Danaher Corporation (DHR) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is April, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Second Quarter 2011 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.

Thanks, April. Good morning, everyone, and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer; and Dan Comas, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, a slide presentation supplementing today's call and the reconciling and other information required by SEC Regulation G, relating to any non-GAAP financial measures provided during the call are all available in the Investors section of our website, www.danaher.com, under the heading Earnings and will remain available following the call. Because we acquired Beckman Coulter to close at the end of the quarter, we intend to file our second quarter Form 10-Q during the week of July 25. In the future we expect to return to our usual practice and file our 10-Q at the same time as we release earnings. The audio portion of this call will be archived in the Investors section of our website later today under the heading Investor Events and will remain archived until our next quarterly call. The replay of this call will also be available until July 28, 2011. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally. The confirmation code is 4214214. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the accompanying slide presentation, our earnings release, and other related presentation materials supplementing today's call and Danaher's quarterly report on Form 10-Q when it is filed for additional factors that impacted year-over-year performance. All references in these remarks and accompanying presentation to earnings, revenues and other company specific financial metrics relate only to the continuing operation of Danaher's business, unless otherwise noted. I'd also like to note that we will be making some statements during the call that may be forward-looking within the meaning of the federal securities law, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set out in our SEC filing. It is possible that actual results might differ materially from any forward-looking statements that we might make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events and developments or otherwise. With that, I'll turn the call over to Larry

Matt, thanks. And good morning, everyone. I'm pleased to report another record quarter for Danaher. We look back here on the first half of 2011. We've gotten off to an excellent start from both the core growth and an operational perspective. Core growth in the second quarter was 7.5%. We feel good about where we are today. Our portfolio of premier brands has never been stronger. Our businesses are performing well. We are well positioned in our certain markets, and the macro drivers propelling our growth remain intact. We continue to be encouraged by the current tone of the businesses. But given the recent economic headlines and macro data points globally, we've been paying particular attention to our leading indicators. We grew at a mid-teens rate in the emerging markets in the quarter, with China growing more than 20%. We've always taken a long view of the emerging markets, believing that our businesses can't be leaders globally in the markets they serve without leading in the emerging markets. The developed markets grew mid-single digits in the quarter, with the U.S. a bit stronger than Europe. The Danaher Business System enables us to capture market share through innovation, new product introductions and go-to-market initiatives. AB SCIEX, Videojet, Fluke, Kollmorgen, ChemTreat, Hach, Tektronix Communications and Radiometer are among the businesses where we believe we have taken notable share from the competition. During the quarter, we delivered strong operational performance with our core operating margin improving 160 basis points year-over-year with Test & Measurement, Life Sciences & Diagnostics and Industrial Technologies all delivering over 100 basis points of improvement all the while continuing to invest in growth opportunities and restructuring-related activities for future margin expansion. So with that as a bit of a backdrop, let me move to the details of the quarter. Today, we reported second quarter adjusted diluted net earnings per share from continuing operations, excluding the impact of the acquisition of Beckman Coulter, of $0.69, representing a record second quarter for Danaher and a 28% increase as compared to our adjusted EPS last year. Revenues for the quarter increased 15.5% to a record $3.7 billion, with core revenues up 7.5%. The impact of currency translation increased revenues by 5%, while acquisitions more than offset the impact of de-consolidating the Apex revenues, resulting in a net 3% increase of revenues. Our year-over-year gross margin for the second quarter increased 250 basis points to 52.4%, largely due to leverage from greater sales volumes, productivity improvements and the higher gross margins of our newer businesses. Overall, our operating margin in the second quarter increased 80 basis points year-over-year to 16.9%, with our core operating margin up 160 basis points. Included in the operating results was $14 million in equity earnings contributed by Apex. Absent the Apex contribution, our operating margin was 16.5%. Operating cash flows from continuing operations for the first half were $1.1 billion, a 26% increase compared to the first half of last year. Free cash flow from continuing operations for the first half of the year was over $1 billion, and our free cash flow from continuing operations to net income ratio was a healthy 121%. We are now confident free cash flow will exceed $2 billion in 2011, which would be a first for Danaher. During the quarter, we completed 3 acquisitions, including the previously announced acquisition of Beckman Coulter. Our strong balance sheet and cash flow enabled us to finance the acquisition in a very cost-effective way. We are just 3 weeks into our acquisition of Beckman Coulter and we are thrilled to be bringing on this iconic franchise in the Diagnostics and Life Sciences base. We're excited to get started in the level of enthusiasm by the Beckman team and their early embrace of DBS has been outstanding. Over time, we'll strengthen Beckman's competitiveness through enhanced quality, innovation and commercial execution. We will also take full advantage of cost reduction opportunities and the strategic synergies in clinical and research applications that we see at Beckman with our Life Sciences & Diagnostics businesses. So turning to our 5 operating segments. Test & Measurement revenues increased 24.5% for the quarter with core revenues up 9.5%. Test & Measurement's core operating margin for the second quarter increased 120 basis points. Overall, operating margin increased 110 basis points to 22.4%. Fluke core revenues grew low double digits in the quarter, with solid demand for our industrial products, including our 190 Series II handheld ScopeMeter and our 810 Vibration Tester. We saw growth in all major geographies, led again by the emerging markets which grew in excess of 30% during the quarter. We are confident that Fluke is outperforming the market. At Tektronix, core revenues were up mid-single digits in the quarter, with orders up low double digits. Sales of oscilloscopes and video test equipment were particularly robust in the emerging markets. TEK continues to invest in innovation and in the second half of this year, we'll introduce a new category of mid-range oscilloscopes to address evolving industry and engineering challenges. Additionally, the introduction of a new oscilloscope capable of greater than 30 gigahertz bandwidth across multiple channels will further enhance our product scope performance portfolio and will help meet electronic designer's needs for more accurate characterization of high-speed serial data beyond currently available platforms. Core revenues from our communications businesses grew to mid-teens rate, led by healthy demand for our network management solutions in North America. We continue to see good momentum from our LTE offering as evidenced by several significant new customer wins during the quarter. We've launched a series of new products across the businesses during the quarter, including Fluke Networks' OptiView XG network analysis tablet designed for automated network and application analysis in the deployment and troubleshooting of new technologies, as well as Arbor Networks' Pravail Availability Protection System designed to ensure application availability for data centers and in cloud computing. Environmental segment revenues increased 5% in the quarter, with core revenues declining 0.5%. Despite essentially flat core growth and continued growth investments, the segment core operating margin was up 20 basis points in the second quarter. Overall, operating margin increased 10 basis points to 21.7%. Water quality core revenues increased at a high single digit rate. And Hach Lange, the demand continued to be healthy for core lab instrumentation, particularly for industrial applications. During the quarter, we did see a slowdown in demand from our municipal customers, though overall municipal growth was still positive. On a positive note, we were encouraged by Hach's strong order book that saw orders improving sequentially each month through the quarter. Trojan core revenues increased at a mid-single digit rate in the quarter, driven by robust growth in industrial applications, particularly in the emerging markets. Those of you who were with us in December will recall Jon Clark's presentation on the $1 billion ballast water opportunity, which would require cargo ships to monitor and disinfect ballast water prior to discharge at port. Currently, 28 countries representing 25% of the world's deadweight tonnage have ratified the agreement and full ratification is widely expected to occur this year. Trojan's land and ship-based testing program is underway and we're starting to see order activity there. ChemTreat's core revenues grew low double digits in the quarter, their third consecutive quarter of double-digit core growth with particularly solid demand from industrial customers in boiler applications. During the quarter, we expanded our Water Quality Group with the acquisition of ADCON Telemetry, a leader in low power wireless telemetry systems for environmental monitoring and in drinking in wastewater operations. Gilbarco Veeder-Root's second quarter core revenues decreased at a low double digit rate due largely to difficult year-over-year comparisons, resulting from enhanced industry security standards last year. We continue to see strong demand for dispensers in North America and Europe and continued double-digit growth at Veeder-Root. Moving to Life Sciences & Diagnostics. Revenues for the quarter increased 30.5%, with core revenues up 8%. Our core operating margin was up 390 basis points in the second quarter. Overall, our operating margin decreased 110 basis points from the prior year to 4.9%, primarily due to acquisition-related transaction costs, change in control charges and fair value adjustments to inventory and deferred revenue associated with the Beckman Coulter acquisition. Radiometer's core revenues grew at a high single digit rate in the quarter, driven by continued success over ABL90 and ABL80 blood gas analyzers and consumables across all major geographies with particular strength in Europe, China and Japan. The rollout of AQT is progressing well with over 25 units placed in emerging markets alone during the quarter. Leica Biosystems' core revenues increased at a mid-single digit rate in the quarter, driven primarily by healthy demand for our core histology systems in China, Japan and North America. During the quarter, we equipped the University of Southern California's new outreach lab with a complete histology system, including BOND-III advanced stainers, core histology instruments, reagents for both advanced and core staining and our first Cerebro sample tracking system to help their lab identify and track patient samples through the histology workflow. With this placement, USC will now serve as a key reference site for Cerebro here in the U.S. Leica Microsystems' core revenues grew at a mid-single digit rate in the quarter, driven by strong sales for confocal and surgical microscopes in China and Latin America. Core revenues at AB SCIEX grew at a mid-teens rate in the quarter. Demand was broad-based with research, applied and pharma markets, all growing in excess of 10%. We continue to be very pleased with the tremendous success of TripleTOF 5600, which has exceeded expectations, and more importantly, is making a significant impact in the market with customers. At the ASMS show in May, we had over 20 scientists, including many key opinion leaders to present their results at AB SCIEX's user meeting, which speaks to the impact the technology is having on the scientific community. At ASMS as well, we launched SelexION, an innovative differential ion mobility spectrometry technology quantitative and qualitative analysis for use on the QTRAP 5500 and the TripleTOF 5600 to improve data quality and accelerate sample preparation. As we mentioned at the outset, during the quarter we closed on the previously announced acquisition of Beckman Coulter. While it's still early, we have been pleased with the customer and associate feedback we have received thus far. Our initial operating reviews have been positive and we look forward to sharing further successes with you in the coming months. Turning to Dental. Segment revenues increased 18% in the second quarter with core revenues up 6.5%. Our core operating margin was up 25 basis points in the second quarter. Overall, our operating margin was up 10 basis points from the prior period to 10.9%. KaVo core revenues increased at a mid-single digit rate in the quarter. Our imaging products have grown low double digit thus far this year, due in part to the continued success of the DEXIS Platinum intra-oral sensor and our recently introduced OP300 hybrid digital imaging system. Demand in North America was robust in the quarter and we continue to build momentum in the emerging markets where KaVo and Sybron are collaborating more intently and investing together in go-to-market initiatives. Sybron core revenues grew at a high single digit rate in the quarter, led by orthodontic solution and infection prevention products in North America and the emerging markets generally, as well as the absence of inventory de-stocking that occurred in the prior year period. Customer response to Kerr's recently launched composite filling system, SonicFill, continues to be very positive, helping drive high teens core growth in general dentistry consumables. So moving on Industrial Technologies, revenues increased 32% for the quarter with core revenues up 14.5%. Our core operating margin increased 190 basis points in the second quarter. Overall, our operating margin was 21.7%, a 100 basis point increase compared to the same period last year. Product Identification core revenues were up low double digits in the quarter, with broad-based growth across all major geographies and product categories. Demand from electronics customers for our parts marking systems was again strong this quarter and we believe we continue to capture market share. During the quarter, we also launched the 1610 DH, a dual head version of our 1000 series CIJ printer. This high-speed continuous inject printer is designed for applications requiring printing in 2 locations on the same product or on multiple lanes of a web application and is ideal for food and beverage, pharmaceutical and building material applications. While still early, we've been pleased with the customer feedback with this new product. Our Motion businesses' core revenues grew at a mid-teens rate in the quarter. The momentum we saw late last year and earlier this year continued as we experienced significant growth in all major geographies and markets. Kollmorgen's AKM and AKD motors and drives continues to capture share and we are on track to double AKD drive revenues this year compared to 2010. So to wrap up, a good start to 2011. We're obviously excited to have Beckman on board and from what we've seen thus far, DBS is going to have high impact at Beckman and that gives us a lot of confidence, not only to tackle the challenges in the business, but also in our ability to take advantage of both the growth and cost reduction opportunities. Our business has continued to perform very much in line with expectations that we laid out in December. With DBS, we have the potential to drive organic growth and margin expansion and with our increased exposure to higher growth emerging markets, we believe we are well positioned to continue to outperform with the remainder of 2011 and beyond. We are initiating third quarter 2011 adjusted diluted earnings per share from continuing operations guidance of $0.66 to $0.71. We are increasing our full year adjusted diluted earnings per share from continuing operations guidance from the prior range of $2.65 to $2.75 to a new range of $2.75 to $2.82. The new full year range includes approximately $0.05 of accretion related to the acquisition of Beckman Coulter.

Thanks, Larry. That concludes the formal comments. We're now ready for questions.

[Operator Instructions] And we'll first hear from Steven Winoker of Sanford Bernstein. Steven Winoker - Sanford C. Bernstein & Co., Inc.: So glad to see Beckman Coulter finally in the fold. And I want to actually though lead off with a couple of questions on just the overall impact that you're seeing on the macro basis from the China deceleration and other emerging market concerns overall across the business. I know you mentioned you were up 20%, but are you seeing any signs of weakness at all?

Well, I think you see signs of weakness all the time, Steve, but having been with the China and India teams earlier this week, albeit telephonically, I would characterize the general tone and outlook is quite buoyant, and we clearly are working to get some very tough comps. I mean, we've seen some signs in China, for example, of a slow start in a couple of businesses, water being one, on account of the timing around the 5-year plan, maybe a bit more so than the tightening. I think some of our businesses are on the outlook for signs of credit tightening, where they deal with that smaller customers. But by and large, I think their mood was quite upbeat with respect to second half. India is obviously dealing with a couple of different issues. But I'd say by and large, we expect a little of the froth to come off, but still think as we look at the third quarter and certainly the second half, the emerging markets will lead the way. Steven Winoker - Sanford C. Bernstein & Co., Inc.: Okay, all right. Well, it's always hard to reconcile that with some of the deceleration in the government's action in interest rate. But okay, that's good to hear. Just on the growth within Environmental that the negative 0.5%, I mean, obviously that's all -- it looks from Gilbarco Veeder-Root. Are you expecting that to turnaround or what should we expect going forward there?

Yes. Steve, I think that, that's exactly right, just to make sure we're all in the same page. We certainly saw Gilbarco play out in the first half, very much as we would have anticipated, in large part, because of the tough comps on the payment schemes here in the first half. That obviously gets easier for us as the year goes on, and we would expect them to be more of a contributor here as we go forward. As we talk about your conference, not that long ago, obviously, we've also seen a little bit of pressure in the muni world at Hach Lange, and to a lesser degree, Trojan. So we're watching that carefully. But as we look at the third quarter, I think that when we talk about the guidance for the quarter, I think the Environmental segment won't be leading the way here. And we talk about our growth guidance for the quarter or for the second half being in that 6% to 8% range, as we've talked, I suspect Environmental will probably be south of that midpoint, but specifically, I think on the GVR we'll begin to improve from here. Steven Winoker - Sanford C. Bernstein & Co., Inc.: And are you expecting additional acquisition-related transaction costs from Beckman, or are we finished in the numbers you took this quarter?

Steve, we will have about $0.14 or $0.15 a share in the second half, primarily related to inventory step-up and deferred revenues. So of that $0.15 that we'll call out in the second half, probably 85%, 90% of that will be noncash in nature. There will be a little bit of cash cost to take out the Beckman bonds here in the third quarter, and we expect to be done with all that by the end of the year.

Next, we'll hear from Deane Dray of Citi Investment Research.

It sounds like we're getting closer to the time to revenue on this ballast water opportunity and it does sound like it could be a big deal for an extended period, and I've seen much higher estimates for that $1 billion. I know that's the addressable market but -- for Danaher, but if you just take us through what you think the gating factors are. From my understanding, it's the coast -- U.S. Coast Guard has to ratify it. That's considered to be the more stringent standards. And then from a technology standpoint, it sounds like Trojan has to partner with someone and just give us a sense of where you are in terms of what product will be assembled and available for -- on these ships?

Sure. Well, I think the -- from a regulatory point of view, this is a global initiative. It's not a U.S. effort, as I know you know Deane, and I think that our read of the political landscape, and I don't think we necessarily have a unique perspective here is that the global agreement will come into force here this year as the folks that aren't yet on board are indeed that signed up. I think that will really trigger this market in earnest. In anticipation of that, as you've indicated, we have been investing heavily at Trojan to really take their disinfection technologies, which they deploy in a whole host of, if you will, land-based applications, primarily it's waste and drinking water treatment facilities, but also in industrial and commercial applications to these cargo ships to basically help them disinfect the water used as ballast before it's dumped at port. That I think is a product capability that we have. We can, by and large, do that ourselves, but obviously, we don't really have a shipboard capability. So we're partnering there, Deane, really from a sales and service perspective to make sure that the technology and the packaging we have is well deployed and obviously a very new vertical for us. So as I indicated in the prepared remarks, we're in the process of a rigorous test protocol for this disinfection equipment that occurs both on land and in situ on board ships. The order book is beginning to percolate here. I really don't think this is a needle mover for us with respect to revenue in 2011, but I suspect by the time you see more, let's say, at year end, we'll be talking about 2012 revenue and we're going to stick to that $1 billion band. That's a big number. And it's still very early in this regard, but again, obviously flagging it here, we're very optimistic about this being a meaningful growth driver for Trojan and for the Environmental segment going forward.

Great. And just as a follow-up and also still in the water sector, you called out some softness in the municipal side and I know this was something discussed last quarter. We're not surprised to see it, but is the nature of the softness? I would trust it's not on the consumable side. Is it more new project-related delays and push-outs?

Yes. I think that's a fair read, particularly in the developed markets. I think that China has, obviously, been a big growth driver for us. I think the team's prediction that the new 5-year plan would cause projects to be a little unclear with respect to timing in 2011 has played out. But I think China gets better for us as we move forward, all things being equal, and who knows what's going to happen with respect to some of these municipalities given some of the political headlines of late, but still good growth. It's all relative here. A little bit of the top has come off at Hach Lange in the wake of these pressures, but they're still performing very well, and we think they will in the second half of this year.

Next, we'll hear from Steve Tusa of JPMorgan. C. Stephen Tusa - JP Morgan Chase & Co: Could you just maybe talk about the trends at Tektronix, the revenue there was a bit light relative to what I was expecting. Can you maybe talk about what's going in the order flow there for the quarter?

Sure, Steve. I think what we saw at TEK was a strong finish following a light start to the quarter. I think we were pleased to see, as we indicated in our prepared remarks, orders north of shipments at a double-digit rate, very encouraged by that. I think as we saw that build through the quarter and even here early in July, TEK would appear to be in good shape and obviously some of the technology end markets that we serve are showing some signs of softness. So we're watching that carefully, but I think given the book-to-bill dynamic there, given the sequential progress through the quarter and frankly, the new product introductions that we commented on that are coming to market here in the second half, we feel very good about where TEK is right now.

And Steve, I would add to that, that dynamic of orders being better than shipments was also true at Fluke and at TEK Communications as well. We had a very good order book across Test & Measurement in the second quarter. C. Stephen Tusa - JP Morgan Chase & Co: So what was the book-to-bill at T&M?

It was -- order -- the shipment growth in Test & Measurement was 10%. Our order growth was mid-teens. That's going to be 1.04, 1.05 or something, I guess. C. Stephen Tusa - JP Morgan Chase & Co: Okay. Maybe just a high-level question, are you guys at all thinking about contingencies? I mean, I know Danaher always has some sort of hedge and restructuring in there, but I mean have your antenna picked up anything in the last couple of months that, kind of changes the behavior of telling your managers to maybe put a little bit more of contingency in place? How are you looking at that?

Well, I think it's a balance right now, Steve, because, again, we had a very strong core growth quarter in the second. I think our outlook for the second half is still quite positive. So we don't want to head for the bunkers prematurely. That said, I think we're always in a mode this time of year to make sure that we're taking a sober look to second half, not only with respect to this year, but also making sure that where the structural opportunities are that those are being identified, so we can continue our quiet restructuring and we would anticipate doing that here in the second half. I think you've heard us for a while now say that we're not seeing dramatic impact from the headlines in the businesses. That's good, but we're taking nothing for granted right now, so we're watching things very carefully and the businesses now to, not only watch as leading indicators, but also to be ready in the event that a more dramatic storm comes ashore here. C. Stephen Tusa - JP Morgan Chase & Co: And then one more question, are you guys ready to do a -- do you think you have the capacity to do another, I don't know, $5 billion plus deal if something kind of comes along in the next couple of months?

Another $5 billion deal the next couple of months? C. Stephen Tusa - JP Morgan Chase & Co: Yes.

I think we're on record of saying our second half deal envelope is probably in the $300 million range, so that would suggest wrecking the balance sheet beyond recognition. Steve, I don't think we'll be going there any time. C. Stephen Tusa - JP Morgan Chase & Co: Okay. So the low end of that $5 billion range?

Yes. I think our appetites are doing a very large deal and having to issue a substantial portion of that deal with our equity. It's a very, very tough time.

Next question from Jon Wood of Jefferies. Jon Wood - Jefferies & Company, Inc.: So Larry, can you just comment on Beckman, the core outlook there following what you guys have seen from that business in the second quarter is a flat assumption for the year or the back half of the year for that matter still relevant? And then going to the accretion side for Dan, is that deal going to be accretive in the third quarter?

Jon, I would say that we were pleased with the second quarter performance at Beckman. If you kind of look at the last 2 quarters there, they've been up low single, up, call it, 2%. Obviously not where we want to be, but I think very much where we thought they would be. And that's I think -- and then you saw second quarter, we saw the second quarter in line pretty much with the last couple of quarters in that regard. So I think we're comfortable with the state of affairs there. You know that we've tried to keep expectations around revenue very modest here given that there are some other issues we need to work through, but I think as we look at the second half of '11, as we look at 2012 right now, we're right where we've been assuming a flattish revenue outlook ahead of the real impact that we're going to have on the top line by improving quality, getting past some of the regulatory challenges, making sure that we are aggressive from a competitive perspective in terms of how we get out and take care of our customers, let alone what we want to do from a new product perspective over time. So no real change, but we much prefer being here today on the other side of closing because we're able just to operate differently and build the momentum we had, albeit the planning momentum over the last 4 or 5 months.

Jon, in terms of accretion in the back half, our expectation is that all that nickel will come in the fourth quarter. We anticipate pretty substantial quiet restructuring. We don't plan to call it out in the third quarter. We will have additional restructuring and realignment cost in the fourth quarter, as well as into 2012. That's all factored in there, but we have a lot of actions we're going after as we speak. There will be a big impact of that in Q3. We think we can absorb that and have it be neutral to EPS. It would be the right thing for the business to position it and then start to be accretive in the fourth quarter.

All right, great. That's very helpful. And then my follow-up on the Life Sciences & Diagnostics core business, obviously SCIEX continues to gain momentum here. Larry, can you just comment on your view qualitatively of that mid-teens number? How much of that do you think is a market share phenomenon and how much do you think is just the mass spec market, if you will?

Jon, I think it's a tough line to draw here in the back of obviously a couple of quarters of very good growth. I think we are encouraged by our performance with the 5600 from a new product perspective. I think there are a number of geographies, particularly North America where we're very pleased with the improved commercial execution of the organization. But clearly, as you know, as well as anyone, the market has been upbeat. Pharma has been, I think, better in the first half of this year than anyone might have anticipated, but I think that this business is doing well. We'll see where some of the other folks come in here. But I think in the first half of this year, we probably took a little bit of share in certain corners. I was up in Boston with the team yesterday. I think they are feeling very good about the response today at ASMS around some of the add-ons the 5600, feeling very good about some prospects for the second half, let alone the product, the new product development pipeline. So all in all, it's still only 18 months in, right, with SCIEX, but we really like where we are with this business.

And next, we'll hear from John Inch of Bank of America Merrill Lynch.

So just so I understand the guide, you beat by $0.04 your midpoint this quarter, you're raising by -- effectively the year by all of the Beckman contribution. If there's no sort of spillover from whatever beat it in this second quarter to the rest of the year based on your positive commentary, it kind of looks like you've got the third quarter flat, right? So what sort of -- why isn't there a little bit more optimism from the second quarter reading through to the rest of the year?

John, I think the -- I think the headlines given what they are obviously have us tempering our thinking here, but I think all in all, as we look at the top line and the BCM here for the second half, as well as the nickel from Beckman, I think we feel very good about that guidance. Certainly, as we look at some of the things that we want to make sure we work through beyond the obvious, whether it's the muni, the muni headwinds that we talked about a moment ago. Obviously, Japan from a supply chain perspective was something we said we'd like to see through, though I think the signs there are all positive and some other items there. But I think all in all, we feel very comfortable about where we are in the second half.

And John, as you know, we like to have some latitude in the second half to pull forward some cost actions we would typically budget. We're in the process of budgeting for 2012. I think if the top line continues, you may see us some take some actions here that in otherwise would occur -- cost actions that would have otherwise occur in 2012.

Now that make sense. I'm just trying to make sure there isn't some implied message of obvious slowing in some aspects of your business, but it seems like that's not what you're suggesting at all?

Yes. Now again, I think we're talking about 6% to 8% core for the second half and that should be from what we see today, balanced between the third and the fourth.

Larry, what do you think the risks are that Beckman next year possibly puts up organic growth that's negative? Is that -- like is the over or under kind of equally weighted if you're looking at sort of a flattish outlook? Or do you think the balance be over sort of tips to more positive versus negative?

I think you've got a number of swing factors there, John, but I'd take a balanced view there given where we are, which is why I think it would show [ph]. I would say we'd take a balance view as to the over/under on that, that flattish outlook, which...

So in other words if it's negative, it's not going be negative by much is the point you're making?

That would be our current view, yes.

What's your outlook, Larry, still for the cost side as you've kind of gotten into Beckman? And how much of the -- is there any sort of the cost synergy baked into the $0.05 this year or just more that kick in next year?

Well, the cost synergy efforts really works against us this year, as Dan highlighted, because we're going to be putting some of that investment into the business ahead of pulling out that $0.25 billion dollars of cost that we've talked about. I think, John, we are very confident given the planning that has been underway for many months now that we can safely reduce their cost structure by that amount and do that. And when I say safely, what I'm referring to and have that come out without impairing the business' ability to grow, to improve quality, to invest in innovation and the like. So I'm highly confident that, as we move forward, we're going to find other opportunities. I think for today, we're going to stay with that $250 million cost out number.

Yes, now that make sense. And then just lastly, can I ask you about industrial, obviously, you sort of saw how the quarter progressed from a macro perspective, right? It looks like there had been a bit of pre-buying in March systematically and then -- I'm not talking about Danaher, I'm talking about overall economy and then May was obviously a little softer and June seems to have been a bit better. What happened within your industrial businesses, not maybe specifically defined to Industrial Tech? But just as you look at sort of your industrial production related types of businesses, what happened in the quarter and what's your outlook? I mean, the 14.5% is, obviously, very strong. So it suggest that there wasn't much of a trend, but maybe what was going on under the surface?

Yes. No, I think it was strong and certainly as we look at the third quarter, I'd say that Industrial Tech, the segment, probably going to be on the high end of that 6% to 8% growth range, though it certainly be above the midpoint. I think your question is -- I think properly framed, if we just look the industrial landscape, but not limited to our Industrial Tech businesses, I think what we saw whether it's the Thomson where we sell through distribution, be it the Fluke industrial business, Our POS was by and large pretty good and I think the distribution by and large was fairly upbeat. And I think as the quarter wore on, things were stable, things were solid. Where we did see I think a little bit of softness, John, was more of the OEM side of the business and that's another one of these second half areas that we're going to have to watch. Certainly at Kollmorgen we saw that and that was primarily in our technology end market. So no surprise there, but obviously something that we want to watch given the supply chains and the build rate risk factors that we would have in our limited OEM facing business.

Right. But did that sort of -- was that trend throughout the quarter or did it kind of see a blip in May and get some sort of bounce back in June? I mean, it sounds trite, but it is sort of -- people are very concerned about kind of monthly progression here, that's all.

Yes. No, and nobody more than me and Dan here, so we understand the question. I would say that it was a bit -- it was kind of -- it was bumpy as we went through May and June. So it's really hard to discern an exact trend and we certainly didn't see a dramatic falloff in our leading indicators, but we did see a softening order, but maybe a little softer than we would have anticipated. So again, that's why we want to make sure we're on our toes here come the second half.

Our next question comes from Shannon O'Callaghan with Nomura Securities.

So Larry, on the FDA issues just kind of troponin and sodium and glucose, things like that, how are you feeling about them in terms of an update and what you're thinking for the second half?

Well, I think that from a regulatory perspective, Shannon, we feel very good about the progress the business is making. Obviously, troponin is probably the single assay under question that gets the most attention. Certainly, plenty of work ahead of us in that regard, so no news this morning in that regard. But again, I would just remind, maybe the broader group that the regulatory challenge at Beckman Coulter is not strictly one born of 3 specific assays where they've had issues historically. It also incorporates a broader quality system effort that has been, I think, well documented and that's going to be a -- that is a significant undertaking. We're pleased with the progress that the company has made. We've had obviously a lot of visibility, not only on the plans, but the progress that we're knee-deep in that with them now. That's our #1 priority here in the short term. Obviously, it will be in the long-term as well. But I'm very encouraged by the trajectory that the Beckman team is on in that regard. But again, a lot of work to do. I think more broadly, the integration planning has gone exceptionally well, Shannon. The transition team is probably, on a full-time equivalent basis, almost 25 people strong from a Danaher view in terms of our folks spending virtually all their time at Beckman. We have made some organizational changes there. We have begun to exit the public company structure and in turn the publicly cost that go with that. We have split the business formally into 2 halves, a Diagnostics and a Life Sciences business, to provide appropriate focus around each of those businesses. We've made a few changes as a result of those 2 moves, which have included the insertion of a Danaher CFO, as well as one of our group execs as the, in essence, the Chief Transition Officer for the business. Tom Joyce continues to oversee all of this. Bob Hurley, the Beckman CEO is a full partner in that effort with Tom, and we're feeling very good about the outlook. Again, a lot of long days and weeks ahead to be sure.

Yes, good luck with that. On dental, what do you think about the margins there? I guess, as you look into the rest of the year into '12. And what's happening there from either a mix or cost standpoint as we look from this kind of 2Q run rate?

Right. Well, there -- they need to be much higher. Let's make no mistake about that. I think what you saw in the second quarter, Shannon, was really a function of a couple of things. Certainly, we had a -- this plant that we're taking out has impacted margins as we would have anticipated, call that quiet restructuring. We certainly have stepped up the growth spending there largely around the second half ramp for the new imaging products that I referenced, as well as in light of the traction we have the emerging markets with the collaboration between KaVo and Sybron long overdue and now well underway. And I think the third issue there was really some of the negative mix we had in certain product categories that certainly didn't help. The team understands that they ought to be a 15-plus percent OP business. They have a roadmap that they are executing in that regard and we would anticipate that nothing less from that business.

And we'd expected a meaningful sequential improvement of those operating margins Q2 to Q3 here.

As we saw in the second quarter, right, because they were up 100 basis points sequentially from the first.

Okay, but getting to the 15% -- getting to the 15% plus, is that going to take a little more time into next year or...

That won't happen this year, Shannon. Sorry, if I suggested that.

No, you didn't. I just concluded it. I just want to make sure I was hearing it right.

No, I think the path to 15% plus at dental is a multi-year effort obviously more of the work resides at KaVo than it does at Sybron, but that progress continues and they need to deliver more of it, obviously, given where they are versus that target. But we're confident we'll do that.

[Operator Instructions] Next, we'll hear from Jeffrey Sprague of Vertical Research.

Can we just spend a little more time on understanding kind of how the FDA issues play out for you? And one element of my question is, obviously, there's substantial costs involved with kind of making this right and getting on the right track with the FDA. Is that cost push that's required fully already embedded in kind of Beckman's cost base, or is there another kind of step up that needs to happen now as you guys take the reins to really make sure this gets fixed?

Jeff, I would say that the effort that has been underway is a considerable one here for the better part of the year. As a result, you're certainly seeing an increase spend in RA/QA type activities across the company, but I don't think that we see a dramatic step up from here relative to what they need to do. It really is more just executing on the plan that has been laid out, that has been staffed, that has been funded over a multi-year period to make sure that we are as good as any company with respect to fulfilling our regulatory obligations, not only to regulators, but obviously in turn to our customers.

And I assume there's some significant outside help and expertise involved in doing this currently?

That's exactly right, Jeff.

And Larry, can you give us a sense then and perhaps its embedded in the 250, but once this is set right, so to speak, I mean, the effort never ends, but once we're kind of past the fire drill, what kind of costs come back out on kind of the FDA correction?

Jeff, our planning assumption is that cost does not come out. Maybe it does, but our -- that 250 savings is not -- none of that includes the benefit of reducing their quality costs. Maybe that's conservative, but I think it's a good planning assumption.

Right, but in actuality, there is some meaningful nut there that likely comes out?

Jeff, I don't think that's what we're saying. I think what we're saying is we've assumed a level of spend there that takes a number of different forms that we think is important. And while a lot of that activity maybe in what you might think of is remediation mode, that will transition into maintenance mode as we move forward. So again, I think we see tremendous cost reductions at Beckman. We see strong margin expansion potential. But first things first, quality and RA/QA top that list. So we're not assuming any reductions there.

Is there anything that we should be looking at kind of from the outside looking in to gauge how this is going or should we kind of expect it just kind of comes in your regular quarterly updates of kind of the acquisition integration and the like?

Yes. We were -- we would anticipate, Jeff, I think using these calls to give you as much of an update as we can, as we move forward. It will be hard to report the Danaher quarter from here on out without a significant amount of time on Beckman, but we'll also obviously be talking about Beckman at different conferences and the like as part of our normal IR rounds.

Right. And just one unrelated follow-up. Product ID orders, can you give us a little color there and how that's looking into the back half?

I would -- as we think about the back half here again with the 6% to 8% range for core, I think we would anticipate that industrial will be above that with Product ID playing a significant role, albeit without the new acquisition Esko being in that calculation. They're off to an outstanding start by the way. So we would -- we have a strong outlook here in the second half with the ID.

I mean, Jeff, they have a lot of momentum. I mean, they did have a very, very strong second half last year. So from a reported basis, their core numbers probably aren't going to be quite as high as they were in the first half, but that doesn't really -- sequentially there's just -- so a lot of strength in the business right now.

Mark Douglass of Longbow Research.

What was -- currency had a bigger impact on the top line versus expectations and probably what you were guiding. And what are you expecting for the rest of the year? And what was the impact on EPS or net income in the quarter?

Mark, I don't think we figured it in our guidance. When we issued earnings in the third week of April, the euro was 1.45 and that actually averaged a little bit less than that for the balance of the quarter. So it wasn't a surprise to us given where the euro was when we announced earnings and gave guidance in April. It obviously was a benefit of about 5%. I think it will be slightly less a couple of points here in -- maybe 3 to 4 points here in the back half, assuming the euro stays kind of in the low 1.40s, clearly there have been some volatility there, but it's in that range.

Okay. I guess, I was thinking 2% for the year, but likely a little more than that?

Yes.

Okay. And then just lastly on the Fluke Networks, TEK Communications, even TEK some, things in comm at least for the equipment space service providers, it seems to have gotten more negative more recently. What is your outlook for the comm space right now going forward? Has it changed materially?

Well, I think what we saw in the second quarter was very encouraging. I again, as I think Dan indicated, across T&M and certainly in the comps group positive book-to-bill, good strength. Some of the comps that are out there that you maybe referring to aren't necessarily the best comps. We don't have a lot of exposure in certain verticals, typically around financial services and with the government, the federal government here in the U.S. that some other folks do. Our exposure tends to be more with the carriers certainly on the mobile side where we're seeing very strong growth at TEK Comm and much of that net is really an enterprise play where we've seen with our portfolio very good performance, and that coupled with a good emerging market exposure is why I think those businesses have fared very well relative to some other companies that maybe comps, but really aren't competitors.

And next, we'll hear from Richard Eastman of Robert W. Baird. Richard Eastman - Robert W. Baird & Co. Incorporated: Larry, can you speak to, maybe just a minute or 2, you talked a little bit about industrial, maybe orders were a little bit bumpy during the quarter. But if you look at kind of order trends and maybe tone of business in Europe specifically, across maybe IT and then also the Test & Measurement business, any discernible slowdown or change in inflection in the tone of business in Europe during the quarter?

I think the short answer is yes. Certainly, as we look at the geographies, emerging markets led the developed markets and the U.S. was ahead of Europe, so it was really the first time we saw that differentiated performance out of Europe. I would say, it was by and large broad-based and certainly didn't necessarily get better as the quarter wore on and the hanks and the like from the headlines grew.

Rick, I would add that the business in Europe that probably held up the best in the second quarter was Test & Measurement. But we did, as Larry alluded to, we did see some weakness in the other industrial businesses, a little bit in Med Tech as well in Europe. Richard Eastman - Robert W. Baird & Co. Incorporated: Okay. And so if we think geographically and we're thinking about this core 6% to 8%, obviously emerging above that, U.S. maybe towards the 6 number and Europe stays positive in low singles, I mean, if we try to split this geographically.

I think that's about how it played out in the second quarter and it's probably not a bad sort of rough planning assumption. Richard Eastman - Robert W. Baird & Co. Incorporated: Okay. And then just general question, when I look at the T&M piece of the business and also the Industrial Tech piece of the business, given the very significant core growth rates that we saw in both businesses, I was a little bit curious, the incremental margin in both businesses was kind of in a 27% range, maybe a little bit below 30%. Is there a concerted effort there maybe to kick up any quiet restructuring or should that incremental have been a little bit bigger on that type of core growth?

Rick, there's a little bit of noise in both of those incrementals because of both the Keithley acquisition and one-time charges there and the recent Esko acquisition in Industrial Tech. If you look across Danaher, you don't have quite this visibility, but if you strip out acquisitions and also currency, our fall through across the businesses were close to the 40%. That was true in Test & Measurement. Now Industrial Tech was a little bit low because of Motion. We are seeing some significant inflation in areas like magnets and the rare earth issue in China where some of the magnets we're buying are literally 10x the price we paid at the beginning of the year. Now they're getting a fair amount of price, they're still doing well, their margins are consistent with where they were in the first quarter, but we're not seeing the kind of seasonal improvement we see in -- more typically see in margins. And that's really in Motion, that's not the other pieces, it's not Product ID, but that's one area where inflation is hitting us very hard. Richard Eastman - Robert W. Baird & Co. Incorporated: Okay. And so the core fall through for all of Danaher or for those 2 pieces was closer to 40%?

All Danaher was closer to 40%. Test & Measurement, was right in there. Industrial Tech was lower because of the dynamic I just talked about with Motion.

And ladies and gentlemen, due to time constraints our final question for today will come from Jason Feldman of UBS.

So at AB SCIEX, the TripleTOF has been very successful and by all accounts it gained a fair amount of share. At ASMS, there were a couple of new product introductions from some of your competitors. Do you still see runway from a market share perspective? Or is it time to think about the next generation of products at some point in the not-too-distant future?

Jason, I think we see a lot of runway. We have not yet been shipping the 5600 for 4 quarters yet. So that coupled with all the KOL support and we feel good about that, but it's always time to think about the next-generation products. And again, I was up with the team. We did an R&D review yesterday. There's always -- this is always the part of a new acquisition integration that takes longer to affect, but I think we're very encouraged about what you'll see AB SCIEX rollout over the next several years by themselves, and obviously over time, you're going to see some of those synergies I referred to at the outset come into play there as well. So we're thrilled about what they've done here in the first half and just have a very upbeat outlook as we think about that business going forward.

Okay. And lastly on Beckman, I think you've been very clear from the very beginning about how that will be initially dilutive to your overall organic growth rates, and I understand that the immediate concern is the cost synergies and the integration and to focus on those issues. How long does it take do you think before you're really able to get focused to working on structurally improving their underlying core growth rate, whether it's sales synergies with other businesses or improved innovation? Is that a 2013 kind of phenomena or some other point?

Jason, our efforts thus far both in planning and here in the last couple of weeks with respect to execution had been focused again, first and foremost, on quality, and I'd say second on growth. So we're already spending a lot of time in a whole host of ways trying to help the top line, both in the near term and the long term. So I think what we've tried to suggest is that despite that activity, given the context of flattish revenue outlook is probably the sober frame for the rest of this year and through next year. I think our hope and intent is that come 2013 and beyond, you'll begin to see the impact of Danaher and DBS on Beckman's core growth. I think the nature of the work is just more straightforward, as Dan highlighted. You'll see that impact with respect to cost out far sooner, but that pairing, that timing of those activities is I think by and large typical and certainly appropriate for this situation.

And Mr. McGrew, at this time, I'll turn the conference back over to you for any additional or closing comments.

Thanks, everyone. Dan and I are going to be around all day for follow-ups.