Danaher Earnings Call INSIGHTS: Deciphering Demand Patterns, Integration Update

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On Thursday, Danaher Corporation (NYSE:DHR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Deciphering Demand Patterns

Steven Winoker – Sanford C. Bernstein: Could you maybe give us some better or some additional clarity, I guess one on how were the demand patterns shifting through the quarter itself? Did you see continued acceleration or deceleration through June? 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.

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Daniel L. Comas – EVP and CFO: I would say – Steven a couple of thoughts here. With respect to the first part of your question, what we saw say by business in the quarter, I think we saw three of the five businesses fundamentally in line with what we thought we would see during the quarter, with Life Sciences and Diagnostics up slightly and Industrial Tech slightly below. I think again, as we saw the quarter play out, I think we were very encouraged with the strength of the overall quarter, as we look around the business, but certainly during the quarter, we saw some things that give us some pause and obviously have us thinking about the environment there 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 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 is not going to come in the timeframe 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 Sciences funding dynamics. Even in the U.S., where we 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 few positive macro headlines out there globally right now, I think give us the impetus here from a top-side perspective to say, hey the risks are in the downside, let’s take note of the fact we’re having a very good year from an earnings, from a cash perspective, so let’s proactively – even though the businesses probably have slightly more optimistic outlook for the second half, go ahead and set the stage, 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, Steve is that we will be fundamentally in line with what we saw in the first half, so call that 2.5, 3. 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.

Daniel L. Comas – EVP and CFO: If we looked at it, Steve, maybe by segment just quickly, we’d be looking at four of the five segments being up low single to mid single with the exception being T&M where we expect that business to be down, not that so the instrument business is getting worst, but as we alluded that the communications business is not going to stay in the double digit growth it had here in the first half, in part because of the comp issue that we can seen T&M down kind of low single digits to mid single digit here in the third quarter. As kind of Larry alluded to our, the number from our businesses would be higher than that. Some of our segment where we’re telling you, we think is low single to mid single, I think number of our businesses would – their numbers – they roll up to more of a mid single digit point of view. So, I think we’ve taken 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 Winoker – Sanford C. Bernstein: So, it sounds like there is contingency built into that is what you’re saying right? In terms of roll-up versus the top down view…

Daniel L. Comas – EVP and CFO: That’s the right way to look at it, yeah.

Steven Winoker – Sanford C. Bernstein: Just lastly the T&M margin pressure, is that mostly operating leverage?

Daniel L. Comas – EVP and CFO: Yeah. As you know, as we’ve talked about T&M as our highest gross margin segment, and obviously that’s hurting us here, and we will see that impact again here in the third quarter, you’ll see a step down sequentially in our margins Q2 to Q3 in T&M.

Integration Update

Steve Tusa – JP Morgan: Can you just give us a little bit of update on the integration and maybe how the instrument placements are going from a top line perspective?

H. Lawrence Culp, Jr. – President and CEO: I assume you’re talking about Beckman, Steve?

Steve Tusa – JP Morgan: Yeah. Beckman, yeah.

H. Lawrence Culp, Jr. – President and CEO: I’m sorry. At year end, I think we’re very pleased with where we are as we highlighted in some of the prepared remarks. Certainly, the primary objective there has been quality. I think we have made a lot of progress to just see that in the re-inspections in the new product approvals and just a lot of the internal metrics that 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 I alluded to here, it’s not yet part of the core for three quarters in a row. I think that speaks to this business really getting back up on its feet. No silver bullet there Steve, but just a lot of different actions being taken to prove 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 organization has us encouraged that this is a business that once fully up on its feet will be a real contributor to Danaher’s overall core growth.

Steve Tusa – JP Morgan: And then just within the business I mean you mentioned some I guess (you gave the) term hairline fractures, and anything more specific than that you’re seeing in your short cycle businesses, and then how have things kind of started off here in July?

H. Lawrence Culp, Jr. – President and CEO: 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 US 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 US I think we saw some signs in and around life science certainly in T&M and to a lesser degree in environmental where even businesses like – even some of the businesses that were printing very good numbers here just had a little bit of softness, a little bit of say a forecast miss here or there where we were seeing customers hesitate to write Pos, in other cases projects seemingly being pushed out a little more than we would’ve anticipated. I think if we weren’t so mindful of the headline and the drumbeat of negative news, it might be easier to say well that’s just noise, but again I think we’re going to exercise a level of prudency 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.

Steve Tusa – JP Morgan: 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 4X headwind with gains in the back half? I know you don’t play that game, but I’m not sure if there’s anything that you’re looking at left in the portfolio that’s kind of non-core?

Daniel L. Comas – EVP and CFO: I think obviously we’ve done a fair amount of pruning in the last couple of years and give it our joint venture Cooper (indiscernible) with the tools, on the tools front, a business that had a very good second quarter and in fact sequentially, towards revenues rise $25 million and terrific fall through hit, $25 million sequential increase in the revenues and $10 million increase in (indiscernible), sequentially Q1 to Q2. That’s something that obviously down the road, under the right situation could be something that could be used for acquisition proceeds.

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