC filings.

These forward-looking statements speak only as of the date they are made.

We don't assume any obligation to update any forward-looking statements, whether as the result of new information, future events, developments, or otherwise.

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

Matt, thanks and good morning, everyone.

We're pleased by the sequential improvement in our core growth and our strong operating margin and cash flow performance in the quarter.

Despite the macro headlines, we grew 3.5% organically in the quarter, and achieved an outstanding job on the execution front, with an 80 basis points year-over-year core operating margin expansion, a 31% year-over-year increase in free cash flow, and 31% growth in EPS.

We continue to focus our efforts on capturing market share, driven by DBS, as well as our investments in innovation.

Videojet, ChemTreat, Leica Biosystems, Esko Curve, Arbor Networks, and Radiometer are among the businesses where we believe we have taken market share during the quarter.

Geographically, the US largely continued its strong start in 2012, with our Q2 revenues growing at mid-single digits, though we did see some pockets of weakness as we exited the quarter.

In Western Europe, our sales were flat in the quarter, which by and large resonates with the headlines.

China was mixed, but flat in the quarter.

The bright spot in China for us has been healthcare with both our dental and life science and diagnostics businesses growing double digits in the quarter.

The rest of the emerging markets remain strong and also grew at a double-digit rate.

We remain active and optimistic on the M&A front.

For the first six months, we deployed nearly $1 billion of capital on eight acquisitions, primarily in our industrial, environmental, and test and measurement segments.

Even taking into account the capital we deployed on these transactions, we still expect to have more than $5 billion of M&A capacity over the next two years.

Turning to details of the quarter, today we reported record second-quarter diluted net earnings per share of $0.84, a 31% increase as compared to our diluted net EPS last year.

The current period includes a $0.03 benefit from a lower-than-anticipated income tax rate, and a gain from resolving a contingency related to a prior asset disposal.

Revenues for the quarter increased 25% to $4.6 billion, with core revenues up 3.5%.

The impact of acquisitions, primarily the addition of Beckman Coulter increased revenues by 25% while currency translation reduced sales by 3.5%.

Our gross margin for the second quarter was 51.7%, and recorded operating margin expanded 100 basis points year-over-year to 17.8%.

Second-quarter operating cash flow was $1 billion, a 31.5% increase year-over-year.

Free cash from the first half of 2012 was $1.5 billion, up 31% and our free cash to net income conversion ratio for the first half was a robust 131%.

Particularly in these uncertain economic times, DBS' impact on cash flow growth served us very well.

Finally, our tax rate in the second quarter was 22.5%, as compared to 24.3% in the second quarter last year.

The lower rate reflects the impact of a discrete tax benefit, resulting from the expiration of a statute of limitations on an uncertain tax position, as well as the accumulated cash affect of a lower estimated tax rate for the full year, which together benefited EPS by $0.02 in the quarter.

We continue to expect an effective tax rate of about 24% for the balance of the year.

Turning to our five operating segments, test and measurement segment revenues and core revenues increased 1% for the quarter.

Core operating margin for the second quarter decreased 85 basis points, while reported operating margin declined 90 basis points to 21.5%.

Our instruments business' core revenue declined mid-single digits in the quarter.

At Fluke, core revenues were down slightly, with growth in the US distribution channel more than offset by weak demand in other geographies, particularly China.

In the quarter, we received two gold medal awards from industrial design excellence for our new clamp meter family.

During the quarter as well, we acquired UK-based Irisys to enhance our R&D capabilities in our core demography lines.

At Tektronix, core sales declined high-single digits in the quarter with continued softness in China and Europe, offset somewhat by strength in Latin America and in our service business.

Core revenues from our communications businesses grew mid-teens in the quarter with continued healthy demand from wireless carriers in both North America and Europe, with Tektronix Communications network management solutions.

At Arbor Networks, we continue to see solid demand for our network security solutions as DDoS and Internet security remain strategic concerns for our customers, as they take solutions to prevent and defend against cyber attack.

During the quarter, Fluke Networks launched the MultiFiber Pro tool for automatic testing of fiber cables and a TS Pro Series for carrier field technicians voice, data, and video testing.

On demand should remain solid in the second half of the year, core growth rates in our communications businesses are expected to moderate due to difficult prior-year comparisons.

During the quarter, we acquired VSS Monitoring in San Mateo, California, a base provider of network monitoring switches and technologies used in next-generation ultra high-speed network probes.

Network monitoring switches serve as the front end for monitoring and securing networks by selectively segregating and directing traffic, allowing telecom service providers and enterprise IT professionals to more effectively manage even the largest networks.

In environmental, revenues increased 4.5% in the quarter with core revenues up 6%.

The segment core operating margin increased 55 basis points in the second quarter, with reported operating margin essentially flat due to the diluted effect of the recent acquisitions.

Water quality core revenues increased at a mid-single-digit rate led by solid growth in North America.

At Hach, demand continued to be healthy for our core lab and process instrumentation.

In addition, companies initiative to expand the service business has helped drive double-digit year-to-date growth in that category.

ChemTreat continues to execute extremely well, with the second quarter marking their eighth quarter in a row of double-digit core revenue growth.

Their sustained outperformance can be attributed to the best-in-class go-to-market initiatives, as well as their commitment to innovation on behalf of their customers.

They recently launched an environmentally-friendly starch-based solution known as [Green VTAC] to help customers reduce sludge buildup in their systems resulting in lower maintenance costs, higher uptime, and reduced waste removal charges.

As you may recall from our investor today last December, we highlighted Trojan's new UV Signa systems, which makes conversion to ultraviolet disinfection easier for customers by reducing the footprint, simplifying maintenance, and lowering the total cost of ownership.

During the quarter, we shifted our first system to a US municipality, and continue to see robust order activity for this new product.

Trojan is also continuing validation work on its ballast water treatment solution and during the quarter, shipped its first system.

Gilbarco Veeder-Root revenues grew high single-digits led by solid demand for dispensers, payment solutions, and environmental monitoring systems.

In particular, payment solutions sales increased low double digits in the quarter, with strong sales of E&B security upgrades for credit and debit cards in North America.

During the quarter, we acquired Catlow, a manufacturer of the nozzles and other hanging hardware, to enhance GDR's data recovery capabilities while also strengthening our alternative fuel dispensing solution.

Moving to life sciences and diagnostics, revenues for the quarter increased 124.5%, largely due to the 2011 addition of Beckman Coulter.

Core revenues were up 5%, including one week of Beckman Coulter revenues, which were not material to the overall core growth rates in the quarter.

Core operating margin in the segment was up 165 basis points, while our reported operating margin increased 820 basis points from the prior year to 13.1%.

Diagnostics continued their solid performance with high single-digit core growth in the quarter.

At Radiometer, core sales increased at a single digit rate with broad-based growth in all major geographies, led by the emerging markets.

China grew in excess of 25% with particularly robust uptake of our AQT system, following regulatory approval late last year.

Leica Biosystems increased at a low double-digit rate, led by advanced staining, which was up more than 20%, while the [cortstology] business rebounded at a high single digit rate.

All major geographies saw growth of the quarter, with particular strength in China, the emerging markets and North America.

At Beckman Coulter, we have been especially pleased with first-year progress as DBS continues to make an impact on many facets of business, including quality, while setting the stage for future growth and improving the cost structure.

Quality remains a critical priority for us at Beckman.

We continue to focus on the quality system itself, and on product quality.

On that front, I'm pleased to report that we have received FDA pre-market approval for the class III prostate health index assay, a simple non-invasive blood test that is 2.5 times more specific in detecting prostate cancer than PSA-alone in patients.

The accuracy of the test also benefits the patients by reducing the number of unnecessary prostate biopsies.

This was the third consecutive quarter of low single digit diagnostic revenue growth.

We also continue be encouraged by our retention and win rates as well as the success we've seen with new product launches, including the AU5800 series and the PHI assay.

We made tremendous progress on the cost side over the last year, and since the acquisition, our operating margin increased more than 400 basis points.

This week we attended the American Association of Clinical Chemistry Meeting in California, where the overall tone was outstanding.

A number of customers commented to the team about improvement they have seen over the past year, particularly with respect to lower unplanned services and other key metrics with respect to service quality.

While there is still a lot of work ahead, we are happy with what the team a couple has accomplished in their first year with Danaher and my thanks go out to everyone at Beckman who has contributed to the success.

In Life Sciences, we saw low single-digit revenue growth in the quarter.

AB SCIEX core sales grew modestly in the quarter, against what was their highest growth quarter in the prior year.

We continue to see strong growth in China, and the emerging markets offset by weakness in the US and Japan.

For those of you that joined us last month in Toronto at our investor day, you saw firsthand DBS' impact on new product development at AB SCIEX.

At AFMS in June, they debuted the new 6500 series, the world's most sensitive triple quad system designed for complex analysis, including drug discovery in development in regulated labs, peptide quantitation and biomarker verification.

They also enhanced the triple [quad], family, introducing the 5600 series for routine analysis and the 5600-plus for a more complex analysis.

Customer feedback on all new products has been exceptional.

In particular, the 6500 has been particularly well-received, with significant orders booked in the second quarter, even though the product doesn't begin shipping until here in the third quarter.

Leica Microsystems core sales were up mid single-digits in the quarter, with strength in China and the emerging markets across most product categories.

Late in the second quarter, we launched the SP8 confocal microscope, a truly innovative solution developed using extensive VOC from life science researchers.

The SP8 allows a researcher to start with an entry-level confocal and to move up in a modular way, to increase the functionality of the system as the research process requires, and as funding becomes available.

Here too, additional customer feedback has been excellent.

In dental, core revenues increased 5% in the first quarter.

We have outstanding traction in margin front with core operating margins, up 325 basis points and reported operating margin increasing 350 basis points to 14.4%.

We are extremely pleased with our first-half dental performance.

Dental consumables core revenues grew mid-double-digits in the quarter, led by sales for our general dentistry consumables, infection prevention products, and orthodontic solutions across all major geographies.

DamonClear, our aesthetic self-ligating orthodontic brackets grew double digits in the quarter.

Dental equipment core revenues were up low single digits in the quarter.

We saw strength in imaging, up double-digits with healthy demand for our intra-oral sensors, along with the solid uptake of our combo 2-D 3-D imaging product, which has now been rolled out globally across all of our major brands.

During the quarter, we also launched the Helios 1800 LED energy-efficient light which goes off an existing platforms with an entry-level solution in the key LED category.

In industrial technologies, total revenues were up 0.5%, while core revenues were up 1% for the quarter.

Our core operating margin increased 105 basis points in the second quarter, with our reported operating margin of 60 basis points at 22.4%.

Product identification core revenues grew mid-single digits in the quarter, with growth across most geographies including US, China, and Latin America.

Sales of our CIJ printers were particularly healthy, growing mid-teens globally.

During the quarter, we launched the Willett 630 CIJ printer designed in China for the Chinese market.

Customer enthusiasm has been high there, with orders for over 500 units in the first couple of months.

During the quarter, we closed our previously-announced acquisition of X-Rite.

While still in the early days, we're off to a great start with the team embracing DBS and exploring opportunities to lever our global network of PID brands.

Last month, both X-Rite and ESKO exhibited at Drupa, the world's largest printing and packaging trade show.

Esko introduced new hardware at the show as well as next-generation software designed in preproduction.

Esko's Suite 12 is packed with new functionality, including richer 3-D capabilities and better workflow automation to help print and packaging customers drive efficiency.

Customer response to Esko's new products was extremely favorable, helping to drive mid-single digit core growth in the quarter.

In Motion, core revenues declined at a high single digit rate in the quarter with softness in industrial automation, technology, and renewable energy markets across most major geographies.

We expect the rate of year-over-year core sales decline to improve, as we move forward into the balance of the year, in part due to easier year-over-year comparisons.

So, to wrap up, we're quite pleased with our growth, earnings and cash flow performance.

While the team continues to execute well, the uncertain macro environment suggests to us that it's prudent to accelerate cost actions, which will help us protect and maintain our growth investments.

We now anticipate spending approximately $100 million this year on restructuring activities, about double our previous plan.

We believe our focus on capturing market share while taking these actions, coupled with our optimism and capacity on the acquisition front, positions us will for the balance of 2012 and beyond.

We are initiating third quarter diluted net EPS from continuing operations guidance, of $0.74 to $0.79.

We are also updating our full-year diluted net EPS guidance from $3.25 to $3.35, to $3.19 to $3.26.

The midpoint of our revised EPS guidance would result in approximately 14% year-over-year EPS growth compared to last year.

Adjusted EPS of $2.83.

The reduction in the full-year guidance is primarily attributable to the accelerated restructuring activities and the anticipated negative currency impact from the recent strengthening of the dollar, partially offset by the $0.03 benefit in the second quarter.

We are assuming second-half core revenue growth will be in line with what we achieved in the first half of this year.

Thanks Larry.

That concludes the formal comments.

We are now ready for questions.

(Operator Instructions).

We'll go first today to Steve Winoker with Sanford Bernstein.

Could you maybe give us some better or some additional clarity?

I guess, one, how were the demand patterns shifting through the quarter itself?

Did you see continued acceleration or deceleration through June?

And then secondly, when we think about the second half core growth in line with the first half, maybe give us some more color by business about how you are seeing it, and whether you are seeing it in either inventory or other indicators that are leading you to the conservatism other than macro indicators?

Yes.

I would say, a couple of thoughts here.

With respect to the first part of your question, what we saw by business in the quarter, I think we saw three of five the businesses fundamentally in line with what we thought we would see during the quarter, with Life Sciences and Diagnostics up slightly and Industrial Tech slightly below.

I think again, as we saw the quarter play out, I think we were very encouraged with the strength of the overall quarter as we look around the business, but certainly, during the quarter, I think we saw some things that give us some pause, and obviously, have us thinking about the environment here with the acceleration of the cost actions.

I think as we think about the second half, certainly we saw in June some signs that the second half might play out a little differently than we had anticipated originally.

Certainly, the China rebound we were anticipating, as others were, is going to come.

It's probably is not going to come in the timeframe that we had anticipated herein the second half.

Certainly Motion and T&M and are not rebounding and the way we had anticipated or had hoped.

That, there's an obvious intersection there between Motion and T&M and the China softness.

Clearly there is more uncertainly today in and around some of the life science funding dynamics.

Even in the US, where we've had another, I think, exceptionally strong quarter, we saw some, if you will, hairline fractures in certain businesses that have us on alert.

I think that, coupled with the headlines, which there are very few positive macro headlines out there globally right now, I think give us the impetus here from a topside perspective to say the risks are to the downside, let's take the fact that we are having a good year from an earnings and a cash perspective, let's proactively, even though the businesses probably have a slightly more optimistic outlook and the second half, go ahead and set the stage, take advantage of the year we are having, to take the cost actions in order to protect our growth environment if the environment has continued to slide here a bit.

I think with respect to the quarter, the third quarter here, and the current year, is that we'll be fundamentally in line with what we saw the first half.

Call that 2.5, 3. We think about fourth, probably more in line with what we just printed, call it 3 to 3.5 on the core side.

Maybe by segment quickly, we would be looking at four of the five segments being up low single to mid single with the exception being T&M, where we expect our business to be down.

Not necessarily the instrument businesses getting worse, but as we alluded, the communications business, is not going to stay in this double-digit growth they've had here in the first half.

Part of it being the comp issues that we can see T&M down low single digit to mid single digit here in the third quarter.

As Larry alluded to, the numbers from our businesses would be higher than that.

So, some of our segments where we are telling you we think it is mostly low single to mid single, a number of our businesses, their numbers roll up to more of a mid single digit point of view.

We're taking again more of a top-level perspective and adjustment here, given the macro environment and given a few things we've seen here of late.

So it sounds like there's contingency built into that is what you're saying, right?

In terms of roll up versus the top down view?

That is the right way to look at it.

Right.

Lastly, the T&M margin pressure, is that mostly operating leverage?

Yes.

As you know, as we've talked about, T&M is our highest gross margin segment.

Obviously that is hurting us here.

We will see that impact here again in the third quarter and you see a step down sequentially in our margins Q2 to Q3 in T&M.

Okay.

Great.

Thank you.

I will pass it on.

We'll take our next question from Steve Tusa with JPMorgan.

Can you just give us a little bit of an update on the integration and maybe how the instrument placements are going from a top line perspective?

I assume you're talking about Beckman, Steve?

Yes, Beckman.

A year in here, we are very pleased with where we are.

As we highlighted in some of the prepared remarks, certainly the primary objective there has been quality.

We have made a lot of progress.

You see that in the reinspections, in the new product approvals, and the internal metrics that we look at on a weekly basis.

With respect to growth, we clearly were encouraged here with the low single-digit growth in diagnostics that we are going to print or allude to here.

It's not yet part of the core for three quarters in a row.

I think that speaks to this business really getting back up on its feet.

No silver bullet there, Steve, but just a lot of different actions being taken to improve service levels, certainly the quality improvements help.

I think that, coupled with the new product introduction, the investments we're making in our sales and marketing organization, has us encouraged that this is a business that once fully up on its feet will be a real contributor to Danaher's overall core growth.

Great.

Within the businesses you mentioned, you used the term hairline fractures, and anything more specific than that you're seeing in your short-cycle businesses, and then how have things kind of started off here in July?

I would say that July is very much in line with what we were anticipating here, so we are encouraged by that.

Little harder to read, at least in the US, given that the Fourth of July holiday falling in the middle of the week.

With respect to what we were talking about in the second quarter, in the US, I think we saw some signs in and around life sciences, certainly in T&M, and to a lesser degree in Environmental where even businesses, even some of the businesses that were printing very good numbers here just had a little bit of softness, a little bit of, say, a forecast miss here or there where we were seeing customers hesitate to write POs.

In other cases, projects being pushed out a little more than we would have anticipated.

I think if we weren't so mindful of the headlines and the drum beat of negative news, it might be easier to say, that is just noise, but again, I think we will exercise a level of prudence here, and say, hey, the risks are probably on the downside.

Let's go ahead and take some proactive actions here that are the right things for the business, so that we continue to make the longer-term investments for the Corporation.

And then one last question.

Is there anything in the portfolio rationalization side where you are still opportunistic in selling things?

Is there anything that is out there that you are looking at that can either fund further acquisition on the balance sheet, but also it is a timing issue, where you can alternately offset this restructuring cost and the ForEx headwind with gains in the back half?

I know you don't play that game, but I'm not sure if there's anything you are looking at, left in the portfolio that's non-core?

We have done a fair amount of pruning in the last couple of years.

Given our joint venture, Cooper soon to be Eaton on the tools front in a business that had a very good second quarter.

In fact, sequentially, revenues rise $25 million.

Terrific fall-through, and it's $25 million sequential increase in revenues and a $10 million increase in OP sequentially Q1 to Q2.

That is something that obviously down the road, under the right situation, can be something that could be used for acquisition proceeds.

Okay.

Great.

Thanks.

We'll go next to Nigel Coe with Morgan Stanley.

Dan, if you could maybe, if you just talk about the core growth cadence, you've given some good detail already, but it looks like 2% to 3% in the second half the year is your planning assumption.

But your comps get much easier 4Q, so I'm wondering, how does 3Q look in your plan modeled to 4Q?

And if you could maybe then pass into that impact of Beckman Coulter rolled into the numbers in the second half of the year?

Yes.

Nigel, to be clear, I think what we will see here in the third is a slight downtick from where we were in the second.

Call that 2.5, 3, given what we know today.

I think we'll see in the fourth quarter step up from that, call it 3 to 3.5.

You are in a band where the first half is going to be in line with the second half.

Beckman does kick in.

It kicked in for the week, that was not meaningful in the second quarter.

It kicks in here obviously here forward, and has an ever so slight dilutive effect but at this point, given the performance we are seeing there, it is not much to call out.

I think what we're looking at again, I think in light of what we are seeing our not seeing in China, certainly the softness in T&M in particular in China and elsewhere, and just some concerns about the way the macro environment plays out in the second half, has us putting that outlook together.

But, one in which we think we can drive good market share gains in.

It doesn't sound like there is much changing, just from your comments, when you talk about some hairline fractures.

But the quarter, you are flat in Europe, you are flat in China.

Is the decision to restructure driven more by what you see on the macro side, or is there a bit more within the businesses, maybe from the book-to-bill ratios in June, that caused you to launch this program?

It is a judgment call.

Admittedly it is hard to describe for you how much of it is a view of what we are seeing internally.

How much of it is a function of what we see out window here.

But I think all-in, even though the comps do get easier, China will take a while to rebound.

I think the political dynamics there are more pronounced than we had perhaps anticipated.

That said, they are clearly engaging.

Europe is what it is and the US has been quite strong for us, but I think we want to make sure that come what may, around the world, we are still in a position to make the growth investments in the second half of this year and the first half of next year, amidst that uncertainly so that we are driving the company forward over the long haul.

That is what we have always managed.

We would like to think this is a prudent approach.

Some may call it conservative, that is fine to our ears.

I think at the end of the day, if things are better, we will obviously print better numbers.

Given what we know today and don't, this is the right thing to do.

On the 3Q guidance, does the bulk of the $0.06 delta on restructuring come within 3Q?

No.

It is more heavily weighted to the fourth quarter.

What you're seeing in the third quarter is primarily an FX dynamic, the euro peaked this time last year.

The year-on-year, we had about a $0.05 headwind and then actually even sequentially, we have about a $0.02 headwind between Q2 and Q3 given the dollar really didn't begin to strengthen significantly until June.

That, coupled with expectation of slightly lower growth sequentially and some restructuring, frames that we've got here for Q3.

Okay.

Thank you very much.

We'll go next to Jon Wood with Jefferies.

Thanks a lot.

Can you tighten up, perhaps, the view on Life Sciences and Diagnostics for the year?

You initially offered 3% to 7%.

Is it possible to get a better view on how the business shakes out for all of 2012 at this point?

I think that what we are clearly seeing there, Jon, is the softening in the spending drivers, particularly with respect of some of the government-funded dynamics.

I think, particularly as we look at some of our big-ticket products, new products, which you know well, in AB SCIEX and Leica, we are encouraged by these product launches, probably has hurt us a little bit, both with the new mass specs out of AB SCIEX and Leica with the new confocal given the timing, that I know we hung some customers up here in the second quarter, as they were evaluating and in turn placing orders on the new products, shipments to come.

But, I don't think the new product launches are going to be pronounced enough for us not to see some softening in the core in Life Sciences.

So I think Life Sciences and Diagnostics as a whole probably will be one of our leading segments from a growth perspective, but Diagnostics will clearly be the better performing business of the two as we look at the second half.

That is good color.

Thanks for the update on Beckman.

Just, if you look to the back half, and obviously with the Troponin submissions already in the FDA, assuming that goes according to plan, is it at the point where we can rule out flat number for Beckman diagnostics?

Would you expect that business to accelerate in 2013 given what you know today?

Well, certainly I think we've got a lot of the things within our control getting better every day.

That is obviously helpful.

There are still some factors where we are working with others to improve our ability to grow.

I think at this point, Jon, as we look at next year, I think low singles is probably what makes sense with respect to expectations, with mid singles being certainly within reach for 2014.

Very good.

Thank you.

We'll go next to Scott Davis with Barclays.

Can you talk about some of the deals you did this quarter?

You did eight, but really all we know about is X-Rite, and it seems like a pretty active deal book.

Just in context and maybe what types of multiples you are seeing?

Are they deals that are easy bolt-ons or generally accretive or dilutive?

Just a little bit of color around that.

I think by and large Scott, we would characterize the other deals here, absent X-Rite, as really bolt-ons where we're bringing on capability, bringing on distribution resources that bolt on in a clear, close, strategic way to existing businesses.

I mentioned a couple in the prepared remarks.

Certainly within Tech Coms where we have seen tremendous growth.

VSS gives us tremendous capacity to continue the monitoring capability that Tech Coms does with wireless carriers.

These network switches are part of a technology term where VSS is very well-positioned.

They will be working hand in hand with the Tech Coms business to make sure that around the world, we are taking their capability and putting it forward in front of customers in the best possible way.

We mentioned Catlow down at GVR as well.

The company we have known for a long time.

As we expand our vapor recovery offering, having that hanging hardware capability that they have is an important addition.

Kind of a classic Danaher bolt-on acquisition in that regard.

In terms of the multiple, I think is most relevant is given the size of X-Rite, and more of an adjacency-type acquisition, and we paid about 10 times trailing EBITDA there.

Given the cost take-outs, some of the public company costs that come out very quickly, we can scale that down very quickly.

Okay.

Excuse me, just get back to some of your macro view.

If you take some of your bellwether businesses, I always think about Fluke for example, and a couple of the industrial tech businesses, but Fluke I know has scale in China.

What do you see in emerging markets as it relates to the shorter cycle businesses and any bottoming that is going on there?

I think by and large Scott, that is a good -- certainly Fluke is a good barometer for us in that regard.

In fact, we've got 40% of our business in non-consumables that also gives a good pulse on some of the other POS data that we have.

They really can't at this point separate China from the rest of the emerging market basket.

I think what we have seen in China has really been, I think, evidence of the slowdown there outside of healthcare.

I am encouraged by that, while we don't like the fact that we have certainly have seen our non-healthcare businesses basically be flat to slightly down with T&M being down double digits, the healthcare businesses I think, because of the government's actions, purely with its rural healthcare initiative have been quite strong, in addition to what they're trying to do to establish an indigenous of life science research capability.

It is what it is.

I don't think that underlying business that we see in industrial and environmental, let alone in T&M gets materially better until late this year, early next year.

If I go to the other side of the so-called BRICKS plus, even though some of the headlines out of India and Brazil have not been particularly encouraging.

By and large, we are seeing a good consistent steady growth.

In many of those markets, we have modest positions.

The base that we are going off of is not that pronounced.

That is a good thing for us.

We are clearly getting our bearings and understanding how to play and compete in those parts of the world.

There is really no place else in the world right now, Scott, that we would say we are seeing this sort of broad softness, ex-healthcare, that we are seeing in China.

Okay.

Very good.

Thanks guys.

We will go next to Shannon O'Callaghan with Nomura.

In terms of margins, you've obviously taken a more conservative view on organic.

Are there areas that are tracking ahead of plan on margins?

Dental certainly looked like a strong spot.

I don't know if you have had a breakthrough there or maybe highlight that or some other areas you think that the margins are tracking ahead of plan.

Certainly Shannon, speaking of Dental, we are very pleased with that.

The first half performance all the way around, given the environment, could not have been better.

I wouldn't say it is a breakthrough though.

We have three years, looks like the fourth year in a row where we have steady margin improvement in Dental.

I think they know, even though they print 14.4 here in the quarter that there is plenty of upside still as we adjust to the cost structure and get quality growth out of that business.

So I, again, I think a lot of us remember some of the false starts that we had there way back when, but that now is something for the history books.

The trend that they are on here in the first half of this year is indicative of what that business and that team is capable of delivering.

I think the other segment that we've been particularly pleased would be the industrial segment where, on modest growth overall, good growth at PID, but a negative impact from the motion-related businesses that we have been able to sustain that 20% segment operating margin and see core operating margin improvement in this quarter to about 100 basis points.

Again, that's somewhat of a function of what we did in the fourth quarter of last year.

Another reason why we're teeing up some restructuring here.

We're also getting somewhat of a favorable price/cost dynamic in Industrial Technology as well.

We have about 1.5 points of price in that segment, and given some of the commodities, some of the recent declines in commodity prices, that doesn't benefit us a lot across the other segments, but it does definitely benefit us there.

Okay.

That helps.

On free cash flow in the quarter, the conversion was particularly strong the whole first half, but particularly in the quarter.

Was there anything unusual there, or how would you characterize that in terms of sustainability?

Well, we printed a little bit over $1.4 billion in the first half.

I think we are positioned to print a comparable number that here in the second half.

That would be probably a $400 million year-over-year increase in free cash flow, so that continues to track very well.

We did get a slight benefit versus last year.

We had higher tax payments in the first half and lower in the second half.

That will be a little bit different this year, they were low in the first half, they'll be a little bit higher in the second half.

But that's a small factor and overall, our working capital performance continues to be very strong.

We've got $350 million of amortization flowing through as well.

That continues to support that very high conversion ratio.

Which in turn, of course, is why we are optimistic and ready go on the M&A front.

We talk about what we have to spend here.

You think about $5 billion of firepower over the next couple of years.

If the environment does become a bit more uncertain, as we are clearly suggesting that it could, that just can't help but make the M&A environment more attractive to us.

But we are ready to go.

Sounds good.

Thanks.

We'll take our next question from Julian Mitchell with Credit Suisse.

Charlie Clark for Julian.

Just a real quick question on the restructuring.

If you could break down where you think where that is going from an operating segment standpoint?

Charlie, the $100 million in aggregate that we are flagging this morning will be well distributed across segments and geographies.

I think as you may know, when we talked about these actions at this stage publicly in the past, we have tried to not get into too much detail.

I think that we prefer to have the opportunity to talk to affected associates before we talk about any specifics publicly.

We will do that again here this year.

But, suffice it to say, obviously the bulk of our developed markets' footprint is where a lot of the structural cost in the corporation resides.

We'll be working hard in that regard, and some of the businesses that have lower relative margins today are probably the ones were there are a bit more upside and potential to improve our structural cost position in order to again preserve and protect those growth investments in the second half of this year and next year, which we think are really the long-term fuel for the organization.

Great.

And then, just real quick, SG&A to sales ratio, just seemed like it ticked up a bit quarter over quarter.

Just didn't know if you had any color on that?

Sorry, I'll have to look, nothing jumps to me off-line.

Okay.

I'll take a look at it.

We'll go next to Jon Groberg with Macquarie Capital.

On Tektronix or the instrument side of Test & Measurement, I think last quarter you highlighted that it had finally returned to a book-to-bill of over one.

Can you maybe talk about what happened there intra-quarter?

And then, maybe, the follow-up on the restructuring?

I know that is where you did a lot of restructuring back in the last downturn.

Is that a business where there is more you can still do, or not as much in that business?

Let me take them in reverse order.

There's always more you can do.

I think that is rooted within the DBS mindset.

We have done a lot, as Dan was mentioning earlier, having done it all over time, that's one reason we have such high margins at T&M and why we will feel that effect of the revenue softness in the second half.

I think we prefer, again, not to get too specific here, in mid-July, we will keep you posted as we talk to associates through the second half, but suffice it to say again, we will be looking at everything as we get ready for the final implementation of this plan.

With respect to what we saw through the quarter, the book to bill at Tech was positive in that regard.

Positive in terms of being north of 1.0.

I think what we've seen is that intersection between pronounced softness in China particularly, Europe to a lesser degree, and just a hesitancy, perhaps a much more subdued investment level on the part of customers at least temporarily here that have us, looking at the second half, in line with what we saw with the first half, where T&M is not going to be the growth leader for us, particularly on the instrument side, that we have seen in years past.

Just to clarify the second half, given the macro indicators that we see, you expect on the instrument side similar to the first half?

That's what you said and you said communications though with the comps would be slightly -- would make the overall number slightly lower, right?

That will be more pronounced in Q3.

We then think we'll see sequential improvement in Q4.

We're talking instruments.

Instruments, right.

And again, I was out here at AACC as you alluded to, and it's clear on the Diagnostic and on the Life Science side, that all of your customers going to be under much more pressure from a reimbursement standpoint or funding standpoint.

Now that you've owned those businesses for a while and you've moving into this period, I'm just curious, does your strategy change at all?

How are you thinking about those businesses given the constraints that a lot of your customers are going to be under?

Well, I think that those constraints are not dissimilar from the realities that we anticipated when we made these relative investments over time, particularly with Beckman last year.

I continue to think on the Diagnostic side, Jon, what we do from a scientific perspective is provide information at the front end of care, which can't help but be part of the solution long-term to some of these macro pressures that all payers, government or otherwise, are going to see.

I think on the Life Science side, what we are well-positioned to do is skate to where the puck is, if you will, and not necessarily be tethered in a broad-based way to overall spending.

What we do at AB SCIEX in mass spec, what we do at Leica with confocals, very much is targeted to the higher growth, the higher interest, the higher impact areas and categories where research work is being done.

I think if we can continue do that strategically, we will be mindful of the macro pressures and any austerity or budget effects that affect our customers.

I think we will be well-positioned to take, if you will, our fair share of those overall budgets because the value we will be providing our customers.

I recognize you do not want to give specifics in terms of where you do the restructuring, but in that environment, is there a need, maybe, as you've looked at it, to be more cost effective than maybe you initially thought or is that -- is everything you're seeing so far, even with some of the cracks that you mentioned, is everything in line with your expectations?

It's more about trying to find the values you just alluded to on the revenue side?

I think if you look at Life Sciences and Diagnostics here in the quarter, they were our star.

Right?

We are flagging that the Life Science environment, at least in the short-term, probably gets a bit more challenging for us, but, that said, I think anything that we might do in Life Sciences and Diagnostics is really a function of the opportunities that we see to improve the overall cost structure much as we have at Beckman, [400] basis points over the year.

Much as we've done at AB SCIEX over the last two years where, I think we have been able to improve the cost structure while improving the overall operation of the business and clearly increasing the investment envelope up there for new technology and being a more serious player from a sales and service view globally.

So, I think what we are suggesting here this morning is really borne of a global macro view and a desire to have more control over our destiny in a more uncertain world, and not really a direct or indirect tie-back to some of the long-term pressures that you are alluding to.

I think there are long-term opportunities embedded there as well which we're strategically very keen to go take advantage of.

Okay.

Very helpful.

We'll go next to Terry Darling with Goldman Sachs.

Couple quick follow-up.

First on assumed conversion margins in the second half.

A lot of moving pieces in the overall margin picture, but the core conversion assumption still around 30% to 35%?

Sure.

Terry, we were about 35% in Q2 when you factor out the acquisitions and the FX impact.

We should be in that zone here and again, the one segment will be challenged here will be T&M, as we expect that segment to be down, tipping the third quarter that was less of a comment about the fourth quarter, where we expect to be down in the low single to mid single digits in terms of growth and expect segment margins to be down a couple hundred basis points sequentially.

But outside that, the other four segments should be in that 35% zone.

Then maybe I missed it in the detail, but did you or could you give either the Beckman core on a stand-alone basis and Q2 or what Life Sciences core including Beckman would have been?

Life Science -- Beckman all-up was up low single digits in the quarter.

Great.

And then you have been very clear on capital allocation near-term and the focus is on the M&A pipeline.

I just wonder, given the shift in the world if you will, number one, number two, looking at your relative valuation versus the peer set versus where it has been historically, I wonder if there's a point in which stock buyback starts to become an option that you entertain more seriously?

And if not, under what scenario could you see that occurring?

I'd say this, from time to time, as you well know, we've been opportunistic buying back shares.

But I think our bias today is consistent with our long-term bias, and that is to redeploy our free cash by way of M&A.

Obviously, it is something that we and the Board constantly evaluate.

But our long-term bias, I think is very much intact as we look forward.

I just wondered if there is some additional color on the pipeline from the standpoint of size.

I think it is been pretty clear that we ought to be anticipating bolt-ons versus anything large, but I wonder if something may have changed there.

Secondly, I think the indication had been previously that maybe you were seeing more things outside of the life sciences area, and has that changed at all?

Things have largely outside the Life Science and Diagnostics space over the last two to three quarters.

I think we expect that to continue, but we will probably, now that we're a year post-Beckman, we'll start to look at bolt-ons for that space as well.

Given where we are from a capital structure, we paid down our net debt down almost $2.5 billion over the last 12 months.

I think we are geared back up beyond just looking at bolt-ons.

Whether it is adjacency type deals like X-Rite, or ever larger deals, I think those are all being considered right now.

Given the macro environment, obviously that creates some uncertainty in the marketplace.

And on Wall Street that tends to be good for people like us.

We are optimistic we are going to be able to put the money to work here.

That is good color.

Thanks very much.

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

Going back quickly on the restructuring.

I might've missed this, but can you address with the assumed paybacks are?

The timing on the incremental restructuring initiatives here?

We would expect to complete this $100 million of restructuring by the end of this year and would expect a slightly north of a one-year payback, in the ballpark of a $75 million benefit next year.

So that would be $75 million on a run rate basis for 2013?

Is that right?

Right.

And I know you don't typically call out the book to bill, it got called out in the first quarter because of the timing of some of the orders and later shipments, but how did that resolve for this quarter?

How did book to bill end up for the second quarter?

It was slightly north of one, but basically one.

Okay.

Last question.

You alluded to some growth investments.

Oftentimes when you see companies that are facing uncertain macro, there's pull-back in growth investments.

Can you just talk about what areas, the magnitude, and whether be a sense of throttling back or are these committed resources?

I think a throttling back is what we are trying to avoid.

I think if we were not taking the actions here in the second half, given the macro uncertainties, we might be dialing back some things on the margin which, frankly, are sometimes the easiest thing to pull back on when things are getting tighter or more uncertain.

But, by the same token, the very things that you ought to protect in tough times.

I think what we want to do is make sure we are taking out the structural cost that we can in a good year here to make sure that, come what may, the go to market investment that we are making, be that in emerging markets, be that with respects to digital marketing, let alone, the science and technology bets that we are making in new product development, are protected and in some cases, increased.

Great.

Thank you.

This will conclude our question and answer session.

I will turn back to Mr. McGrew for closing remarks.

Thanks, everybody.

Dan and I are around all day for follow-up.

Ladies and gentlemen, thank you for your participation.

This concludes today's conference.

Have a great afternoon.