Danaher Corporation DHR
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Good morning. My name is Jennifer and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Second Quarter 2013 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

I would now like to turn the call over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin.

Matt R. McGrew - VP, IR: Good morning everyone and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, our second quarter Form 10-Q and the reconciling 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 on our website, www.danaher.com, under the heading Financial Information 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 archived until our next quarterly call. A replay of this call will also be available until July 25, 2013. The replay number is 888-203-1112 in the U.S., and 719-457-0820 internationally, and the confirmation code is 5527091.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the supplemental materials in our second quarter Form 10-Q 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.

I'd also like to note that we'll be making some statements during the call that are forward-looking statements within the meaning of the federal securities laws, 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 forth in our SEC filings. It is possible that actual results might differ materially from any forward-looking statements that we make. 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.

H. Lawrence Culp, Jr. - President and CEO: Matt, thanks. Good morning, everyone. In the second quarter better than anticipated core revenue growth and outstanding execution from our team, while the strong earnings margin and cash flow performance.

Core revenue growth of 2.5% was slightly higher than expected, led by Hach, Gilbarco, Beckman Coulter Diagnostics and our Life Sciences platform, all of which were up mid-single digits. Investments we've made in innovation and go-to-market initiatives in the high-growth markets continue to drive growth and help us capture market share.

The impact of the Danaher Business System and the quality of this growth were evident in the excellent year-over-year margin improvement in the quarter. Our gross margin improved by $140 million or a 100 basis points and our core operating margin expanded 95 basis points.

As we look to the second half, we intend to make additional investments aimed at share gains and margin expansion for 2014 and beyond. So with that as a backdrop, let me move to the details of the quarter.

Today, we reported second quarter diluted net earnings per share of $0.87, a 3.5% increase compared to our diluted net earnings per share a year ago and representing another record quarter for Danaher. Excluding a $0.03 gain recognized in the prior year period, adjusted net earnings per share increased 7.5% year-over-year.

Revenues increased 4% to $4.7 billion, with core revenues up 2.5%. The impacted acquisitions increased revenues by 2%, while the negative impact of currency translation reduced sales by one half of 1%.

From a geographic perspective, high growth markets grew high single digits. In particular, we saw sequential improvements in Brazil and the Middle East, as each region was up more than 15% year-on-year.

China saw low-double-digit growth in the second quarter, led by our Life Sciences & Diagnostics and Dental segments, which grew in excess of 20%. In addition, our water quality platform in China grew at a double-digit rate for the second quarter in a row.

Developed markets were up slightly, with the U.S. and Japan up low single-digits and Western Europe down low single-digits.

Our gross margin increased 100 basis points year-over-year 52.7%, driven by both volume increases and prior year-over-year productivity improvements. This significant improvement has allowed us to increase our growth investments are still delivering excellent bottom-line results. Our reported operating margin in the second quarter was essentially flat at 17.8%, while core operating margin improved 95 basis points.

The Danaher business system continued to service well, helping to generate yet another quarter of solid cash flow performance. Second quarter operating cash flow was $899 million and free cash flow was $763 million. Our free cash to net income conversion ratio for the second quarter was 124%.

We continue to find attractive bolt-on opportunities and closed over $300 million of acquisitions in the quarter focused in our Environmental and Life Sciences & Diagnostics segments. Given our healthy balance sheet, we have more than $8 billion of potential M&A capacity available through 2014 to expand and strengthen our strategic growth platforms.

Turning to our five operating segments, Test & Measurement core revenues increased 0.5%. Core operating margin decreased 30 basis points while our reported operating margin declined 60 basis points to 20.9%. In our Instruments platform core revenues declined low single digits. Fluke's core revenues were flat with 10% growth in high-growth markets offset by weak demand in most developed markets. However, we are encouraged by the mid-single-digit growth we saw in North American industrial Instruments during the quarter.

At Tektronix, core revenues declined low single digits with growth rates in both developed and high-growth markets improving sequentially from the first quarter. Core revenues for our communications platform grew low single digits, led by strength in the high growth markets, specifically the Middle East and Latin America.

Across the platform, we've increased our R&D spending by approximately 15% year-to-date focusing on new product development and innovation to address the expanding needs of our wireless and enterprise customers.

At Fluke Networks, we unveiled the new Versiv product family designed for copper and fiber certification during network installation. The DSX-5000 cable analyzer gives field technicians unmatched speed and efficiency in certifying performance in copper cables while the certified pro provides the same certification capability for fiber networks.

At Arbor Networks, demand for network security solutions remains very strong across all major geographies. During the quarter, we added over 50 new customers in both the enterprise and service provider markets, which includes significant expansion orders at two large global financial institutions.

As a testament to Arbor’s innovation and leadership in network security, they were recently named the best overall security company during the Info Products Guide award at the RSA conference.

Turning to our Environmental segment, revenues increased 8% in the quarter with core revenue increasing 4%. The segment core operating margin increased 70 basis points with reported operating margin essentially flat due primarily to the dilutive effect of recent acquisitions.

Our water quality platform core revenues increased at a low-single-digit rate. Hach grew mid-single digits driven by core lab and process instrumentation and mid-teens growth in service. We believe we are growing faster than the market. Geographically, the U.S. was up mid-single digits in the quarter, while China grew double digits, driven by solid demand for drinking water projects.

During the quarter, we launched several new products, including a (value line) of electrochem products designed specifically for China. We also unveiled the 5500sc Silica Analyzer, which features predictive diagnostic software, allowing customers to avoid unplanned downtime caused by silica buildup on boilers and turbines in PowerGen stations.

Gilbarco Veeder-Root's core revenues grew mid-single digits, led by healthy demand across all major product lines and most major geographies. Sales in Asia, in the Middle East were particularly robust, driven by large customer side upgrades for dispensers and payment solutions. We believe we are gaining share with our point-of-sale and payment products, both of which grew at mid-teens rates in the quarter.

GVR recently completed the previously announced acquisition of Automated Fuel Systems Group, a leading provider of fuel management solutions to government, fleet and mining customers in South Africa.

Moving over to Life Sciences & Diagnostics; revenues increased 5.5%, with core revenues up 5%. We saw outstanding margin performance with our core operating margin improving 180 basis points and our reported operating margin increasing 130 basis points to 14.4%. The strong margin performance occurred even with a double-digit increase in R&D expenses at Beckman Coulter Diagnostics, where we continue to ramp up our product development efforts.

The Diagnostics platform continued their solid performance with mid-single-digit core growth in the quarter. At Beckman, core sales increased at a mid-single-digit rate with growth in all major product categories.

This quarter marks the second anniversary of the Beckman Coulter acquisition and we are exceptionally pleased with the progress that's been made by the team around the world. We’ve seen low single-digit core growth or better for the last five quarters and the business is becoming more competitive each day.

Over the last eight quarters, we made significant improvements in our internal capabilities, specifically addressing on-time delivery, service and product quality through improved design to ensure that we’re serving our customers well.

We’ve also made tremendous progress to enhance efficiency with second quarter operating margin expanding 150 basis points year-over-year. We’ve also made considerable progress on the regulatory front. For example, we recently received FDA 510(k) clearance for the troponin assay for use on our Access 2 System.

This approval allows Beckman to offer component to new customers in the U.S. for the first time since 2010 and marks an important milestone for our customers as well as the Beckman Coulter team.

As Beckman enters its third year with Danaher, we are actively increasing growth investments in business particularly in R&D to boost new product’s vitality and ultimately drive higher organic growth rates.

Radiometer core sales were up at a high single-digit rate with growth in all major product lines. High growth markets were up more than 20% in the quarter, led by China, which grew about 45%.

Instrument placements were particularly strong in the quarter with blood gas up 25% and AQT up over 50%. As previously announced Radiometer closed the acquisition of HemoCue a leader in hemoglobin and glucose point-of-care testing.

In Leica Biosystems, sales increased in a mid-single-digit rate, led by advanced staining, which was up low-teens in the quarter. Most major geographies saw growth with particular strength in China which grew to high-teens rate. Further, our core histology business grew low single digits year-over-year, and we are pleased to report that Leica Biosystems can be found in 100% of the top 50 cancer centers in America as recently ranked by U.S. News & World Report.

Subsequent to quarter's end, Leica Biosystems acquired Amsterdam based Kreatech Diagnostics. Along with Leica's advanced staining Instruments Kreatech's probes and reagents enable customers to detect genetic aberrations that may lead to cancer and other diseases.

Our Life Sciences platform, core revenues increased in a mid-single-digit rate in the quarter. AB SCIEX's core revenues were up mid-single-digits led by robust growth in pharma and the applied markets, particularly food and environmental. The 6,500 or high-end triple-quad platform continues to be very well received by customers globally in all major market segments and is expected to generate more than a $100 million in revenue on an annualized basis.

AB SCIEX recently launched its 3200 MD CEIVD series of mass spectrometers for clinical diagnostic use in Europe. This is an exciting achievement for AB SCIEX as 3200 MD expands their addressable market to include clinical care customers and we look forward to leveraging channel synergies with our diagnostics platform to help drive growth of this largely previously focused product category for the research realm.

Leica Microsystems core sales were up mid-single-digits led by double digit growth in China the Middle East and Japan. We continue to see solid demand for our confocal microscopy systems which grew over 10% in the quarter. Demand for our SP8 modular confocal laser-scanning microscope remains robust, growing at a high-teens rate.

To expand our go-to-market efforts in Latin America, we acquired Aotec, Leica's distribution partner for microscopy and histopathology solutions based in Sao Paulo, Brazil.

Turning to Dental, segment revenues grew 3% in the second quarter, with core revenues up 2.5%. Core operating margin increased 90 basis points while reported operating margin expanded 90 basis points to 15.3%.

Dental consumables core revenues grew mid-single-digits, led by sales of professional dental consumables across most major geographies. In addition, our implant business grew at a high-teens rate as they continue to take market share.

Kerr recently launched The Demi Ultra Curing Light System, the industry's first ultracapacitor powered light curing system, which provides dentists with more efficient curing and eliminates the need for battery power.

Ormco's Insignia Advanced Smile Design received the 2013 American Technology Award in Health & Medical Technologies from the TechAmerica Foundation. This award is presented annually to the product that most improves the delivery of health services.

KaVo's core revenues were up low-single-digits driven by demand in China and other high-growth markets.

Last quarter, we highlighted the new i-CAT (Flex) which achieved a full 3-D scan at lower radiation doses than traditional 2-D panoramic X-ray imagers. Reception in the market has been outstanding with the (Flex) receiving a Best New Product award at the Henry Schein National Sales Meeting and the 2013 Pride Institute Award for Best-in-Class Technology.

In Industrial Technologies, total revenues increased 2% while core revenues declined 2.5% for the quarter. Both our reported and core operating margin increased a 110 basis points with a reported operating margin at 23.5%.

Our Motion businesses' core revenues declined at a mid-teens rate with weakness in most major verticals. We've begun to see signs of stabilization in North American distribution, which grew modestly both year-over-year and sequentially. As evidenced by strong profit performance, Motion continues to transition out of some of their lower margin business. This transition will continue to impact core revenues, which are expected to remain negative in the second half of this year.

Core revenues for our Product Identification platform were up mid-single digits with solid demand from our in-line variable printing technologies as well as our packaging and color management solutions. Sales increased across most major geographies.

Those of you who joined us last week in Chicago at our Investor Day saw firsthand the evolution of our Product ID Platform from our core marking and coding businesses into a leading provider of integrated packaging solutions expanding the entire consumer packaging value chain. I thought our team did a great job illustrating how we use strategy and DBS to establish, then build and grow a strategic platform. For those of you that weren't able to participate, I strongly encourage you to watch the replay available on our website.

At Videojet net product introductions have been an important driver of our share gains. In the quarter, we introduced the 1620 and 1650 lines of ultra-high-speed printers capable of speeds 40% faster than the previous industry benchmark with minimal planned downtime.

Also in the quarter, Procter & Gamble announced their adoption of Pantones, new cloud-based color management solution, Pantone Live, which improves operational efficiencies throughout the packaging supply chain. This is the second major consumer packaged goods company to adopt (PantoneLIVE) building on early momentum in the market.

So to warp up, we were very pleased with our second quarter results. Better than anticipated core revenue growth and outstanding execution led to solid operational performance.

We are initiating third quarter diluted net earnings-per-share guidance from $0.78 $0.83, which assumes 2% to 3% core revenue growth. We are narrowing our full-year 2013 adjusted diluted net earnings-per-share guidance to $3.37 to $3.42 from a previous range of $3.32 to $3.47.

As we move into the second half of the year, we are maintaining a conservative macro outlook while staying confident in our ability to deliver solid operating margin expansion. We expect investment in innovation in the high growth markets to continue to drive growth in share gains.

Our earnings outperformance in the second quarter allows us to make additional high-impact growth investments and to fund productivity and efficiency initiatives that we believe will position us well for the balance of this year and beyond.

Matt R. McGrew - VP, IR: Thanks, Larry. Jennifer that concludes the formal comments, we are now ready for some questions.

Transcript Call Date 07/18/2013

Operator: Scott Davis, Barclays Capital.

Scott Davis - Barclays Capital: Talk a little bit about the investments you are making on the – Larry, can you help us understand, how much of this is driving growth versus restructuring and cutting cost. I guess the question. The obvious question here is that, are you investing more money because you are seeing or thinking there is going to be reacceleration of growth or is it more focused on getting cost out ahead of continued weak – relatively weak macro environment?

H. Lawrence Culp, Jr. - President and CEO: Scott, I would say that operationally this is really more of the same consistent with the path we’ve been on in this slower growth macro environment that we're operating in today, and frankly I think we see ourselves working through going forward. So, there is no macro call here to suggest we've seen inflection point relative to thing getting materially better and hence we want to be ready for that. I think that as we've seen through the first half of this year, we've been well served, having in the past, position ourselves, not only with the step up in R&D to drive new product launches, but also our step up particularly in the high-growth markets to go grab market share where we can and in turn to make sure we're being smart about our cost structure, we can make those investments and drive the margin expansion and the earnings growth that you've seen. So, what we're really talking about here in terms of taking the beat and putting it back into the business if you will in the second half is really a combination of stepping up those growth investments, both in R&D and sales and marketing as well as in those productivity efforts that you've typically seen us put through in the second half. We flagged last year on that point – at the end of last year that we probably had dialed in about $70 million this year in the back half to do that. We are going to step that up here certainly as we look to the second half, but again, it's really a balanced approach to make sure we're making the investments with share gains and margin expansion as we work our way through the second half of this year.

Scott Davis - Barclays Capital: As a follow-up to that, Larry, when you think about the step up you had in R&D, I mean you already fairly – you've always been a fairly large investor in R&D. So it's not if you underinvest in the past, but the step up in 2013 versus '12, do you anticipate this being an ongoing trend and then you have another step up in '14? Or is it reset the bar and you kind of hold this level versus sales longer-term? I have just a quick follow-up to that, just and conceptually every company (recover) is raising R&D as a percent of sales and I think even in the medical world that's happening. Has this become a little bit of a tax, if you will that it just cost more to drive incremental growth and you don't really get that much net benefit, because everybody is investing more? So it's bit of an arms race or is there really some differentiation that you think can occur with that added investment?

Daniel L. Comas - EVP and CFO: Scott, this is Dan. As we look back at Q2, we really saw the benefit across a number of the businesses in the step-up at R&D. So we talk about Hach, Gilbarco, PID, all businesses where we think we took share in the quarter. Their new product revenues improved sequentially 50% Q1 and Q2, and we think that was a big driver of the share gains. So I think we are seeing – we are not seeing it everywhere, but some of this targeted step-up we've made in R&D, we are seeing the payback for that. I think as long as we continue to see that and we’re taking share, our bias would be to spend more.

Scott Davis - Barclays Capital: (Multiple Speakers) my question, all right. I mean if you can gain share, it's definitely worth it. If it just (grow) in line with the market, but you have to spend more than it starts to – industry structure starts to come in to question, I guess?

H. Lawrence Culp, Jr. - President and CEO: Scott, to the structural question, I would just add, I think being spot on there that if you were in the sessions with us as we talk to the businesses, the tone is really fundamentally an offensive one. We see opportunities to do things that no one else does. We see opportunities to help our customer in a way that maybe we uniquely can and that really drives the agenda, the budget, any step up that you see it. Really not a lot of examples where we’re sitting there and saying, gosh, there is a catch-up to be made or taxes you say to be paid. So I think that qualitatively combined with the quantitative market share impact that we’re seeing suggest these are good investments for us, but we’ll continue to be prudent to make sure we're getting those returns as we put this additional money in.

Operator: Steve Tusa, JPMorgan.

Steve Tusa - JPMorgan: Just on the second quarter, I understand that it's kind of a similar revenue seasonality if I'm kind of doing the math correct on the core as last year. Is that right first of all? Just a sequential decline?

Daniel L. Comas - EVP and CFO: Yes. I mean last year we were down about $140 million Q2 to Q3. We probably have become a little bit more seasonal, a little weaker in Q3 given some of the acquisitions we’ve done over the last couple of years. I don't think we'll be down $140 million sequentially, but maybe we're down, call it, $100 million.

Steve Tusa - JPMorgan: When I look at like Beckman, for example, I think (DA) it was pretty – if you go back historically with their business, it was kind of flat-to-up seasonally and then last year, I think I thought you had kind of the initial drop-off in some of the more cyclical businesses, as well as that Life Sciences, call it, I don't know, an air pocket or whatever you want to call it on the product side. So, I guess, that's the difference between the $100 million and $140 million is – I am just struggling to – this is probably – last year was probably your biggest sequential decline and I am just kind of struggling to figure out what's changed here relative to 10 years of history.

Daniel L. Comas - EVP and CFO: Well, I think part of the history is number of years where we've done Q2 acquisitions, so the organic decline we've had historically over the last five years Q2 to Q3 is larger than our printed number. There is an acquisition element, so the seasonality was more severe last year, but less out of line than the number would suggest because of M&A.

Steve Tusa - JPMorgan: Is there any change in the level of restructuring this year as well, like I think you talked about the couple of pennies of investment in the third quarter, but I guess just the fourth quarter?

H. Lawrence Culp, Jr. - President and CEO: That's what I was trying to suggest in response to Scott's questions Steve, so we are stepping out both the growth investment and the productivity moves.

Operator: Shannon O'Callaghan, Nomura.

Shannon O'Callaghan - Nomura: Larry, interested on the somewhat better North American Industrial, I mean you talked about the distribution piece, anymore color on that, I mean was it a restock or pickup in end demand or anything you could make out of it?

H. Lawrence Culp, Jr. - President and CEO: I mean I think we flag that both at Fluke and in Motion. I'm not sure we're ready to extrapolate too much from that at least at this point. I think we were encouraged to see Fluke improve sequentially in that regard, but I think we need to see this play out for another quarter or so to think we've got legs there. There was some inventory movement at Motion, which is part of what we saw there, but again I think it's early signs, but we'll see how the third quarter plays out.

Shannon O'Callaghan - Nomura: How about on the Tek side of things, I mean any movement in either direction in terms of customers sort of attitudes around equipment spending on that side?

H. Lawrence Culp, Jr. - President and CEO: No, I mean clearly sequentially things improve. We're still negative from a core perspective. I think we've got the potential to be positive in the second half and in large part because of the comps. But as you know, maybe one geography in particular that we're watching closely, particularly in T&M on the Instrument side is China. China has been a real struggle, particularly the export base has struggle there. The comps help was probably more than necessarily the underlying demand does, but I think that combination should help us get positive there in the second half, but not widely or overly so.

Shannon O'Callaghan - Nomura: So you haven't seen any sort of significant change in behavior yet?

H. Lawrence Culp, Jr. - President and CEO: Not yet, we're looking believe me, we're looking.

Operator: Nigel Coe, Morgan Stanley.

Nigel Coe - Morgan Stanley: Just a quick – couple of quick follow on from some previous questions. So, to Dan, I think you referred to the step-up in R&D. Obviously it makes sense if you're getting the payback, but the 40 bps in the quarter, is that indicative of the kind of step-up you expect in the back half of the year?

Daniel L. Comas - EVP and CFO: In that range, Nigel.

Nigel Coe - Morgan Stanley: Okay. Then Larry, the restructuring spends, you mentioned a couple of $0.02 in 3Q, but the 4Q, I mean – how do we think about that? Do you have a number in mind? Or, is that number fungible depending on how the back half plays in?

Daniel L. Comas - EVP and CFO: Nigel, I think we're still a little fluid in that regard. As Larry highlighted, we talked about $70 million in our plan in the second half. That will be more fourth quarter than the third quarter. That's pretty typical. But we're going to spend more than that $70 million here. We're still sort of figuring that out. We're trying to embed that in our guidance.

Nigel Coe - Morgan Stanley: But more than $70 million in the fourth quarter rather than the second half?

Daniel L. Comas - EVP and CFO: Well, it tends to more Q4 focused, yes. There'll be some in Q3, but it will be more biased to Q4.

Nigel Coe - Morgan Stanley: Then switching to the performance in – at Beckman, obviously very encouraging (to see there is some growth stability). Can you maybe just give us a little bit more color in terms of what's driving that? Is it (fall of) an attrition? Are we seeing more growth? That's – any help there would be interesting.

H. Lawrence Culp, Jr. - President and CEO: Nigel, it's really not any one thing, but I think the program that we've been working to improve our retention in win rates in North America, I think, our step-up in terms of the investments in the high-growth markets, which really have been driving most of growth at Beckman. Certainly, as we really fixed the quality issues witnessed troponin and others, but also bring on some additional new products, every little bit helps, right? So, to see a mid-single-digit quarter here, isn't necessarily in anyway a declaration of victory, but having been out there here in the last couple of weeks, I just think we've got a lot of progress and momentum building in the commercial execution in new product development, which bodes well for the business. But again, as you heard me say, there is still a lot of work to do, but we are highly confident we are going to continue to improve Beckman and make that as good as any Danaher business that we have.

Nigel Coe - Morgan Stanley: How have you treated the upside of Beckman's for the second half of the year? Have you seen that – great quarter, but (indiscernible) continues or have you rolled forward some of that upside in the second half of the year.

Daniel L. Comas - EVP and CFO: I don't – I think we are still working with a low single-digit focus in the second half here, but clearly a little bit more encouraged given what we've seen, not only the numbers we printed, but just the general tone of the business.

Operator: Steve Winoker, Sanford Bernstein.

Steven Winoker - Sanford Bernstein: Just first question, the T&M core margin decline of 30 points, was all of that due to operating leverage or what other – any other dynamics in that?

H. Lawrence Culp, Jr. - President and CEO: Steve, it's really a combination of two things. One is, we noted Instruments is down, Instruments is the higher margin piece of that segment, so that hurts. And communications is an area where we are stepping up our growth investments. Clearly that's the best growth quarter they have ever registered, but as you know, probably one of our best growth businesses here in the last couple years with a tremendous amount of runway, given their focus and mobility, their opportunities in security and certainly building up more of a position with the enterprise customer base. So it's really the – the Instruments volume and the R&D step up, really OpEx step up in comps, which create that pinch.

Steven Winoker - Sanford Bernstein: Then you talked about a Beckman a bunch, but if you step back now two years later, how are the financials compared to your original expectations, both for ROIC and accretion at this point now?

Daniel L. Comas - EVP and CFO: Steve, we are right on track, probably the revenue is a little better, margins are ahead of where we thought they would be, we thought we'd have $250 million of cost, by the end of this year, we’re north of $300 million, so, little ahead on the margins and little bit ahead on the revenue line as well.

Steven Winoker - Sanford Bernstein: Maybe just a little bit of overarching commentary on any changes in the M&A environment is always helpful on these calls?

H. Lawrence Culp, Jr. - President and CEO: I don't think we've really seen a change, Steve, in the last 90 days, I think we're encouraged and fundamentally optimistic about our ability to deploy the capacity that we have the $8 billion or so that you guys talk about in terms of the next couple of years. Clearly valuations are up, that means we can't by every company we might want to buy, but that's never our (MO). We're looking for great fits where we can add value. Where we can generate a return for our shareholders and the silver lining in environment like this particularly for a strategic well-capitalized buyer like ourselves means you can have high quality conversation with high-quality companies. We're doing just that. So we continue to – I think have that level of optimism of confidence that we will smartly deploy that capital to help build out the businesses as we move forward here. But again, not a dramatic sea change 90 days on.

Operator: Jeffrey Sprague, Vertical Research Partners.

Jeffrey Sprague - Vertical Research Partners: I'm wondering if we could just try to put a little finer point on some of this incremental spending. Dan, I guess, you made it pretty clear that $70 million (in flux), you don't know where it goes, but I guess, first point. Would we been talking about it if it's only $5 million or $10 million…?

Daniel L. Comas - EVP and CFO: No, we would not be. So if it was $10 million, $15 million more, we wouldn't be talking about it. So maybe it's in that $90 million, $100 million range.

Jeffrey Sprague - Vertical Research Partners: Then just trying to get head around the incremental R&D and SG&A growth spending. You gave the basis points in R&D to Nigel, but relative to what you were thinking, how much is that changing? We heard the story of 170 new marketing people (just) Videojet last week. It seems like there is a lot going on, but was that all kind of baked in the plan or is there a real increase there too?

H. Lawrence Culp, Jr. - President and CEO: In terms of what we are talking about for the second half, there are real increases, both in R&D and some, on the sales and marketing side, we've mentioned the high-growth markets. You flagged some of the marketing initiatives there as well, Jeff, that you virtually saw in Wood Dale. It's really a step-up, because as we go through the year, we obviously are reading and reacting, we are learning, we are developing skills, and we don't want to be too static in those growth investments. So really we hear us talking about dynamic resource allocation, we are really trying in real time to fund the opportunities as quickly as we can as opposed to being slaves to an annual budget.

Jeffrey Sprague - Vertical Research Partners: So even there, we’re not talking about single-digit millions and we’re probably talking fives and tens, so to think?

Daniel L. Comas - EVP and CFO: That's probably, correct.

H. Lawrence Culp, Jr. - President and CEO: That's fair.

Jeffrey Sprague - Vertical Research Partners: Then just back to kind of Q3, I get the whole sequential discussion, but on a year-over-year basis the comp is really easy against obviously while it's a pretty disappointing Q3 last year. Why wouldn't you accelerate a little bit against that, just 0.8 organic last year?

H. Lawrence Culp, Jr. - President and CEO: Right. Well, there is no question, Jeff, there is an easier comp in the third. I think what we’re trying to share with you today is in essence what we’re seeing customers and markets saying and doing today, right. So as we work through what's happening at point of sales, we talk to our distribution partners as we go through our sales pipelines with our direct business as we take the pulse of both the headwinds and the tailwinds out there externally, I think we come up with a top line figure that suggested on a core basis we'd likely to be in that 2% to 3% range here in the third quarter. It's really as simple and as straightforward as that.

Jeffrey Sprague - Vertical Research Partners: Then just finally, can you size in basis points or dollars, whatever is easier, just how significant the Motion headwind is just from kind of unwinding the lower margin products?

H. Lawrence Culp, Jr. - President and CEO: There is probably, call it, 400, 500 basis points of core revenue headwind within Motion as a result of that, I think, appropriate and smart transitioning out of some of that lower margin business. So we take the core revenue hit where you clearly see the resilience of those Motion revenues as the positive offset, a trade we'll take any day.

Operator: Jon Groberg, Macquarie Capital.

Jon Groberg - Macquarie Research: You've talked a bunch about Beckman, Larry. On Leica, I just remember last quarter, Leica Bio, you had the control issue, Europe distribution change, worries of potentially new competitor come into market. Can you just give a little bit of an update on each of those issues and kind of where you stand on Leica Bio in the quarter and for the rest of the year?

H. Lawrence Culp, Jr. - President and CEO: Sure, I think in terms of the control issue for the broader audience, we have seen in the U.S., some policy guidance changes, which has negatively impacted some of our underlying volume in the business. I think that is modest and kind of working its way through the business. Our European distribution change there continues, but I think we certainly had a better quarter in that regard than we did in the first and continue to believe strategically we're heading in the right direction and financially we should see less headwind as a result. You mentioned competition, I have no idea who you are thinking of there, Jon, but we haven't really seen any material competitive pressure change here of late and continue to believe that particularly in advanced staining we saw very strong underlying growth vis-a-vis the market.

Jon Groberg - Macquarie Research: Would you expect kind of what you saw in the second quarter here to continue in the second half for that Leica Bio?

H. Lawrence Culp, Jr. - President and CEO: We certainly have that expectation with LBS as we drive into the second half.

Jon Groberg - Macquarie Research: Then just one more. If I do the math on the core diagnostics, Beckman looks like, you said – in your Q, I think, you said North America and Europe were actually down low single. So I was looking like high growth and probably China is still kind of plus 20%. Anything at all you are seeing there, you know given what's going on in China that makes you concern that that could slow some, just may be an update geographically on that business?

Daniel L. Comas - EVP and CFO: Yeah, John. I think it's hard not to be a little bit cautious on that front just the number of quarters, we put back to back to back with 20% in terms of another parts of high-growth market. So we think they'll continue to be very good, could there be some tempering? I think that's a possibility and while Europe and U.S. were down, they were down less than they were the last couple of quarter. So hopefully we can get a little bit of improvement in the developed market, because I think there is some likelihood, we'll have very good growth in the high-growth markets, but it's going to be probably hard to staying at these levels.

Jon Groberg - Macquarie Research: Do you think North America and Europe should be getting to the point where they actually turn positives in the next few quarters here given some of the successes that you've talked about at the Beckman?

Daniel L. Comas - EVP and CFO: We're not yet prepared to forecast, but we like the trend line.

Operator: Julian Mitchell, Credit Suisse.

Julian Mitchell - Credit Suisse: Just on the operating cash flow, it was down 2% in Q1, it was down 14% in Q2 and you talk in the queue about timing of customer deposits in T&M and so and in the network coincide. Could you maybe talk a little bit about how quickly you expect the operating cash flow to normalize and what's driven that customer deposits issue?

Daniel L. Comas - EVP and CFO: Sure. Julian there probably three factors driving the first half cash were being down slightly year-on-year. I'll come back to the customer deposits on third point, one of which is just the timing of tax payments. We've had relatively higher tax payments here in the first half, that will normalize through the year. The second element is we have slightly higher inventory levels, part of that's related to a number of new product launches. We've talked about some of the benefits we are seeing of that Hach, Gilbarco, product ID. Again we expect the inventory levels to normalize through the year. Then finally, customer deposits last year on some large projects, we're able to get some upfront payments. That will probably not normalize through the year, so there will be a slight headwind, but these are the two factors will help and you should see an acceleration back to more normalized level of cash flow through the balance of the year.

Julian Mitchell - Credit Suisse: Then within the environmental, you talked a bit about municipal spending being down, not a surprise, but I guess any sense on the pace of the declines or how you think that will trend as we go through the year?

Daniel L. Comas - EVP and CFO: With a little bit bifurcated, so the lower ticket municipal spending actually got sequentially better Q1 and Q2. We will probably a little cautious of that because of number of the governments have year ends of June 30th. So, we may have seen a little bit of benefit, but it’s okay, it's not great, but again probably a little better than what we saw in Q1, continue to see the high-ticket stuff to be challenging. And I don't think we’re calling for a turn in that part of the business.

H. Lawrence Culp, Jr. - President and CEO: That call was really focused I think in the U.S. and to a degree in Europe. I think we’re pleased with the China growth that we saw for now two quarters here, coming in those small parts from the muni side, which have been a bit more sluggish or so over the last couple of years.

Julian Mitchell - Credit Suisse: Then just lastly on Europe, there has been some hope around slightly higher PMIs and so on. It doesn’t sound like you have seen anything at all, around kind of inflection point in any end marketing year. Is that fair or…

Daniel L. Comas - EVP and CFO: We were down point or two in Europe, which has been comparable to maybe slightly better than what we have been seeing. We've seen a few of our business, PID had a better quarter in Europe, but I'd say, generally speaking, we're not seeing much of any turn here.

Operator: Brandon Couillard, Jefferies.

Brandon Couillard - Jefferies & Company: Larry or Dan, could you give us a view around the book-to-bill in T&M in the quarter and how would you expect that business to trend in the second half, particularly for Tek Instruments and to what degree you are beginning to see any change in demand trends out of China?

H. Lawrence Culp, Jr. - President and CEO: T&M book-to-bill was flat. I think if we look at Tek for the second half and really Instruments more broadly, I think we have the opportunity to grow, it be call it, low singles if all goes well. China is really important. China is important both at Tek and at Fluke. As I mentioned earlier, we've seen softness, prolonged softness both with the export base, which we largely served at Tek and frankly in a host of other verticals that the deal with the domestic infrastructure principally at Fluke. But as we have gone through those reviews recently with the teams, again in part because of the comps and part because of some of our own execution opportunities, we think we can go positive here in the second half and we are working hard to do that. But China will be an important swing factor for the Instruments platform, no doubt.

Brandon Couillard - Jefferies & Company: Then, Dan, in terms of the overall core revenue growth experience in the quarter, can you give us a breakdown between equipment and consumables?

Daniel L. Comas - EVP and CFO: Sure. The consumables stayed right in that – consumables in aftermarket stayed right in that 3% to 4% range all up and equipment and instruments were a little better than Q1, so we were essentially flat in Q1 and we were up 1% to 2%. Again, we talked about some of that Gilbarco, some of the Life Science businesses benefiting to that number.

Operator: Isaac Ro, Goldman Sachs.

Isaac Ro - Goldman Sachs: Just on Industrial Tech, I wanted to put your comments on Motion in context to the – that core growth target 0% to 3% you put out last December. You guys trended a little bit lower than in the first half. So just want to make sure I understand what's embedded in your assumptions for the back half of the year?

Daniel L. Comas - EVP and CFO: Back half we're looking Industrial Tech to be flat to slightly down in the third quarter. The biggest driver of that would be Motion, which we expect to be down high-single digits. Most of that we did getting out of some of this very low margin business. Then the fourth quarter, we would expect a sequential improvement from that.

Isaac Ro - Goldman Sachs: And then just in China, maybe qualitatively we touched on that issue couple of different ways here. But I did want to spend a minute with regards to nature of your customers in China, specifically with regards to capacity utilization. I mean, nothing, we all know lot of the growth in China has been driven by success in investment and I think one thing that's harder for us to read is sort of what your customers' capacity utilization looks like on your products over there just qualitatively? Can maybe comment on that and just how you think about what your customers underlying demand looks like just given the current environment there?

H. Lawrence Culp, Jr. - President and CEO: Issac, I immediately can't give you a figure as to our diagnostic customers, our Chinese diagnostics customers, utilization of our installed base over there, but I would say, that as you might anticipate, it's higher, closer to the coast, those new installs that have gone in are ramping, but there's probably very few places outside of the major coastal cities where our installed basin is anywhere close to capacity. So we're proud to be part of this healthcare initiative in China and certainly as that installed base is utilized more actively in the delivery of enhanced care, that will be good for those patients and it will be good business for us.

Operator: John Inch, Deutsche Bank Research.

John Inch - Deutsche Bank Research: Troponin, is that going to be significant to growth in the segment? Or is it – like, when does that kick in, do you guys think?

H. Lawrence Culp, Jr. - President and CEO: Well, those are two different questions, John. I think it's kicking in now that we have that 510(k) approval. Frankly, it is kicking in not only in terms of the resumption of being able to sell that product, but it's another box that's checked in terms of the commitments we made to not only our regulators, but our customers, which helps the overall business. I think we've tried to downplay the specific quantitative or financial impact, John, of getting those assays back on the market just because largely I think that was overdone. I think this was more reputational issue and as we've gone through this hoop and others, I think people understand that that we are getting Beckman back in the shape that it once was in and will be again. That helps us with retention, that helps us with new customer wins not only here in the U.S. where this issue was most acute, but more broadly as well.

John Inch - Deutsche Bank Research: Yeah. No, Larry, I'm just wondering is there a sort of a short-term pop-up if you will that maybe a significant to Beckman's result that you could see sort of near-term associated with Troponin?

H. Lawrence Culp, Jr. - President and CEO: I would say, if there is any near term pop, it would be muted and immaterial.

John Inch - Deutsche Bank Research: So that makes sense. Can I ask you about just maybe Dan is aware of this, pricing trends, perhaps just juxtaposed with some declining (raws). How are you guys sort of seeing that across your portfolio or say, across significant differences in geographies if anything is noteworthy?

Daniel L. Comas - EVP and CFO: John, I just probably have a top level point of view. Our prices remained about 70 basis points in the last two, three quarters. Again, getting it on the consumables in the aftermarket relatively flat on the equipment on the instruments. So part of that 100 basis points of margin improvement is the cost actions we took last year, but clearly we're seeing some price cost benefit right now. It's not getting a lot of price, getting a little bit of price and seeing some benefit on the cost side.

John Inch - Deutsche Bank Research: Is there any discernible differences, Dan, in terms of pricing trends sequentially that would be noteworthy?

Daniel L. Comas - EVP and CFO: No. I mean we did say and this started a couple of quarters ago that it got tougher to get price on equipment and instruments. We went from maybe slightly positive to kind of flattish, slightly negative price, but probably overall flattish instrument and equipments and that has stayed relatively steady here at least through the second quarter.

John Inch - Deutsche Bank Research: Just lastly, Larry, as you think about emerging markets and you guys obviously are doing extremely well in China. Part of the playbook, I think, had been to sort of broaden that success into the NDAs in Latin Americas of the world, but clearly the world looks perhaps different today than it did even a year ago in terms of the run rate for those markets. How are you, Danaher is strategically thinking about that and why not maybe go for even more penetration in China, some of these markets around the world, maybe with the exception of the Middle East, look like they could be significantly more challenged in the coming few years in terms of realizing growth rates.

H. Lawrence Culp, Jr. - President and CEO: I think strategically, Jon, as you rightly point out and you know this is as well as anyone. What we've tried to do is build on our China first strategy for the last couple of years and taking the successes we've had in learnings that we've taken to all the other high growth regions of the world. I think the evidence that we're having good traction in that regard for all the examples pepper through our prepared remarks in terms of the successes we are having in the Middle East. What we are seeing in Brazil, Eastern Europe, right on down the line. India has been a little softer for us this year to be sure, Latin America and in part (vis-a-vis) couple of tough comps was tough in the second quarter, but that basket which no longer China-only basket was up what high singles here. I think we're mindful of the headlines relative to that basket as we think about the second half. I think that's part of our conservative posture on the macro, but strategically, you hit the point. These markets may slow in their overall growth, but they are still going to be the best game in town and the penetration levels of most of our products in these parts of the world are still pretty modest, so you pick your market, take 200, take 500 basis points of growth of the top, yes, that will be define how much investment moneys we have to put in the play, but that underlying growth, our penetration opportunities to grow in excess of those market rates still makes those places incredibly important targets for us, and that's the way we're operating.

Operator: Deane Dray, Citi.

Deane Dray - Citi: You covered a lot of ground here already and maybe just some closing comments regarding guidance. Larry, last quarter you had some specific commentary about having more of a midpoint bias to earnings guidance. Now you've put up a solid second quarter, playing a little bit more offense and making some growth investments. So how would you characterize that bias today? Then same question for core revenue growth for the second half?

H. Lawrence Culp, Jr. - President and CEO: Yeah, I think that what we've done here, Deane, with the update on guidance is really stay true to that midpoint mindset that you heard me express back on the first quarter call. So been at the half way point here, having a little bit more clarity as to the puts and takes doesn't really change our outlook materially in that regard and we thought we could tighten up the guidance accordingly. I really think it's that simple. In terms of the core outlook, I think we're looking at a low-single-digit environment here in the second half. We quantify that as two to three as best we can figure here for the third quarter. But in essence, I think, what we saw in the second quarter is on balance slightly what we're dealing with here in the second half. We wish it were otherwise, but it is what it is and we're going outperform accordingly.

Operator: At this time, I’d like to turn the call back over to Matt McGrew for any additional or closing remarks.

Matt R. McGrew - VP, IR: Thanks for joining everybody. We’ll around all day for follow-ups.

Operator: That does conclude today’s conference. Thank you for your participation.