Danaher Corp (DHR) 2012 Q3 法說會逐字稿

Good morning.

My name is Deeana and I will be your conference facilitator today.

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

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

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

(Operator Instructions)

I will now 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, and our third-quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investor section of our website, www.Danaher.com, under the heading Financial Information and the subheading Quarterly Earnings, and will remain available following the call.

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 available until our next quarterly call.

A replay of this call will also be available until Thursday, October 25.

The replay number is (888) 203-1112 in the US and (719) 457-0820 internationally, and the access code is 9404363.

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

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

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

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

It's possible that actual results might differ materially from those projected in any forward-looking statements, and additional information concerning factors that 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 that they are made and we do not assume any obligation to update our forward-looking statements, whether as a result of new information, future events and development, or otherwise.

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

Hey, Matt, thanks, and good morning, everyone.

Given what was clearly a difficult operating environment during the third quarter, our team did an outstanding job on the execution front, with a 100-basis-points increase year over year in our core operating margin and a 50% year-over-year increase in our free cash flow during the quarter.

For the first time in the Company's history, our trailing four quarters of free cash flow exceeded $3 billion.

We grew 1% organically in the quarter, with sales in Western Europe declining at a mid-single-digits rate and the US modestly negative, both of which were slightly below our expectations.

Despite these macro pressures, we successfully protected our organic investments and stayed active on the M&A front, announcing $500 million of new acquisitions.

In addition, during the quarter, we purchased approximately 5 million shares of Company stock at an average price of approximately $52 per share.

We saw the positive impact of DBS on growth in a number of our businesses, including Esko, Leica Biosystems and Hach.

Especially in this environment we are focusing our efforts on capturing market share.

In the quarter, DBS helped to accelerate new product introductions across many of our businesses and, coupled with our go-to-market initiatives, drove share gains at Videojet, ChemTreat, Tektronix Communications, Radiometer, and Kerr to highlight a few specific operating businesses.

Geographically, the emerging markets grew at a double-digit rate in the quarter.

China was also up low-double digits, though sequentially we did not see any improvement in industrial end-user demand.

Healthcare remains a bright spot in China with our Dental and Life Sciences & Diagnostics businesses growing in excess of 20% in the quarter.

Turning to the details of the quarter, today we reported record third-quarter diluted net earnings per share of $0.77, a 7% increase as compared to our adjusted diluted net EPS last year.

We delivered this increase in earnings despite the fact that quarterly revenues declined slightly to $4.4 billion, due to the negative impact of currency translation, which reduced sales by 3%.

Core revenues grew 1% and the impact of acquisitions increased revenues by 1.5%.

Our gross margin for the third quarter was 51.6%, and our reported operating margin expanded 260 basis points year over year to 17.1%.

DBS remains the key driver of our outstanding cash flow performance.

Third-quarter operating cash flow was $975 million, a 42% increase year over year.

Free cash flow for the first nine months of 2012 was $2.3 billion, up 37%.

And our free cash flow to net income conversion ratio for the first nine months of the year was a robust 140%.

Across each of our growth platforms, we are active and optimistic on the M&A front.

Through the first nine months of the year we've already deployed more than $1 billion of capital on 10 acquisitions and have reached agreement to acquire two additional businesses for another $500 million this quarter.

Subsequent to quarter end we announced the pending sale of Apex Tool Group, our strategic joint venture with Cooper Industries, to Bain Capital for $1.6 billion.

We expect the sale to generate after-tax proceeds to Danaher of approximately $650 million and to close in the first half of 2013.

The transaction is expected to be diluted to 2013 net earnings per share by approximately $0.08, until we redeploy that capital.

The transaction remains subject to customary closing conditions, including regulatory approvals.

Turning to our five operating segments, Test & Measurement segment revenues declined 5% in the quarter, with core revenues down 6.5%.

Core operating margin for the third quarter decreased 320 basis points, while reported operating margins declined 390 basis points to 20.1%, primarily a result of the lower sales volumes in our Instruments businesses.

Instruments core revenue declined at a low double-digit rate.

At Fluke, core revenues were down double digits.

While demand there was healthy in Latin America and in the Middle East, it was more than offset by continued weakness in other geographies, primarily China.

Despite the difficult environment we continue to protect and nurture the growth investments in the business, and in the quarter expanded the range of Flukes's front-line industrial maintenance and troubleshooting tools with the launch of the 805 Vibration Meter.

At Tektronix, core sales declined at a mid-teens rate, with further weakening globally across the business.

Tektronix recently introduced the next phase in our award-winning MDO product portfolio, the MDO4000, a lower price-point model of our all-in-one oscilloscope and spectrum analyzer targeting design engineers across a broad range of applications.

Core revenues from our communications businesses grew at a mid-single-digit rate in the quarter, driven by demand for Tektronix Communications mobile network management solutions in North America and China.

We expect core growth rates in our communications businesses to decline in the fourth quarter, primarily due to the timing of a large carrier project from last year that is winding down.

Demand for our network security systems is particularly strong in light of recent high-profile DDoS attacks.

As a result, Enterprise customers across many sectors are seeking to fortify their network security defenses.

Turning to Environmental, revenues increased 2.5% in the quarter with core revenues up 3.5%.

The segment core operating margin increased 70 basis points in the quarter, with reported operating margin essentially flat primarily due to the dilutive effect of recent acquisitions.

Water quality core revenues increased at a low single-digit rate in the quarter.

Hach core revenues grew mid-single digits, with solid demand in all major geographies and across most verticals.

Municipal spending for our core lab and process instrumentation was up low single digits globally.

Hach remains focused on expanding its service capabilities, doubling its service revenues as a percent of sales over the last several years.

Today, consumables and service represent 55% of our water quality group's total revenues.

During the quarter, we acquired [Bingley], a Chinese distributor of online water quality instrumentation.

This is our first water quality acquisition in China and provides Hach with both engineering and integration capabilities, which will help drive growth in our process business.

The third quarter marked ChemTreat's ninth straight quarter of double-digit core revenue growth.

Our best-in-class sales force initiatives continue to capture market share with several new account wins during the quarter.

Charging core revenues declined in the quarter as municipal spending for capital equipment remained weak.

Gilbarco Veeder-Root's core revenues grew low single digits led by robust demand for our dispensers in Latin America, driven by anti-tampering security regulations in Mexico.

In addition, the Encore 700, our highly flexible EMB ready dispenser designed to support security upgrades for credit and debit cards in North America, which we launched at the end of last year, continues to see strong adoption and now represents over 30% of Gilbarco's US sales.

CSP Magazine, a convenience store trade publication, recently awarded Gilbarco their 2012 retailer choice Best New Product in Technology category for its Applause TD dispenser which enhances customer loyalty and increases store traffic.

During the quarter, Gilbarco acquired ACS group, an Eastern European provider of products and services to the retail and commercial petroleum industry.

Moving to Life Sciences & Diagnostics, revenues for the quarter decreased 3% due to the impact of currency exchange rates and a small divestiture.

Core revenues were up 2.5%.

Core operating margin for the segment was up 320 basis points, while our reported operating margin increased 890 basis points, from the prior year, to 12.2%.

The Diagnostics businesses continued their strong performance with mid-single digit core growth in the third quarter.

Radiometer's core sales increased at a high single-digit rate with growth in all major geographies and solid placements at both our core blood gas instruments and our new AQT immunoassay analyzers.

AQT unit sales were up more than 25% from a year ago.

During the quarter, we received an order from a large German dialysis company to place 250 ABL 90 blood gas analyzers in clinics throughout the country.

This contract runs for five years and is expected to result in over 1 million tests per year.

Leica Biosystems sales increased at a mid-single digit rate, with advanced standing in core histology sales up low teens and mid-single digits, respectively.

Growth was balanced geographically with North America, Europe, and the emerging markets all contributing.

At the National Society for Histology convention in Vancouver this month, Leica Biosystems showcased six new products, the most of any presenting company at the show, further emphasizing our commitment to innovation.

One of the products we debuted was the Bond Advanced software package, which allows multiple advanced-standing instruments to run from one central control panel, thereby increasing efficiency for busy lab technicians.

As we discussed at our Leica Investor Day last year, digital pathology is an increasingly important element in the path lab, as advanced standing is driving therapeutic treatment options and increasing the need for more advanced image analysis.

So, during the quarter, we were pleased to announce the pending acquisition of Aperio Technologies, a leader in this market with a full range of process covering scanning, managing, viewing, and analyzing images.

The combination of Aperio and Leica Biosystems strengthens our position in digital pathology with considerable innovation and go-to-market synergy potential to serve doctors and patients better and to fuel strong organic growth.

We were pleased with our progress at Beckman Coulter, where DBS has made an impact on many facets of the business, including new product introductions, sales and marketing, and quality all the while improving the overall cost structure.

Diagnostics again grew at a low single-digit rate organically, the fourth consecutive quarter of low single-digit growth.

While modest, the sustained growth we've seen over the last year has encouraged us that this business, once fully up on its feet, will be a strong contributor to Danaher's overall core growth.

Beckman's launch of the AU5800 series, a new high volume clinical chemistry analyzer, while still early, is going well with encouraging initial customer feedback.

As production and placements ramp over the remaining of the year, we expect the 5800 to be a key driver of growth in 2013 and beyond.

During the quarter we announced the pending acquisition of IRIS International, a leading manufacturer of automated in vitro urinalysis diagnostics systems and consumables.

IRIS's well-respected brand and market position provides an attractive entry point into this vast growing IBD segment.

This transaction is expected to close before year end.

Our Life Sciences businesses core revenues declined low-single digits in the quarter.

AB SCIEX core sales grew low single digits in the quarter with particular strength in China.

We began shipping the 6500, our most sensitive triple-quad system, which we launched at AFMS in June.

The 6500's ability to increase our customers research and experimentation capabilities has resulted in very good feedback from initial users, and we expect shipments to increase through the balance of this year.

Leica Microsystems core sales declined mid-single digits in the quarter with soft demand in North America and Europe as the pace of activity slowed across a number of customers.

Earlier this year we debuted the SP8 modular confocal laser scanning microscope, a truly innovative new technology.

We began shipments late in the second quarter and expect to see a ramp over the next several quarters.

In Dental, revenues for the quarter decreased 1% due to the adverse effect of currency exchange rates.

Core revenues were up 3%.

Core operating margin increased 90 basis points and reported operating margin increased 100 basis points, to 15.5%.

We were pleased both with the team's execution and the relative stability of the overall dental market.

Dental consumables core revenues grew low-single digits in the quarter, led by sales for our general dentistry consumables and orthodontic solutions across all major geographies.

Our Kerr brand continues to take share as a result of a robust new product portfolio and strong commercial execution around the world.

Dental equipment core revenues increased low-single digits in the quarter with growth in instruments and equipment.

This month, we launched the KaVo E30 treatment unit, an extension of our successful E70 and E80 lines, which allows doctors to flexibly match their treatment units with desired instrumentation.

We are quite happy with our performance in China as our combined equipment and consumables go-to-market initiatives resulted in another quarter of double-digit growth.

These joint efforts in China are a model for our dental businesses globally as we accelerate their emerging market penetration.

In Industrial Technologies, total revenues increased 5.5% while core revenues were up 1.5% for the quarter.

Our core operating margin increased 120 basis points while our reported operating margin declined modestly to the 21.8%, primarily due to the impact of recently acquired acquisitions.

Brock Identification core revenues were up low-double digits in the quarter with growth across most major geographies.

Sales of Videojet CIJ printers were particularly strong, up greater than 10% in the quarter.

We launched the Videojet 3020 laser coder, an entry-level laser for marking and coding applications in the consumer package goods and industrial products markets.

At Esko, core sales grew more than 10% in the quarter with strength across all major product categories.

The consumer packaged goods industry continues to look for Esko to help fulfill their packaging design needs, which help drive mid-teens growth in our software business in the quarter.

Despite the economic headwinds in Europe, Esko's sales there grew high-single digits due to a healthy order book following the Drupa trade show in the second quarter.

X-Rite, our largest acquisition year to date, is off to a solid start with several new products set to be introduced here in the fourth quarter.

Collaboration between X-Rite and Esko has already begun, with both teams excited to leverage opportunities to work together.

Our Motion businesses core revenues declined at a high-single digit rate in the quarter with weakness in most major geographies.

We continue to see softness in industrial automation, engineering solutions, and technology markets across most major geographies.

We expect core sales to improve in the fourth quarter, in part due to easier year-over-year comparisons.

So, to wrap up, our team continues to execute well.

While the impact of DBS is evident in the share gains we saw across a number of businesses, clearly the macroeconomic headlines are having an impact on our growth.

We're mindful that the operating environment is likely to remain challenging going forward, and as a result we are increasing our previously announced 2012 anticipated restructuring efforts from approximately $100 million to approximately $120 million.

We believe our strong recurring revenue base, now 40% of total revenues in our efforts to reduce our structural costs along with the margin expansion opportunities present in our newer businesses and investments in growth initiatives, should position us well for the balance of 2012 and beyond.

We are initiating fourth-quarter diluted net EPS from continuing operations guidance of $0.80 to $0.85, as well as adjusting our full-year GAAP diluted net EPS guidance from $3.19 to $3.26 to a new range of $3.14 to $3.19.

The midpoint of our revised GAAP EPS guidance would result in approximately 12% year-over-year growth compared to 2011 adjusted EPS of $2.83.

We are assuming fourth quarter 2012 core revenue will be similar to what we've seen in the third quarter.

Thanks, Larry.

That concludes the formal comments.

Deeana, we are now ready for questions.

Thank you.

(Operator Instructions)

Shannon O'Callaghan, Nomura.

Larry, so the US going a little bit negative, how much of that surprised you and maybe talk about some of the key drivers and what you think is behind that?

Yes.

I think that we wouldn't isolate, Shannon, the US.

I think it was really from a geographic perspective, both a US and a Western European dynamic here.

I think we've said for many years that the third quarter is often about September, certainly given the weak summer that we and others saw that was all the more true here in the third quarter.

We saw an uptick in September.

We just didn't see a big enough uptick relative to expectations.

And again, in real contrast to the high-growth markets where we saw that low double-digit growth.

I think when you look at it from a product perspective it's interesting because from a consumables, we're pretty much right where we thought they'd be.

We thought they'd be around 4% core.

They were.

Again, that's about 40% of our overall revenue.

I think where we saw the swing was really in the bigger ticket capital purchases where I think we had pegged the US and Europe to be up slightly and it ended up in both places being down slightly.

Again, as we indicated in our prepared remarks, Shannon, it was principally in instruments, Fluke and tech.

Certainly saw that in Motion where we're serving bigger ticket capital investments.

At Trojan, we saw things soften and push out again, kind of big-ticket muni spending.

And in Life Sciences we saw some of the academic and government spending pressures to a degree.

So we're really talking about a couple hundred basis points of a swing there around if you will Western market capital spending.

And as your launching new products, things like AB SCIEX and some of the things that have come out, are those kind of initial launches not what they used to be and what are you hearing from customers in terms of any deferral?

Is there interest but they're saying check me again in three to six months?

What's the nature of the feedback?

I would say with the new products and particularly in Life Sciences, we really couldn't be better positioned.

I think if you look at SCIEX for example we continue to ramp around the new products, particularly the 6500 on the high end, the 4500 in the mid-price point range.

Talked about the new confocal at Leica, the SP8.

So those conversations, they couldn't be going better, Shannon.

I think that's why we're alluding to these shipment startups and these ramps around products that we really put out in the market in the first half of the year.

Those, by and large, have been good conversations.

I think it's more, if you will, that the bread and butter products and programs where we've seen some of the pressure that we're alluding to, again primarily in the US and in Europe.

Okay.

Great.

Thanks a lot.

Innovation, quickly in Life Science research is the name of the game and fortunately I think we're in a good position in that regard.

We just have got to get a little bit more time behind us to get these products ramped.

Got it.

Thanks, guys.

Steve Tusa, JPMorgan.

Can you talk about what's going on in Life Sciences?

I guess the little bit weaker performance there and the margin is also a bit of a disappointment.

Is there anything specific that we should watch out for that's going to be part of this restructuring over the next few quarters that you would expect improvement on there?

Well, let me break it down in terms of the top line margins and restructuring.

If we start with Life Sciences again, Life Sciences group was down low-single digits.

I think a real contrast to the mid-single digit growth we saw in Diagnostics, which continued to be very strong.

I think with AB SCIEX and with Leica, which are the two engines there of course, we saw academic and government spending be more muted here in the second half than we were anticipating.

And we've seen that in the wake of some of the austerity, some of the sequestration concerns that are out there.

As we ramp some of these new products, we'll get some benefit to offset that more modest spending environment.

But I really think that's largely what we're talking about here, Steve, in terms of what we're seeing in Life Sciences.

It's largely a Western dynamic.

I think we help ourselves a good bit as we get these new products out the door.

But again as we flag a fourth-quarter growth rate in line with what we've seen here in the third, it's in part due to a view that the spending environment in and around some of these bigger ticket items will be less robust in the short term than it would normally be.

And why does that get that better?

Isn't there a risk that that gets actually worse if these guys don't get together and get something done here in the near-term?

Isn't that kind of -- what's kind of the worst-case for that related business for next year in case something happens here with the cliff that's coming up?

My view, Steve, and this may be one of the few times will get the benefit of being here in Washington, talking to a lot of the folks out at NIH, up on the Hill.

I think regardless of how the election plays out, regardless of which party's in charge, I think there is a view that the US, much like China, [our company] needs to invest in life science research -- it's the right thing to do, it's a source of national competitive advantage.

So I don't think we worry so much about the long-term worst-case, I think what we're seeing is more temporary given the strategic long-term interest that these customers, be they government or non-government, have in mind.

Again, to the earlier question, as we continue to fuel innovation, like the 6500 and the 4500 at SCIEX, the SP8 at Leica, Navios at Beckman in flow cytometry, I think we'll be well-positioned to take share of the spending that is led out there around the world.

Right.

But I guess as you contingency plan for next year, is this a business that could possibly be down double digits in a worst-case scenario?

I don't think that is in our planning scope at this point, Steve, in any way, shape, or form.

Okay.

And one last question just on you guys buying back stock, just maybe what's -- how did that decision -- how did you come to that decision and does that reflect on perhaps a lack of acquisition opportunities out there?

Historically you guys have been pretty good buyers of your stock and it's performed well after you've bought it.

Just curious as to with such a lack of visibility out there on the macro, why step up and do it now?

Steve, I think clearly the bias is to that M&A side.

As Larry alluded to, we've spent about $1.5 billion year to date on M&A.

The buyback represented about one-sixth of that amount.

But as you pointed out we do periodically go and buy back some stock.

You'll remember we issued about 20 million shares last year, so it was an opportunity to bring some of that stock back in and in terms of -- hard to read EPS within a couple cents, that's not really how we look at the buyback.

We look at it on a cash basis so we issued the stock last year at $52.

At that point our free cash flow was about $2 billion, $2.1 billion and we were able to buy that stock back at an average price of $52 and right now our free cash flow is $3 billion up 40%.

So it just seemed like a good investment and a good opportunity to take some of that stock back but clearly the bias is on the M&A side.

Okay.

That's a lot.

Thanks, Steve.

Deane Dray, Citi Research.

Good morning, everyone.

For the expectations on the M&A side, I know we've talked about the interest in rebalancing the portfolio more towards -- lowering the Life Sciences, Dental, med tech to closer to 40%.

Iris came up--it looked like a nice tuck in for Beckman but how are you thinking about the mix versus what you look in the funnel of potential M&A opportunities?

Deane, let me hit on three points.

First, I think the intent today is just as you described it.

I think we would be very keen to put the next $1 billion, $2 billion, $3 billion to work predominantly outside of Life Sciences and Diagnostics and Dental.

I think as we look forward, we want to maintain that balance.

We think that serves the Company and shareholders very well.

I think as you look inside the funnel to your specific question, we are active in a whole host of areas in that regard.

So I think we continue to be optimistic per Dan's comments a moment ago that we'll be able to deploy capital in that direction and in a serious, meaningful way.

The third point I'd make is that certainly, as you can appreciate, Iris coming on board is a wonderful addition.

Your analysis is one test modality that Beckman is not in today.

I think Iris, through our global distribution channels, will be a significant contributor going forward.

Clearly, digital pathology is a core trend in the future, in and around one of our most successful businesses.

That being Leica Biosystems.

If Leica can come anywhere close to doing in digital pathology, with Aperio, what they were able to do with vision systems and advanced staining I think we'll be very happy.

That said, let's keep in mind that as you step back on the spend here in 2012 or at least the commitment, we're talking about $1.5 billion and I think just over $1 billion is outside of Life Sciences and Dental.

So we're very happy with what we've done with X-Rite and Product ID we've made some important additions to the communications business at Tek Coms, and so forth.

So I think the intent is as it was.

I think the funnel is in good shape.

If you look at the body of work so far this year, a couple of nice Life Science additions to be sure, but I think you see that intention very much playing out with the capital decisions we made.

Great.

And just as a follow-up and since we're on the topic of the M&A funnel, and you and I have spoken about this before, but I'd just like to hear an updated thought process about Danaher's potential interest in specific software-as-a-service type of businesses.

And clearly so much of Danaher businesses today already have embedded software, whether it's ESKO or Tek Communications.

But are there opportunities for Danaher to look into specific standalone software-as-a-service and what would be the mindset and valuation expectations for those types of businesses?

Well, Dean, I think the short answer is yes, because as you rightly point out, whether it's what we've seen at ESKO, what we're increasingly doing at Tek Coms, software is not only a critical component of the value we create for our customers, but the business model around how we deliver that value are evolving.

And whether it's software-as-a-service or some of those other web-based or cloud-based models, I think you're going to see that being of increased importance and thus interest to us.

I suspect you can see us approach this not only inorganically, but organically as well.

We are a week away from completing our strategic plan reviews for all the businesses.

This was a common theme of opportunity as we look to extend our hardware or equipment based value props in just a whole host of places, some of which actually might be quite surprised to see.

In terms of valuations obviously the valuation framers we've talked about in the past are going to hold here.

I don't think in any way we would see different business models really requiring us to depart from, frankly, some old-school math in terms of cash-on-cash returns, but as we've seen thus far, as we look forward, we think we'll be able to do that.

So I don't think you'll see 10 of the next 10 deals be SaaS-based transactions but clearly that's the way the world's moving.

And those sorts of additions to the portfolio will be strategically important and I think value enhancing along the way.

Great.

Thank you.

Jon Wood, Jefferies.

So, Larry, thanks for the update on the Beckman top line experience there.

Could you offer us an update on how the margin trajectory looks for that business, as well as cash flow?

Just where you are from a synergy perspective and how you're tracking relative to the plan you laid out at the December analyst day?

John, this is Dan.

I'll lay out a few facts and I'll let Larry add a little bit of color.

We continue to track quite well.

Up 400 or 500 basis points year on year.

We will do the $120 million of restructuring in the fourth quarter.

It will be broad-based but Beckman and others will clearly be part of that and we expect some additional opportunity from that as well in terms of higher margins going into '13.

As you know in the procurement side and regulated industries, things can take longer.

That was part of our plan.

We're making progress there again.

You'll see some of that benefit.

So we clearly will achieve the $250 million of cost savings that we thought we would have in '12.

And believe there's another $100 million of costs to come out and margin improvement between '13 and '14.

So I think were pretty well positioned.

From a cash flow perspective it's been terrific.

We've taken out about $175 million of capital out of the business through the first nine months of the year.

That's on top of a pretty large number the second half of last year.

So cash flow at Beckman has just been extraordinary.

John, I would add to that that clearly as you well know the foundation of that strong initial financial performance is what we're doing from a quality and from a service perspective first and foremost.

We've had a number of the key facilities, Brea, Chaska, re-inspected without incident.

Very encouraged by that.

Obviously we've got the components submissions into the FDA.

We were out a fair bit over the last six, seven weeks for some strategic reviews.

We had the Board out in fact.

Just a core DBS implementation around service calls and past dues.

Service calls for example -- unscheduled calls down 20% from a year ago.

Just a lot of good improvements that we see in our metrics there that customers are beginning to see.

In the prepared remarks we flagged the progress we're making on the growth side.

Again we're not going to try to get too far ahead of ourselves but encouraged by what we're seeing, not only in retention, but increasingly the at-bat opportunities we get for new business where we are not the incumbent on the back of some of these improvements.

And as we get outside of the US and we get outside of Western Europe clearly the high-growth markets continue to really contribute to the overall performance that we're seeing.

We had for the first time all of the Diagnostics businesses together out in Brea looking at some of the strategic synergies both top and bottom line.

That was a great week to have radiometer and Leica Biosystems in addition to Beckman together.

So we're excited about where we are, but I'd say all the more excited about the future in and around Beckman and the Diagnostics Group.

That's great color.

Thanks a lot.

Jeff Sprague, Vertical Research Partners.

Just a couple random things here.

Back on margins, Test & Measurement, the decremental seemed very severe there.

Was there something particular going on with mix or restructuring or something in the quarter?

Can you just elaborate a little bit more there?

The reported -- if you just look at the base numbers, it was almost 100%, but if you strip out acquisitions and FX, it was 60%, still a high VCM on that.

It is our highest gross margin business and our highest VCM business.

Clearly we're doing some restructuring.

We'll do more restructuring here in the fourth quarter.

That's an element of it.

We are also sustaining investments across a number of our T&M businesses, so I think as we get through some of the restructuring here, in the second half, that VCM degradation will decline and again, I think we are of the view that this is not going to be as pronounced a downturn as we saw a couple years ago.

But you are expecting the business revenues declining into the fourth quarter again?

We are.

Yes.

And just back to the questions on Beckman, so you're getting a lot of year-over-year margin improvement, but did the margins improved sequentially?

Obviously the segment overall did have organic growth, although you have some weak spots, but the margins were down sequentially in the segment aggregate.

Yes.

We were down I think 80 or 90 basis points.

There was a little bit of -- there was a write-down of an investment that Beckman had made prior to our acquisition that impacted margins a little bit in the quarter.

And the biggest impact on margins is the fact that Life Science was down not only at Beckman but broad-based we were down at LSD, so our Diagnostic margins were up year on year but the sequential decline was really driven by Life Science where the core growth was negative.

And just on the restructuring, Dan, do you expect to get dollar for dollar payback next year or does it spread into '14?

How do we think about that?

$120 million, we should get about $90 million payback.

And maybe we don't get all of that in Q1 but by Q2 we think we'll be fully ramped on that.

So we'll get the 95% of that here in '13 is our expectation at this point.

Okay.

And then just finally, is there a desire to retire that entire 20 million shares that are related to the Beckman deal?

I'll give the same answer as M&A.

We don't have a plan there.

We will continue to look at it periodically and opportunistically.

Okay.

Great.

Thanks a lot, guys.

Nigel Coe, Morgan Stanley.

Wanted to focus on a couple of the bright spots first.

First, the free cash flow was exceptional.

And since -- from your comments Dan, a lot of that was due to Beckman Coulter.

I'm wondering how much of that 130 or so of conversion was driven by -- has been driven by Beckman Coulter this year?

If you look at our nine-month performance, where our free cash flow to continuing net income is about 140%, if I took away the $170 million of capital we've taken out of Beckman, it would still be 130%.

Even if -- say we are three years from now, we're not going to get $170 million but we still expect say, $50 million.

But if I take that all and put it on the sidelines we'd still be at 130% conversion.

We're seeing broad-based very good cash flow across our businesses.

Okay.

So the message is more to come from Beckman but perhaps not $170 million?

Right.

Okay.

And, Larry, how do we think about China here because China was up low double digits versus pretty flat in 2Q?

Do you feel that double-digit is sustainable from here?

Well, I think, Nigel, we're more the beneficiaries of easier comps right now, than we are any pronounced pickup in China.

So we're thrilled to be back printing double-digit deltas here.

I suspect we'll be close to being able to do that in the fourth quarter again, but I think until we get into '13, until they're on the other side of at least their transition, perhaps pulling a few more policy levers than they've pulled this year, I think that's really going to be the dynamic -- the comps will make us look better but we'll be fighting for business virtually everywhere.

The export base there as you know is soft and part is a function of the their exposure to Europe.

We feel that probably most in Instruments, particularly at Tektronix and probably to a degree in Motion.

We're very pleased again with both Life Sciences and Diagnostics as well with Dental.

Don't really see any reason that that would, in a pronounced way, slow.

And we would expect given the five-year targets, for that to be another highlight in '13.

But otherwise I think we're probably certainly like many others of the more cautious view in the short-term relative to China, certainly in contrast to perhaps where we were in the springtime.

Okay.

That's helpful.

And then may be just finally could you help us think about 4Q in terms of -- obviously September was a bit softer, but how does that flow-through into 4Q especially given that we've got some tough comps coming up in 4Q?

And then on top of that, we normally see a pickup in margins in Life Sciences and one or two other businesses.

Should we expect to have some of that normal seasonality coming through?

Maybe on the Life Science, we're going to have -- they're going to get their fair share of restructuring in the fourth quarter in Life Science Diagnostics.

But despite that, you'll see a nice sequential improvement here from Q3.

Maybe broadly on --

From a top line perspective, Nigel, again, I think we're going to see, or would expect the fourth quarter to come in pretty much in line with what we've seen here in the third quarter.

But that's despite a 300 basis point easier compare.

So I think there were a number of places where September showed a little bit of a push at the end, but not enough for us to get excited because I think on balance, that might have been pent up from July, August, so that is perhaps typical quarter end stuff.

But I think we remain concerned about the US and Europe, particularly with respect to capital or bigger ticket discretionary sorts of things.

And we could see some of that get pushed again.

Okay.

Thanks, guys.

Julian Mitchell, Credit Suisse.

The first question, just really on pricing, I guess you called out that pricing was pretty good in Industrial Tech and Environmental.

I just wondered if the margins in Life Science and Test & Measurement -- when you were talking about the sequential move down in Life Science and the heavy year-on-year decremental in Test & Measurement -- was there anything going on in price?

The volumes have obviously softened as you gone through the year.

Are starting to see price get a little bit worse in any of the business segments?

I mean, Life Science price, Julian, was slightly negative in Q3 but I think that's pretty comparable to what we saw in the first half.

Again it really was more the fact that you had your high VCM equipment business and Life Science being down organically really driving the margins.

Probably a little bit of element in that in T&M, price more of an impact in margins.

We were running probably about half a point of price in the first half of the year.

And we didn't get any price -- it wasn't negative but we didn't get any price in the third quarter, so that probably hurt us a little bit on the margin side in T&M.

Okay.

Thanks.

And just on the portfolio, you've obviously announced the JV divestment will close early next year.

When you look at the rest of the portfolio, are you broadly happy with that?

You feel you've got out most of the areas now after the last 18 months and it's really just a question of how much M&A you do from here?

I think that's broadly the case, Julian.

I think as we look at the portfolio, while we would never say never, we would submit that over 90% of the revenues today are in our desirable growth platforms.

So as we think about the next $1 billion, the next $5 billion of activity, it should be acquisitions more so than divestitures.

And again hopefully balanced across the five segments.

Great.

Thanks.

Steven Winoker, Sanford Bernstein.

Thanks and good morning.

I know Beckman gets most of the limelight now from Tektronix but could we maybe go back to Tek a little bit?

I guess this is the fourth quarter of continuing worsening core growth.

Was down low-single, down mid-single, down high-single and now down mid-teens.

And maybe just dive into that a little bit versus your expectations and the updates we've gotten over the year in terms of how you think that -- passed the integration now and how that business unit is kind of playing out from your perspective within the portfolio?

And whether this is just a cyclical issue?

Again, I think that when we look at Tek, we wouldn't -- any business within Danaher has a healthy list of improvement opportunities and Tek is no different, Steve.

If we look at the second half performance here in the outlook Dan just referenced, I think what we've seen is, frankly, that the technology end markets that we serve and some of the key geographies, particularly China, have been soft.

I think we're of the view that they would be firming up a bit, that we'd be into anniversary some of those down comps and that would be helpful, but between what we're seeing in Tek and what we're seeing in China particularly, that's not the near-term outlook, unfortunately.

So again, I don't want to suggest to you that we are executing flawlessly there, but I think it's largely a macro call and we want to get to work on the things we can control and ride out the macro as best we can.

Is it living up to your return-on-capital expectations in terms of -- or is that getting pushed out even further at this point?

In light of the top line this year it's getting pushed out.

Our communication side of the business is way ahead.

But the top line, the instrument side has push that out.

Right.

Okay.

And but strategically there's no sort of major changes to the direction of that business, right?

No.

Okay.

And maybe contrast that with some of the strongest performing accelerating growth from Product ID -- we're seeing that in Product ID, we're seeing it in ChemTreat, we're seeing it in Radiometer where something like 11 and 16 quarters of straight growth.

That's been pretty significant.

And inquisitive areas over time, how -- what is driving some of that consistently?

Is that the product introduction side that you're frequently referencing or how should we think about that?

I think if you were to put those businesses on the table, Radiometer even Leica Bio, you talk about ChemTreat, you talk about Product ID from VJ to Esko, you'd really break it down, Steve, I think differently across the businesses.

With DBS being the common denominator.

Better go to market execution.

In terms of what the marketers are setting up for the sales force and the way the sales force is executing in the field.

New product innovation is very much an important part of what we're doing in those businesses without question, but the third bit, which is still important, is what we do from a quality [of living] cost perspective.

Some folks think that, if you will, shop floor DBS isn't as relevant, but whether we're going into the factory in Copenhagen at Radiometer or the service network at ChemTreat or even in the software writing labs at Esko, DBS has a lot a positive impact so that the rest of the business can't really operate without a tremendous amount of friction.

So we could kind of break down each one of those stories, but it's just I think day in, day out, strong, balanced, continuous improvement in those three areas, which is driving the growth that you see.

Certainly in Product ID, we get the secular benefit of broad exposure to supply chain product security and more customized marketing trends particularly in consumer goods.

Clearly at ChemTreat we are benefiting from a fair bit of market disruption over time as well.

In Diagnostics, particularly in critical care and in oncology, unfortunately those are both growth sectors where Radiometer and Leica Bio, respectively, are very well-positioned.

So we get -- we've got to make a little bit of our own luck there but we also think we face some broader secular trends there and elsewhere that are going to be good over the long haul.

Great.

And just a final detail, the euro assumption that you have and that I think $0.01 in the fourth quarter from FX, could you just give us that on your assumption?

Yes.

It's just basically the $1.30 versus the mid-$1.20s where it was over the summer.

Okay.

Thanks, guys.

John Inch, Deutsche Bank.

Larry, did the second half of September -- I know September is a very important month and often in these quarters -- there's a swing factors in the final days of a quarter.

Did the second half of September or the quarter, or the month of September played on demonstrably weakened in terms of expectations in terms of the CapEx dynamic that you were talking about?

I wouldn't say it was -- there was broad-based weakening that accelerated in the last week or two, John.

But we certainly saw some places where we saw some things push that we thought wouldn't in the last week or two, but I didn't try to tally it up to determine what that meant when the dust settled.

Were there any pockets of the portfolio that actually got a little bit better than expected?

I think the consumables businesses or the consumable parts of a number of the businesses, again whether it's Product ID, even Diagnostics, were solid.

I wouldn't say that we saw an uptick.

There were some places where we saw POS pick up a bit but I really wouldn't want to try to get to a lot of detail there, John, because I think it would be potentially misleading.

I think we saw by and large that September uptick just wasn't enough and the tone out there, again in the US and Europe particularly, ex housing, ex autos, where we don't have a lot of exposure is just not that buoyant right now.

That's fair.

Can I ask you, you guys did a tremendous job of preserving profits in the last recession.

This time around, you are sort of in advance of a lot of companies in terms of restructuring and doing some more restructuring than previously called out.

If the US were to tip into let's say a mild recession, do you feel as confident that Danaher would be able to have as many cost levers to go after, if you will, to be able to preserve profitability the way you did last time?

Well, I certainly would say that we would have that intent, John.

I think that when you think about the downturns as I think Dan was alluding to earlier, we are not in any way anticipating a post Lehman, post dot com sort of downturn.

If there's anything out there of that nature we would expect it to be more muted.

The operating challenge, of course, is to make sure that we're balancing what we do on the cost side with the protection of our organic investments, be they short-term in terms of go to market or longer-term around new product development.

But that's always the case.

I think what we've tried to not only back in the summertime with the $100 million call out, now the 20% increase to that restructuring effort here this year, is just to give ourselves more latitude in that regard as we think about earnings growth and long-term growth investments going into '13.

Just lastly, Larry, given the deal you did in China and the downturn in China, is that shaking out more M&A opportunities for you there for whatever reason, maybe more willing sellers or just evolution of markets?

How are you thinking about that?

John, I think it's an interesting question.

I think we're more optimistic today about our China M&A outlook than we've ever been.

It's hard for me to pinpoint the root cause because the macro dynamics that you highlight are very much in play.

I also think our team is doing a better job.

So it's really the combination which I think fuel our optimism.

Got it.

Thanks.

Thank you.

Jon Groberg, Macquarie Capital.

I guess just one big picture question.

Larry, you said you expected 4Q to be similar to 3Q in terms of core growth but obviously, as you mentioned, your comps get much easier.

So if you think about sequentially may be thinking about those big buckets that you talked about -- consumables versus instruments.

Is it the instruments that you expect to maybe be a little bit more worst sequentially in the fourth quarter or how are you thinking big picture about the sequential dynamics of the business?

Good morning, Jon.

You nailed it.

If we break down consumables versus equipment we would look broadly and say we think consumables, again despite the comps, would be in that 4% range, but we would expect equipment and primarily again, around some of the businesses that we flag, to be down slightly.

Okay.

And if I can just two quick clarifications.

One, it was kind of hit on on the Tektronix business and guess you don't have much more insight in the next three months or so as to what will happen there.

But on the Life Sciences side, I was -- it looks like AB SCIEX in 2Q and 3Q was kind of low-single digits.

So I just wanted to clarify what happened there.

Was it more the Leica business?

I think they're similar size, was it more the Leica business that was down more than expected or would you expect AB to grow even better than it did in the quarter?

You're right again, Jon.

It's principally the softness at Leica that is bringing down the overall number there.

SCIEX, as you can appreciate, probably has a little bit of pent up business here with the timing of the launches coming out of ASMS particularly the 6500 but on balance it's a Leica story.

Okay.

And last one just quickly.

How are you thinking about the medical device tax in '13?

And maybe just either size of it, I know it's on the manufacture costs, so maybe it's not the full 2% are you going to be able to offset that in any way?

Just curious how you're thinking about it today.

I was hoping to avoid any political questions here a few weeks before the election.

I think we're in the process of working through our options and the impact here, Jon, as we gear up from an operating perspective in the fourth quarter not only from -- with our '13 budgets, but frankly some of the more tactical considerations.

Clearly, we need to be mindful as to what others do here, but to the extent that we can pass some of this along, we will attempt to do that.

And, Jon, we'll go through all the detail in our budgets here in November, but our top level look is the full tax goes in and we're not able to recover any of it and that's not going to be our assumption but just to lay out the math, it's probably about $0.01 a quarter hit.

So $10 million-plus a quarter hit.

Okay.

I know you'd talk about it more when you give guidance but just people all already in '13 estimates so I just wanted to make sure we were clear.

Thanks.

That will conclude our question and answer session.

I'd like to turn the call back over to Matt McGrew for closing remarks.

Thanks, Deanna.

Thanks, everybody, for joining us today.

Dan and I will be around all day for follow-ups.

That does conclude today's conference.

We thank you for your participation.

You may now disconnect.