Danaher Corporation (DHR) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Debbie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Second Quarter 2012 Earnings Results Conference. [Operator Instructions] Just a reminder, today's conference is being recorded. And now, I would like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.

Good morning, everyone. Thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer; and Dan Comas, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, a slide presentation supplementing today's call, our second quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investor section of our website, www.danaher.com, under the heading Financial Information and 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 till our next quarterly call. A replay of this call will also be available until Thursday, July 26. Replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally, and the access code is 1304801. During the presentation, we will 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 businesses unless otherwise noted. We will also make some 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. Any 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 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, development or otherwise. With that, I'll turn the call over to Larry.

Matt, thanks, and good morning, everyone. We were pleased by the sequential improvement in our core growth and our strong operating margin and cash flow performance in the quarter. Despite the macro headlines, we grew 3.5% organically in the quarter, and the team did an outstanding job on the execution front with an 80 basis points of year-over-year core operating margin expansion, a 31% year-over-year increase in free cash flow and a 31% growth in EPS. We continue to focus our efforts on capturing market share, driven by DBS, as well as our investments in innovation. Videojet, ChemTreat, Leica Biosystems, Esko, Kerr, Arbor Networks and Radiometer are among the businesses where we believe we have taken market share during the quarter. Geographically, the U.S. largely continued its strong start to 2012, with our Q2 revenues growing mid-single digits, though we did see some pockets of weakness as we exited the quarter. In Western Europe, our sales were flat in the quarter, which, by and large, resonates with the headlines. China was mixed but flat in the quarter. The bright spot in China for us has been healthcare with both our Dental and Life Sciences & Diagnostics businesses growing double digits in the quarter. The rest of the emerging markets remained strong and also grew at a double-digit rate. We remain active and optimistic on the M&A front. Through the first 6 months, we've deployed nearly $1 billion of capital on 8 acquisitions, primarily in our Industrial, Environmental and Test & Measurement segments. Even taking into account the capital we deployed on these transactions, we still expect to have more than $5 billion of M&A capacity over the next 2 years. Turning to details of the quarter. Today, we reported record second quarter diluted net earnings per share of $0.84, a…

Thanks, Larry. That concludes the formal conference. We are now ready for questions.

[Operator Instructions] We'll go first today to Steven Winoker with Sanford Bernstein. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Could you maybe give us some better or some additional clarity? I guess, one, on how were the demand pattern shifting through the quarter itself? Did you see continued acceleration or deceleration into -- through June? And then secondly, when you think about the second half core growth in line with the first half, maybe give us some more color by business about how you're seeing it and what you're seeing either in inventory or other indicators that are leading you to the conservatism other than sort of just macro indicators.

Yes. I would say -- Steve, maybe a couple of thoughts here. I think with respect to the first part of your question, what we saw, say, by business in the quarter, I think we saw 3 to 5 businesses fundamentally in line with what we thought we would see during the quarter, with Life Sciences & Diagnostics up slightly and Industrial Tech slightly below. I think, again, as we saw the quarter play out, I think we were very encouraged with the strength of the overall quarter as we look around the business. But certainly, during the quarter, I think we saw some things that give us some pause and obviously have us thinking about the environment here with the acceleration of the cost actions. I think as we think about the second half, certainly, we saw in June, I think, some signs that the second half may play out a little bit differently than we had anticipated originally. Certainly, the China rebound, I think we were anticipating as others were, is going to come; it's probably just not going to come in the time frame that we had anticipated here in the second half. Certainly, Motion and T&M are not rebounding in the way that we had anticipated or had hoped. Now there's an obvious intersection there between Motion and T&M and the China softness. Clearly, there's -- I think there's more uncertainty today in and around some of the life science funding dynamics. And even in the U.S., where we've had another, I think, exceptionally strong quarter, we saw some, if you will, hairline fractures in certain businesses that just have us on alert. I think that, coupled with the headlines, which there are very view positive macro headlines out there globally right now, I think give us the impetus here from a topside perspective to say, hey, the risks are to the downside. Let's take note of the fact we're having a very good year from an earnings, from a cash perspective. But let's proactively, even though the businesses probably have a slightly more optimistic outlook for the second half, go ahead and set the stage to take advantage of the year that we're having to take the cost actions in order to protect our growth environments if the environment does continue to slide here a bit. I think with respect to the quarter, the third quarter here, and the current view, Steve, is that we'll be fundamentally in line with what we saw in the first half, so call that 2.5, 3. And as you think about the fourth, probably more in line here with what we just printed, call it 3, 3.5 on the core side.

And if you looked at it by -- Steve, maybe by segment, just quickly, we'd be looking at 4 of the 5 segments being up low single to mid-single with the exception being T&M, where we would expect that to be down. It's not that the instrument business is getting worse, but, as we alluded, that the communications business is not going to sustain its double-digit growth it's had here in the first half, in part because of the comp issues. So we could see T&M down kind of low single digit to mid-single digit here in the third quarter. And as kind of Larry alluded to are the numbers from our businesses would be higher than that. So most -- some of our segments, where we're telling you we think it's low single to mid-single in some of our businesses, with their numbers, they were all up to more of a mid-single-digit point of view. So I think we're taking, again, a little bit of a top level perspective and adjustment here, given the macro environment, given the few things we've seen here of late. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay. So it sounds like there's contingency built into that is what you're saying, right, in terms of roll up versus the top down view?

That is -- that's the right way to look at it, yes. Steven E. Winoker - Sanford C. Bernstein & Co., LLC., Research Division: Okay. And just lastly, the T&M margin pressure, is that mostly operating leverage?

Yes. As you know, as we've talked about, T&M is our highest gross margin segment, and obviously, that's hurting us here. And we will see that impact again here in the third quarter, and you'll see a step-down sequentially in our margins Q2 to Q3 in T&M.

We'll take our next question from Steve Tusa with JPMorgan. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Can you just give us a little bit of an update on the -- in integration and maybe how the instrument placements are going from a top line perspective?

I assume you're talking about Beckman, Steve? Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Yes. Beckman, yes.

Yes, I'm sorry. A year in here, I think we're very pleased with where we are as we highlighted in some of the prepared remarks. Now certainly, the primary objective there has been quality. I think we've made a lot of progress. You just see that in the reinspections and the new product approvals and just a lot of the internal metrics that we look at on a weekly basis. With respect to growth, and clearly, we're encouraged here with the low single-digit growth in Diagnostics that we're going to print or allude to here, it's not yet part of the core for 3 quarters in a row, I think that speaks to this business really getting back up on its feet, no silver bullet there, Steve, but just a lot of different actions being taken to improve service levels, certainly the quality improvements help. And I think that, coupled with the new product introductions, the investments that we're making in our sales and marketing organizations, has us encouraged that this is a business that, once fully up on its feet, will be a real contributor to Danaher's overall core growth. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: Great. And then just within the businesses, I mean, you mentioned some, I guess, you used the term hairline fractures, I mean. And anything more specific than that you're seeing in your short cycle businesses? And then how have things kind of started off here in July?

Well, Steve, I would say that July is very much in line with what we were anticipating here, so we're encouraged by that. A little hard to read, at least the U.S., given the 4th of July holiday falling in the middle of the week. But with respect to what we were talking about in the second quarter, in the U.S., I think we saw some signs in and around Life Sciences, certainly, in T&M and, to a lesser degree, in Environmental, where even businesses like -- even some of the businesses that we're printing very good numbers here just had a little bit of softness, a little bit of, say, a forecast miss here or there where we were seeing customers hesitate to write POs, in other cases projects being pushed out a little more than we would have anticipated. I think if we weren't so mindful of the headlines and the drumbeat of negative news, it might be easier to say, hey, well, that -- those are just -- that's just noise. But again, I think we're going to exercise a level of prudence here and to say, hey, the risks probably are to the downside. Let's go ahead and take some proactive actions here that are the right things for the business so that we continue to make the longer-term investments for the corporation. Charles Stephen Tusa - JP Morgan Chase & Co, Research Division: And then one last question. Is there anything in the portfolio rationalization side where you guys are still -- you're opportunistic in selling things? Is there anything that's out there that you're looking at that could either fund further acquisition on the balance sheet, but also maybe just a timing issue where you could, ultimately, offset this restructuring cost in the ForEx headwind with gains in the back half? I know you don't play that game, but I'm not sure if there's anything you're looking at left in the portfolio that's kind of noncore.

Steve, I think, well, obviously, we've done a fair amount of pruning the last couple years. And given our joint venture with Cooper, soon to be heating [ph] with the tools -- on the tools front, a business that had a very good second quarter and, in fact, sequentially. So as revenues rise $25 million and with terrific fall-through hits, $25 million sequential increase in revenues and a $10 million increase in OP sequentially, Q1 to Q2, I mean, that's something that obviously down the road, under the right situation, could be something that could be used for acquisition proceeds.

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

So, Dan, if you could maybe -- or, Larry, if you just talk about the CAGR [ph] cadence. You've given some good detail already. But it looks like 2% to 3% for the second half of the year is your planned assumption, but your comps go much easier in 4Q. So I'm wondering how does 3Q look in your plan relative to the 4Q. And if you could maybe just then pass into that, the impact of Beckman Coulter rolling to the numbers in the second half of the year.

Yes. Nigel, to be clear, I think that what we're going to see here in the third is a slight downtick from where we were in the second. So call that 2.5, 3, given what we know today. I think we would see near the fourth quarter step up from that, call it to 3, 3.5. But you're kind of in a band where the first half is going to be in line with the second half. Beckman does kick in. It kicked in for a week, but that was just -- it's not meaningful in the second quarter. It kicks in here obviously -- here forward and has an ever so slight dilutive effect. But at this point, given the performance that we're seeing there, it's not much to call out. So I think what we're looking at -- again, I think in light of what we're seeing or not seeing in China, certainly, the softness at T&M, in particular in China and elsewhere, and just some concerns about the way the macro environment plays out in the second half has us putting that outlook together, but one in which we think we can drive good market share gains in.

And then -- I mean, it doesn't sound like there's much changing just from your comments, but you talked about some hairline fractures. But the quarter, you're flat in Europe. You're flat in China. I mean, is the decision to restructure, is it driven more by what you see in the macro side, or is that a bit more within the businesses, maybe some of the book-to-bill ratios in June that caused you to launch this program?

Nigel, it's a judgment call. So admittedly, it's hard to describe for you how much of it is a view of what we're seeing internally, how much of it is a function of what we see out the window here. But I think all -- and even though the comps do get easier, China is going to take a while to rebound. I think the political dynamics there are probably more pronounced than we had perhaps anticipated. That said, they're clearly engaging. Europe is what it is, and the U.S. has been quite strong for us. But I think we want to make sure that come what may, around the world, we're still in a position to make the growth investments in the second half of this year, the first half of next year, admits that uncertainty so that we're driving the company forward over the long haul. That's the way we've always managed. We'd like to think this is a prudent approach, some may call it conservative. That's fine to our ears. I think at the end of the day, that if things are better, we'll obviously print better numbers. But given what we know today and don't, I think this is the right thing to do.

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

No, it's more heavily weighted to the fourth quarter. What you're seeing in the third quarter is primarily an FX dynamic. The euro kind of peaked this time last year. The year-on-year, we have about a $0.05 headwind. And then actually, even sequentially, we have about a $0.02 headwind between Q2 and Q3, given the dollar really didn't begin to strengthen significantly until June. That, coupled with -- of the expectation, slightly lower growth sequentially and some restructuring, frames up the guide here for Q3.

We'll go next to Jon Wood with Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: So, Larry, can you just tighten up perhaps the view on Life Sciences & Diagnostics for the year? You initially offered 3% to 7%. Is it possible to get a bit better view on how that business shakes out for all of 2012 at this point?

Yes. I think that what we're clearly seeing there, Jon, is the softening in the spending drivers, particularly with respect to some of the government-funded dynamics. I think, particularly, as we look at some of our big ticket products, the new products, which is SCIEX and Leica, I think we're encouraged by those product launches, probably hurt us a little bit, both with the new mass specs out of SCIEX and Leica with the new confocal, given the timing. I know we hung some customers up here in the second quarter as they were evaluating and, in turn, placing orders on the new products, shipments obviously to come. But I don't think the new product launches are going to be pronounced enough for us not to see some softening in the core in Life Sciences. So I still think Life Sciences & Diagnostics, as a whole, probably will be one of our leading segments from a growth perspective. But Diagnostics will clearly be the better performing business of the 2 as we look at the second half. Jon Davis Wood - Jefferies & Company, Inc., Research Division: All right, great. That's good color. And I mean, thanks for the update on Beckman. Just if you look to the back half and obviously with the troponin submissions already in the FDA, assuming that goes according to plan, I mean, is it at the point where we can kind of rule out the flat number for Beckman diagnostics? And would you expect that business to accelerate in 2013 just given what you know today?

Well, certainly, I think we've got a lot of the things within our control getting better every day, and that's obviously helpful. There's still some factors where we're working with others to improve our ability to grow. But I think at this point, Jon, as we look at next year, I think low singles is probably what makes sense with respect to expectations, with mid-singles being certainly within reach for 2014.

We'll go next to Scott Davis with Barclays.

Can you talk about some of the deals you did this quarter? And you did 8, but really, all we really know about is X-Rite, and it seems like a pretty active deal book. Just in context and maybe what type of multiples you're seeing, are they deals that are easy bolt-ons or generally accretive or dilutive? I mean, just a little bit of color around that.

I think that by and large, Scott, we would characterize the other deals here, absent X-Rite, as really bolt-ons, where we're bringing on capability, bringing on distribution resources that bolt on in a clear, close, strategic way to existing businesses. I mentioned a couple in the prepared remarks. Certainly, within TEK Comms, where we've seen tremendous growth, VSS gives us tremendous capacity to continue the monitoring capability that TEK Comms does for the wireless carriers. These network switches are really part of a technology term where we think VSS is very well positioned. So they'll be working hand in hand with the TEK Comms business to make sure that, around the world, we're taking their capability and putting it forward in front of customers in the best possible way. And we mentioned Catlow down at GVR as well, a company we've known for a long time. But as we expand our vapor recovery offering, certainly, having that hanging hardware capability that they have is an important addition, but again, kind of a classic Danaher bolt-on acquisition in that regard.

And in terms -- I mean, in terms of the multiple, I think the one that's most relative, just given the size, would be X-Rite. It's more kind of an adjacency-type acquisition, and we paid about 10x trailing EBITDA there. Given the cost takeout, some of the public company costs that come out very quickly, we can scale that down very quickly.

Okay. Just to get back to some of your macro view. I mean, if you take some of your bellwether businesses, and I always think about Fluke, for example, and a couple of the industrial TEK businesses, but Fluke I know has scale in China, I mean, what do you see in emerging markets as it relates to their shorter cycle businesses? And any bottoming that's going on there?

Yes. I think, by and large, Scott, that's a good -- certainly, Fluke's a good barometer for us in that regard. The fact we've got 40% of our business on consumables also gives us kind of a really good pulse in addition to some of the other POS data that we have. We really can't, at this point, separate China from the rest of the emerging market basket. I think what we've seen in China has really been, I think, evidence of the slowdown there outside of healthcare. I'm encouraged by that, because while we don't like the fact that we've certainly seen our non-healthcare businesses basically be flattish with flat to slightly down, with T&M being down double digit, the healthcare businesses, I think because of the government's actions purely with its rural healthcare initiatives, have been quite strong, in addition to what they're trying to do to establish an indigenous of life science research capability. But it is what it is, and I don't think that underlying business that we see in Industrial and in Environmental, let alone in T&M, gets materially better until late this year or early next year. But if I go to the other side of the so-called BRICS plus, even though some of the headlines out of India and Brazil have not been, I think, particularly encouraging. By and large, we're seeing a good consistent, steady growth. In many of those markets, we have modest positions. Though the base that we're growing off of is not that pronounced, that's a good thing for us. We're clearly getting our bearings and really understanding how to play and compete in those parts of the world. But there's really no place else in the world right now, Scott, that we would say we're seeing the sort of broad softening x healthcare that we're seeing in China.

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

So in terms of margins maybe a little bit, I mean, you've obviously taken a more conservative view on organic. I mean, are there areas that are tracking ahead of plan on margins? I mean, Dental, certainly, it looked like a strong spot. I don't know if you've had a breakthrough there, maybe highlight that or some other areas where you think margins are tracking ahead of plan.

Yes, I mean, certainly, Shannon, speaking to Dental, I think we're very pleased with that. Really, the first half performance all the way around, given the environment, could not have been better. I wouldn't say it's a breakthrough though, because we've got 3 years, this looks like it's going to be the fourth year in a row, where we had very steady margin improvement in Dental. And I think they know, even though they print, what, 14.4% here in the quarter, that there's plenty of upside still as we adjust the cost structure and get quality growth out of that business. So again, I think a lot of us remember some of the false starts that we had there way back when, but that now is really something for the history books. And the trend they're on, here again in the first half of this year, I think is indicative of what that business and that team is capable of delivering.

I think the other segment that we've been particularly pleased would be in the Industrial segment, where on modest growth, overall -- good growth at PID, but negative impact from the Motion-related businesses. We've been able to sustain that 20% segment operating margins, see core operating margin improvement in this quarter to about 100 basis points. Again, that's somewhat of a function of what we did in the fourth quarter of last year, another reason why we're teeing up some restructuring here, but we're also getting somewhat of a favorable price cost dynamic in Industrial Technology as well. We've got about 1.5 point of price in that segment. And given some of the commodity and some of the brief in declines in commodity prices, it doesn't benefit us a lot across the other segments, but it does definitely benefit us there.

Okay, that helps. And then on free cash flow, I mean, in the quarter, I mean, the conversion was particularly strong, I mean, the whole first half but particularly in the quarter. I mean, was there anything unusual there? Or how would you characterize that in terms of sustainability?

Well, we printed a little bit, over $1.4 billion in the first half. I think we're positioned to kind of print a comparable number to that here in the second half. That would be a probably $400 million year-on-year increase in free cash flow. That continues to track very well. We did get a slight benefit versus last year. We had higher tax payments in the first half, lower in the second half. That'll be a little bit different this year. They were low in the first half. We'll be a little bit higher in the second half. But that's a small factor though. Overall, our working capital performance continues to be very strong. And we've got $350 million of amortization flowing through as well, and that continues to support that very high conversion ratio.

Which, in turn, Shannon, of course, is why we are optimistic and, I think, ready to go here on the M&A front, right. We talked about what we have to spend here. You think about the $5 billion of firepower over the next couple of years. If the environment does become a bit more uncertain, as we are thoroughly suggesting that it could, that just can't help but make the M&A environment more attractive to us. We're ready to go.

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

It's actually Charlie Clarke for Julian. Just had a real quick question on the restructuring. Just if you guys could kind of break down kind of where you think that's going, just kind from an operating segment standpoint.

Charlie, the $100 million in aggregate that we're flagging this morning will be well distributed across segments and geographies. I think as you may know, when we've talked about these actions at this stage probably in the past, we've tried to not getting into too much detail. I think that we prefer to have the opportunity to talk to affected associates before we talk about any specifics publicly, and we'll do that again here this year. But suffice it to say, obviously, the bulk of our developed market's footprint is where a lot of the structural cost in the corporation resides. We will be working hard in that regard. And some of the businesses that have lower relative margins today are probably the ones where there's a bit more upside and potential to improve our structural cost position in order to, again, preserve and protect those growth investments in the second half of this year and next year, which we think are really the long-term fuel for the organization.

Okay, great. And then just real quick. SG&A-to-sales ratio just seemed like it ticked up a bit kind of quarter-over-quarter just enough. Do you have any color on that?

Sorry, I'd have to look at it. Nothing jumps to me off-line right here, but I can -- I'll take a look at it.

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

So can you, Larry, on Tektronix around -- maybe on the instrument side of Test & Measurement. I think the last quarter, you highlighted that the department returned to a book-to-bill of over 1. Can you maybe just talk about what happened there intra-quarter? And then maybe kind of the follow-up on the restructuring. I know that's where you did a lot of restructuring back during the last downturn. Is that a business where there is more that you can still do, or not so much in that business?

Let me take them in reverse order. There's always more you can do. I think that's rooted in the DBS mindset. We have done a lot, as Dan was mentioning earlier. Having done a lot over time is one reason we have such high margins at T&M and why we're going to feel that effect of the revenue softness in the second half. I think we prefer again not to get too specific here in mid-July. We'll keep you posted as we talk to associates through the second half. But suffice it to say, again, we'll be looking at everything as we get ready for the final implementation of this plan. With respect to what we saw through the quarter, the book-to-bill, again, at TEK was positive in -- I mean, positive in terms of being north of 1.0. But I think what we've seen is, again, that intersection between pronounced softness in China, particularly Europe to a lesser degree, and just a hesitancy, perhaps a much more subdued investment level on the part of customers, at least temporarily here, that have us, I think, looking at the second half, again, in line with what we saw in the first half, where T&M is not going to be the growth leader for us, particularly on the instrument side, that we have seen in years past.

And just to clarify, in the second half, given the macro indicators that we see, you expect, on the instrument side, similar to the first half. That's what you said. And you said communications, that the comps would be slightly -- would make the overall numbers slightly lower, right?

And that'll be more pronounced in Q3. We then think we'll see some sequential improvement in Q4.

Talking instruments.

Talking instruments, yes, right.

Okay. And then if, again -- I mean, is that here at AACC [ph] as you alluded to? And it's clear unlike the Life -- on the Diagnostic and on the Life Science side, that all your customers are going to be under much more pressure from either a reimbursement standpoint or a funding standpoint. So now that you've owned those businesses for a while and you're kind of moving into this period, I'm just curious, did your strategy change at all? Or how are you just thinking about those businesses, given the constraints that a lot of your customers are going to be under?

Well, I think that those constraints are not dissimilar from the realities that we anticipated when we've made these relative investments over time, and particularly so with Beckman last year. But I just continue to think that on the Diagnostic side, Jon, what we do from a scientific perspective is provide information at the front end of care, which can't help but be part of the solution long term to some of these macro pressures that all payers, government or otherwise are going to see. I think on the Life Science side, what we are, I think, well positioned to do is really skate to where the puck is, if you will, and not necessarily be tethered in a broad-based way to overall spending of what we do at AB SCIEX in mass spec, what we do at Leica with confocals. Very much it's targeted to the higher growth, the higher interest, the higher impact areas and categories where research work is being done. I think if we can continue do to that strategically, we'll be mindful of the macro pressures and any posterior budget effects that fall through our customers. I think we'll be well positioned to take, if you will, our unfair share of those overall budgets because of the value we'll be providing our customers.

But just -- and I recognize you do not want to give specifics in terms of where you're going to do your restructuring, but in that environment, is there a need maybe as you've look at it to be more cost effective than maybe you initially thought? Or is that -- is it in line -- is everything you're seeing so far, even with some of the cracks that you mentioned in the U.S., is everything in line with your expectations, so it's more about trying to find the value you just alluded to on the revenue side?

Yes. I think if you look at Life Sciences & Diagnostics here again in the quarter, they were our star, right. I think we're flagging that the Life Science environment, at least, in the short term, probably gets a bit more challenging for us. But that said, I think anything that we might do in Life Sciences & Diagnostics, Jon, is really a function of the opportunities that we see to improve the overall cost structure, much as we have at Beckman, 400 basis points up over the last year, much as we've done at AB SCIEX over the last 2 years, where I think we've been able to improve the cost structure while improving the overall operation of the business and, clearly, increasing the investment envelope up there for new technology and being a more serious player from a sales and service view, globally. So I think what we're suggesting here this morning is really borne of a global macro view and a desire to have more control over our destiny in a more uncertain world and not really a direct or indirect tieback to some of the long-term pressures that you're alluding to. And again I think there are long-term opportunities embedded there as well, which we're strategically very keen to go take advantage of.

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

I had a couple quick follow-ups. First, on assumed conversion margins in the second half, a lot of sort of moving pieces in the overall margin picture, but the core conversion assumption is still around 30%, 35%?

Sure. Terry, we were about 35% in Q2 when you factor out the acquisitions and the FX impact. We should be in that zone here. And again, the one segment we will be challenged here will be T&M as we expect that segment to be down, tipping the third quarter. I think there will be less of a comp [ph] in the fourth quarter to where we expect to be down low single to mid-single digits in terms of growth and expect segment margins to be down a couple of hundred basis points sequentially. But outside that, the other 4 segments should be in that 35% zone.

Okay. And then maybe I missed it in the detail, but did you or could you give either the Beckman core on a stand-alone basis in 2Q or what Life Science's core, including Beckman, would have been?

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

Okay, great. And then, Larry, you've been very clear on cap allocation in the near term and the focus is on the M&A pipeline, but I just wondered, given sort of the shift in the world, if you will, number one. Number two, looking at your relative valuation versus the peer set versus where it's been historically, I wonder if there's a point at which stock buyback starts to become an option that you entertain more seriously. And if not, under what scenario could you see that occurring?

Terry, I'd say this, from time-to-time, as you well know, we've been opportunistic in buying back shares. But I think our bias today is consistent with our long-term bias, and that is to redeploy our free cash by way of M&A. But obviously, it's something that we and the board constantly evaluate. But our long-term bias, I think, is very much intact as we look forward.

Okay. And then maybe I just wonder if there's any additional color on the pipeline from the standpoint of size. I mean, I think it's been pretty clear that we ought to be anticipating bolt-ons versus anything large, but I wonder if something may have changed there. And then secondly, I think the indication had been previously that maybe you are seeing more things outside of the Life Sciences area, and is that unchanged -- has that changed at all?

Terry, that's largely been -- things have been largely up by the Life Science-Diagnostics space over the last 2 to 3 quarters. I think we expect that to continue, though I -- we will probably -- now that we're a year post-Beckman, we'll start to be looking at bolt-ons for that space as well. Given where we are from a capital structure, we paid down -- our net debt down almost $2.5 billion over the last 12 months. I think we're geared back up beyond just looking at bolt-ons. And whether it's adjacency-type deals like X-Rite or even larger deals, I think those are all being considered right now. And given the macro environment, obviously, that creates some uncertainty in the marketplace and on Wall Street, that tends to be good for people like us. And we're optimistic we're going to be able to put the money to work here.

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

Just going back quickly on the restructuring. I might have missed this. But could you address what the assumed paybacks are, the timing on these -- the incremental restructuring initiatives here?

Deane, we would expect to complete this $100 million of restructuring by the end of the year and would expect a slightly north of a 1-year payback that'll -- in the ballpark of a $75 million benefit next year.

So that would be $75 million on a run-rate basis for the -- for 2013, is that right?

Correct.

Okay. And then I know you don't typically call out book to bill. It got called out in the first quarter because of the timing of some of the orders and later shipments. But how did that resolve for this quarter? How did book to bill end up for the second quarter?

It was right -- it was slightly north of 1, but basically 1.

Okay. And then last question. Larry, you alluded to some growth investments. Oftentimes, when you see companies there facing a little bit uncertain macro, there's a pullback in growth investments. Can you just talk about what areas, the magnitude and would there be a sense of throttling back, or are these committed resources?

I think the throttling back, Deane, is exactly what we're trying to avoid. I think if we were not taking the actions here in the second half, given the macro uncertainties, we might be dialing back some things in the margin, which, frankly, are sometimes the easiest things to pull back on when things are getting tighter or more uncertain, but by the same token, the very things that you ought to protect in tough times. So I think what we want to do is make sure we are taking out the structural costs that we can in a good year here to make sure that come what may, the go-to-market investments that we're making, be that in emerging markets, be that with respect to digital marketing, let alone the science and technology bets that we're making in new product development, are protected and, in some cases, increased.

Ladies and gentlemen, this will conclude our question-and-answer session. I'll turn it back to Mr. McGrew for closing remarks.

Thanks, everybody. Dan and I are around all day for a follow-up.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great afternoon.