Danaher Corporation
Q3 2011 Earnings Call Transcript

Published: 20 Oct 2011

[Operator:]

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

[Matt R. McGrew:]

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 third quarter Form 10-Q and the reconciling and other information required by SEC Regulation G, relating to any non-GAAP financial measures provided during the call are all provided in the Investors section of our website, www.danaher.com, under the heading Financial Information and will remain available following the call. The audio portion of this call will be archived on the Investors section of the 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 October 27, 2011. The replay number is [phone] in the U.S., [phone] internationally and the confirmation code is 4721216. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the accompanying slide presentation, our earnings release, our third quarter 10-Q and other related presentation materials supplementing today's call for additional factors that impacted year-over-year performance. All references in these remarks in the company's presentations to earnings, revenues and other company-specific financial metrics relate only to the continuing operation of Danaher's businesses, unless otherwise noted. I'd also like to note that we will 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 today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events and developments or otherwise. With that, I'll turn the call over to Larry.

[H. Lawrence Culp:]

Matt, thanks. Good morning, everyone, and thank you for joining us. We are pleased to report an outstanding third quarter result for Danaher. The quarter largely played out in line with expectations, the expectations we shared with you both in July and when we were together with many of your in early September. Our core growth in the third quarter was 7.5%. While we are cognizant of the macro concerns, we continue to feel good about where we are today. The Danaher business system continues to be a competitive advantage, helping our businesses capture market share through innovation, new product introductions and go-to-market initiatives. We had a number of exciting new product introductions in the quarter, most notably at Tektronix where we launched 2 game-changing oscilloscopes, which I'll talk about more later. From a geographic perspective, what we've seen thus far is again very much in line with what we saw in the second quarter

[Matt R. McGrew:]

Thanks, Larry. That concludes the formal comments. Dave, we are now ready for questions.

[Operator:]

[Operator Instructions] And our first question will come from Steve Tusa with JPMorgan.

[C. Stephen Tusa:]

What's the core growth for the fourth quarter?

[H. Lawrence Culp:]

Steve, I think the guidance that we just shared you would assume mid-single-digit core growth, call it 4%, 5%.

[C. Stephen Tusa:]

Okay. And then, obviously, you're upping the restructuring. I think one of your higher-quality competitors in Europe also talking about incremental restructuring today. Do you worry that you're pulling the trigger here too soon given what we're seeing out there? Obviously, there's a lot of macro crosscurrents, but the micro for most seems to be somewhat holding in. How convinced are you that you kind of need to do this in the fourth quarter? And then, kind of how does this -- if you're growing 4% to 6% in the fourth quarter, how does this kind of play out into kind of early next year? Are there comp issues where that accelerates, or is that kind of a good way to think about the ongoing kind of is that more of trend line rate in the medium term?

[H. Lawrence Culp:]

Well, I think we'll speak to the top line outlook for 2012 when we get everybody together in December. We've just literally kicked off our budgeting process, having wrapped up our annual strategic reviews with the businesses. Steve, I would say that first off, we come to the fourth quarter restructuring with a view that it's always time to take out costs that you don't need. I think we're pleased with the performance thus far. I think -- and the momentum we have going in the fourth quarter, that gives us the opportunity and ability to go after the programs inherent in the $100 million of spend. So that's going to be split roughly 50-50 between the U.S. and Europe. Dental's going to get a big chunk of that, as well the Industrial businesses, both at motion and PID as well as in T&M. So it's a broad-based effort, both by business and by geography, I think, very characteristic of the way we always operate. Clearly, we're seeing some moderation in the economy. We all read the headlines. It certainly is prudent at any time in the cycle. But I think our view is, particularly so right now given the uncertainties around 2012, better to be prepared and ready for what may come than to postpone what we think is a very prudent action here.

[C. Stephen Tusa:]

And then just one more question. In September, where did you see -- if you did see deceleration, which sounds like a little bit towards the end of the quarter, maybe a little bit of deceleration, what was kind of the -- what was the worst business from a deceleration perspective? And did you have any businesses that were negative?

[H. Lawrence Culp:]

Steve, I would say that if you look at the third quarter, I think what we were particularly pleased with is that it was steady pretty much start to finish in that regard. We didn't see a dramatic tail off in September in the -- with all the headlines out there and whatnot. Clearly, we had some businesses that had, I think, just gangbuster quarters. AB SCIEX being one, ChemTreat another, looks like PID did well here again. But clearly, I think what we saw in the businesses works [ph] pretty well with what others are saying. You mentioned one competitor in Europe here this morning, I think the last several weeks in the papers relative to China still growing nicely, but at a slower rate. We clearly saw certain of our technology end markets that we serve both at motion and Tektronix soften up a bit. And I'd say in the industrial world, particularly with some of our OEM exposure at Kollmorgen, softened up. Now there's some overlap there between both China, frankly, and some of the end markets, but those are probably the 3 pools with some overlap where we saw slowing through the quarter.

[C. Stephen Tusa:]

And that's mostly tech, not industrial automation, right?

[H. Lawrence Culp:]

Well, when we say technology end markets, we'll feel some of that at Tektronix and we'll feel some of that particularly at Kollmorgen where we serve those end markets from the OEM side, not the test bench side as we do at Tektronix.

[Operator:]

And next we'll go to Scott Davis with Barclays Capital.

[Scott R. Davis:]

You've had 3 months of time to dig into what's going on at Beckman. I mean, where is your view now versus where it was 3 months ago? I mean is the opportunity bigger, is it less, is it the same? I mean, is there any kind of change in what you think you can get out of it?

[H. Lawrence Culp:]

Scott, I would say that 3 months in here, we've been pleased by the absence of surprises on both sides of the ledger. I'd say at 90 days in, we're very pleased with the performance of the business. I think the integration has gone very well. And we're really having, I think, significant impact on the way we run the business. You look at just the third quarter performance, top line very much in line with expectations, so no surprise there. Margins came in a little bit better than we expected. They were up about 100 basis points sequentially. Some of that is the faster traction I think we've gotten on the headcount reductions. A little bit more disciplined on the G&A spend. And on the cash flow side, we said we'd get after working cap and CapEx. That's happening, so good early results in that regard. I think with respect to the integration, that is going well. We had an excellent reception there throughout the organization, and they are rapidly adopting DBS. I think we've kind of split the company largely into 3 discrete businesses

[Scott R. Davis:]

Sounds complicated. But anyways, the restructuring, the $100 million that you're going to spend now, I mean how much of that is Beckman related and kind of a pull forward of you know what you need to take out in costs and now you're able -- business conditions are good enough that you can kind of afford to do it? I mean how much of that is Beckman versus just general Danaher?

[Daniel L. Comas:]

Yes, Scott, the $100 million is all outside of Beckman. So in Q3, we spent about $50 million of restructuring on Beckman. We'll probably spend another $25 million, maybe north of $25 million on Beckman here in Q4. So our total restructuring will be probably north of $125 million in the fourth quarter.

[Scott R. Davis:]

Okay. So where is the restructuring at? Is it SCIEX? Is it TEK? I mean where is the delta, I guess, the $50 million to $100 million?

[Daniel L. Comas:]

The $100 million is in all 5 segments. The 3 segments that are probably getting the biggest share of that would be Industrial, Test & Measurement and Dental. But they're all getting pretty healthy chunks of restructuring here.

[Operator:]

Our next question will come from Nigel Coe with Morgan Stanley.

[Nigel Coe:]

Did you -- could you maybe just parse out the 7.5% organic between major territories

[Daniel L. Comas:]

Sure, Nigel. It played out pretty similar to Q2. Emerging markets grew low double digit. As you mentioned, China, which was growing 20% the first half of the year with kind of low teens in Q3. We actually saw faster growth in Brazil than we had -- in Latin America than we had seen in the first half. So overall, quite comparable to Q2. The U.S. was right about 5%. And Western Europe was about 2%, 2.5%, again pretty consistent with what we saw in Q2.

[Nigel Coe:]

Okay, and then I guess I'll just follow on this. The 4% to 5% you -- that Larry threw out at 4Q, I mean how does that look by geography?

[Daniel L. Comas:]

I'd say for all the regions, slightly less. We think we'll see a similar distribution between emerging markets being the strongest, the U.S. in the middle and Europe, the weakest. Though we're not looking for a particular outlier from those 3 at this point.

[Nigel Coe:]

Okay, and then again just looking at 4Q, we saw some weakness -- some weakening coming through in motion and a little bit within Test & Measurement, the rest of technology verticals. But in 4Q, do you expect any of your businesses to go negative maybe, motion or perhaps KaVo?

[H. Lawrence Culp:]

No, no. I think on the contrary, Nigel, I think if you look at mid-single digit 4% to 5% fourth quarter, I think we're going to have 4 of the 5 segments very much in that zone. I think what we would expect is, as I think Dan just alluded to, Environmental, Dental and Life Sciences & Diagnostics to be fairly steady. We are seeing a little bit of pressure in motion and in Industrial, but I think all 4 of those are going to be in the zone. T&M's probably the outlier. They'll probably be in that low single-digit band, largely because of the timing on some of that TEK Comms projects. We are seeing again some slowing in the technology end markets and in China at Tektronix on the core instruments side of the business, but to have T&M as the outlier there is largely going to be a function of the timing at TEK Comms. Elsewhere in distribution, at Fluke for example, they continue to do very well.

[Nigel Coe:]

Okay, that's really helpful. And then just finally, fantastic job on the delevering during the quarter. Does that change at all your timeline for coming back into the M&A market in any meaningful way?

[Daniel L. Comas:]

Well, sure. I mean, clearly paying down over $600 million of debt in the quarter really puts us in a good position here. We think we'd probably have a $4 billion to $5 billion envelope over the next couple of years. As we've talk about, we were a little discouraged by the industrial M&A market and the prices being paid up to about May or June of this year. I think we've been encouraged that you've seen very little industrial M&A. To me that's kind of a first sign that maybe things are getting better. And I think we're going to be very well-positioned, and we're gearing back up as we speak.

[Nigel Coe:]

Okay, and the $4 billion to $5 billion, you're still looking at $2 billion for next year?

[Daniel L. Comas:]

Correct.

[Operator:]

And next we have Jon Wood with Jefferies.

[Jon Davis Wood:]

Larry, so SCIEX again over double -- over 10% despite you lapping the 5600 launch. Obviously, a lot of consternation out there about the government research budgets. Can you just kind of parse out what you see from an end-market perspective going forward in the SCIEX business?

[H. Lawrence Culp:]

Sure. Well, keep in mind, Jon, we're lapping the launch. We really began to ship that product in earnest in the fourth quarter of last year, but -- in fact, I was up in Toronto with the team yesterday and they've come a long way in really just a 1.5 years. I think if we look at just Life Sciences & Diagnostics more broadly, it's important to keep in mind that pro forma with Beckman, that's about $6.5 billion segment for us, right? About 25% of that is geared toward research applications. And of that, call it $1.6 billion, just under $1 billion is probably what we would frame as kind of classic academic research, government-funded sort of activity. I think if you look at size as well as some of the other businesses, be it Leica, be it Beckman, they're certainly seeing some pressure this year really as they try to comp the U.S. stimulus from a year ago. But I think, by and large, they are certainly reading all the negative outlooks that are out there, but are of the view that you if go back to say '06 to '08, when at least in the U.S. we saw flat funding, we were able to grow at a double-digit rate really by focusing on where innovation was occurring and in turn where money was being spent. So I think if you look at some of the correlation studies in microscopy, obviously stem cell, ultra high solution for Leica, for example, there are just a number of different ways in which the businesses, I think, are positioned to not be wholly dependent on the top line budget trends. And you have some dynamics -- we were talking with the SCIEX team yesterday, for example, about what's happening in Germany. Obviously, a lot still to be sorted out, but you have some countries that are decidedly taking a pro-investment stance, particularly with respect to scientific research and innovation. Well-positioned in those countries, well-positioned around those applications. So I think all in, that hopefully frames the exposure that we have, but also provides a little bit of color as to why we're going in with, I think, optimism to whatever the funding environment may be in '12 and '13 in Life Sciences.

[Jon Davis Wood:]

All right. Great. One last one, if you look within T&M, you talked about the low single digits in the fourth quarter being largely a result of the comms side. What do you expect from kind of the core Fluke and core Tektronix businesses in the fourth quarter?

[Daniel L. Comas:]

I think Fluke we're looking kind of a mid-single-digit growth rate. TEK could be a low single-digit growth rate, but would expect the book to bill still be north of 1.

[Operator:]

And next we'll go to John Inch with Bank of America.

[John G. Inch:]

China didn't really sound like there was a lot of change. Is there anyway, Larry or Dan, to provide a little more color? Are you seeing sort of changes in terms of intentions in the part of customers? Is there a regional difference, say, between the west versus the coast, or are you just being somewhat cautious ahead of what's obviously an attempt by the government there to slow things down because of inflation?

[H. Lawrence Culp:]

John, I think that we certainly grew at a lower rate in the third quarter than we did the first half. So I think we certainly saw the government's actions or whatever else is happening there. I think for us that was principally in some of the technology end markets that we serve, many of which that have obviously migrated heavily to China the last several years. We also had -- and again we have that exposure at Tektronix and Kollmorgen, principally. I'd say we also saw some of the municipal pressure that we've talked about through the year. They're just getting off to a very slow start in this regard relative to the 12th 5-year plan. But in that regard, we saw some, frankly, some encouraging signs. We also have some exposure primarily at Kollmorgen to some of the clean tech efforts that the government has put in place, and we saw those OEM customers slow considerably during the course of the quarter. So still, one of the best growth markets we've got. We've got excellent competitive positions there, but it is what it is. And again I think that, as you alluded to, the government is trying to manage a number of different competing objectives there. But I think long term, we want to be there to see these leadership positions continue to grow, and that's what we're going to do.

[John G. Inch:]

I guess where I'm going Larry, you would expect China to slow, not even just that the emerging markets meeting, but before then. I mean there is comparison issues and just natural trends as your base gets bigger. Over the course of the quarter, did it appear and may be based on your exit rates what you're looking at to date, has it slowed a little bit beyond expectations, or is it in line? That sort of was the context of what my question was.

[H. Lawrence Culp:]

No. I think we're very much in line in that regard.

[John G. Inch:]

Okay. That's where I was going, okay.

[H. Lawrence Culp:]

I'm sorry.

[John G. Inch:]

No, no. That's okay. Beckman, are you guys still thinking Beckman is up a little bit next year? Or is it still a little too early to tell in terms of the organic trajectory?

[H. Lawrence Culp:]

John, I don't think we're going to change our top line outlook for Beckman today. We said that, I think, from the outset that this year and next would be challenging top line, given the issues we were inheriting and that a flattish performance is what we're expecting. And in turn, you should expect. So far we're in line with those expectations and really no reason to alter that course today.

[John G. Inch:]

And is Beckman in China, which is a big contributor, is that still sort of the same or has that changed at all?

[H. Lawrence Culp:]

No, Beckman China is a high-performing business, a real growth catalyst for the company. And they continue to be, I think, very well-positioned in obviously an exceptionally important market.

[John G. Inch:]

Lastly, Larry, obviously there's a pretty obvious risk of a European recession, some big slowing here that's sort of reflected in the actions you were taking. Could you comment on your -- how you're sort of thinking about your playbook maybe in contrast to '08? And I don't know, maybe if you could comment sort of around how you're thinking about Dental for example and the performance then versus heading into a possible mild recession this time or perhaps some of the other businesses. I mean I think your portfolio looks a little more defensive especially with Beckman, but I'd like to hear your thoughts.

[H. Lawrence Culp:]

Well, certainly you bring on a $4 billion book of business that's 75% in the aftermarket, that creates a lot more ballast in the hull here if tough times are ahead. But I don't think that we would see anything like an '08, '09 collapse of the economy as we all saw just a few years ago. But I think your frame, John, is a good one, relative to the playbook that we intend to use going into next year. I mean regardless of what the macro scene ultimately is, I think you're going to see us continue to be aggressive in and around our investments to grab share, and that's both investments in technology and sales and marketing. I think you will continue to see us be equally aggressive on the cost side of things. You see that partially in the $100 million spend here in the fourth quarter. Obviously, as Dan just highlighted, we're spending almost that much at Beckman this year to get that cost structure straight. And that just gives us both, I think, earnings protection, as well as frankly latitude to invest in growth -- organic growth at a time when others won't. You couple that with the, I think, positioning we're going to have both strategically, operationally and financially to be an active acquirer at a time when, all things being equal, our valuations are probably more reasonable and attractive for a strategic acquirer. I think that means we're set up for 2012. And again our crystal ball is no better than anyone else's, but I think that playbook, very similar to the playbook we had a couple of years ago, but modified given again we don't expect to see that sort of paralysis next year is going to serve us very well.

[John G. Inch:]

Yes, in other words, it sounds like a mild recession maybe, to a degree, it might actually play a little a bit to your long-term strategic hand in terms of share gains and some other investments in M&A.

[H. Lawrence Culp:]

John, we would never wish for a downturn, but if you go back to '08, '09, go back to '01, '02 in an odd way perhaps they have served us well.

[Operator:]

And next we'll hear from Steven Winoker with Sanford Bernstein.

[Steven E. Winoker:]

When you think about that $4 billion to $5 billion of additional M&A spend over the next 2 years, given how human resource constrained you probably are in Life Sciences and Diagnostics, you have acquisitions, I'm sure, throughout the pipeline everywhere in all the divisions, how confident can investors be that should the right, big, good ones come up in LS&D or the medical side of the business that you'd actually still hold those off and wait for the industrial side over the next 2 years, or is it kind of -- could it come out more balanced?

[H. Lawrence Culp:]

Steve, I think what we've said in the past is obviously we've got our hands full at Beckman Coulter. Again pleased with where we are 90 days in. But investors should expect us, all things being equal, to deploy that capital elsewhere in the portfolio. And if you look at T&M, you look at Environmental, a couple of things in Industrial, could be interesting particularly around product ID. I think that Dan and I this morning don't talk about that $4 billion to $5 billion envelope without conviction that those opportunities exist. We can get at those investments in ways that I think will generate real returns for shareholders. So I don't think there's any change in that regard. And again as I think Dan alluded to, the better valuations in the industrial world, at least today and going forward, than maybe we'd seen in the last couple of years are certainly conducive to the effort that we intend to lay in T&M, Environmental and Industrial.

[Steven E. Winoker:]

And you didn't mention Dental there. I take it intentionally, would that fall into the same category as Life Sciences even though you don't have as much acquisition work going on there?

[H. Lawrence Culp:]

Yes, I think that Dental, again a hyper fragmented market by and large. Don't be surprised if we do small thing here or there, but in terms of big bets, I think they're going to be elsewhere.

[Steven E. Winoker:]

Okay, great. And then just a couple of follow-ups. One the capacity -- sorry, the comments on $100 million restructuring spend, just to be clear, is any of that being directed at capacity reduction as well? I don't mean sort of shifting footprints. I assume you're getting more productivity out of other areas I mean -- or should we think about you're taking capacity out? Net capacity out?

[Daniel L. Comas:]

I think we're making structural costs out. We don't view it as capacity. And these are basically projects that would've been in -- that were in the 2012 budget that we're starting to go through. And I think given the progress we have with the Beckman margin, the very strong core margins we had in Q3, we just felt we sort of had the room to kind of pull it forward and get it done here.

[Steven E. Winoker:]

Okay. And then finally on price/cost, could you give us some flavor in terms of how that dynamic progressed through the quarter across the businesses maybe?

[Daniel L. Comas:]

Well, it hits us both in industrial. We got about 20 basis more price this quarter versus Q2. Clearly, there's been a fair amount of inflation probably through the -- probably the end of July. We've seen some of that subside obviously in spot rates, but we haven't really seen that benefit yet across the businesses. Hopefully in Q4, there's often a lag. You bring inventory in and then run it through the P&L. So it's a net and that was probably a slight negative in the quarter, the price/cost dynamics. Hopefully, that may be a slight positive for us. But again given our business mix, it's not a huge issue overall for our P&L.

[Steven E. Winoker:]

Right. So there'll be a marginal potential upside to the fourth quarter?

[Daniel L. Comas:]

Yes.

[Operator:]

And next we'll go to Shannon O'Callaghan with Nomura.

[Shannon O'Callaghan:]

So on Beckman, just I guess an update on -- I mean you still thinking the $0.05 of accretion in the fourth quarter and where are you thinking about next year and maybe just give us a sense of kind of milestones that we should be thinking about?

[Daniel L. Comas:]

Shannon, just maybe briefly on the accretion. Clearly, we trended better in the margins through the third quarter than we had forecasted at the beginning of the summer. I think that puts us in a position where there's probably a couple more cents of accretion in Beckman in Q4. We're taking some of that and putting that back into that $50 million of incremental restructuring. I think we'll avoid sort of updating any '12 numbers until December. I don't know if you want to talk about additional milestones, Larry or...

[H. Lawrence Culp:]

Shannon, any particular area of the business that you're thinking about with these milestones?

[Shannon O'Callaghan:]

Well, I mean you mentioned some of the, I guess, some of the FDA already. I guess maybe from an organizational standpoint on the cost side of things, obviously, you've got 3/4 of the 1,000 done, I mean what sort of comes next?

[H. Lawrence Culp:]

Well, I mean from an organizational perspective, obviously, we have the remaining quarter for 250 people that we need to transition or will be transitioning out here in the fourth quarter. So obviously, a new structure. You have a reconstituted leadership team with Beckman veterans and some Danaher folks and again with some industry experience being brought in as well. Obviously, with nearly 10% of the headcount reduced, that changes a lot in the organization. So I think what you're going to see -- well, you're not going to see a lot of this. It will be happening inside the business. That new structure, that new leadership team, the new organization is really going to begin to again work more like a Danaher business than perhaps they have in the past. To Scott's question earlier, I alluded to some the progress that we're making with respect to quantity and growth, very much the focus here. And that's just daily work. That's what we do in transforming and building businesses. We're thrilled with the progress. Obviously from a quality perspective, there will be some things that you'll be able to see from the outside in terms of some of these public customer-facing issues. Again I mentioned some of the product recalls that have been widely publicized. We've got one of those behind us. We're making good progress on the other 2 and are obviously keen to have all 3 remediated in the not-too-distant future. Obviously, there's a lot more to the quantity challenge at Beckman. I think that presented itself in the warning letter. But again to reiterate, we really didn't find that there was new news in the wake of that FDA audit. The work that the company had disclosed previously, the progress that they've made, all of that combined, I think gives us a conviction that we will not only fix the issues of the past, but ultimately make quality a competitive advantage for Beckman Coulter.

[Shannon O'Callaghan:]

Okay. And then on dental, one of the real weak spots, I think, last quarter and a sharp recovery, maybe talk a little bit about what got done and then -- but yet it's still a focused area for restructuring. So what still needs to happen?

[H. Lawrence Culp:]

Well, clearly, we've talked about dental in the past as a business that ought to be a 15% to 20% segment OP performer, very much in line with some of the other segments. Shannon, it's a long list of different items that constitute what they'll do here in the fourth quarter. There will be, obviously, as Dan was alluding to earlier, some structural costs that comes out. That will be fairly well balanced between what we do here and what we do in Europe. And as we go through the quarter, I think we'll be able to give you a little bit more color as to some of the specifics. But again pleased with what they've done this year, certainly you saw that present itself in the third quarter. And we continue to have tremendous conviction that the Dental segment can and will be an in-line contributor at Danaher.

[Operator:]

Our next question will come from Jeffrey Sprague with Vertical Research.

[Jeffrey T. Sprague:]

Larry or Dan, can you give us Beckman's actual pro forma core revenue growth in the quarter and some color how it's split between equipment and consumables?

[H. Lawrence Culp:]

Jeff, it was again basically a flattish performance at Beckman on the top line. And I would characterize that as fairly well balanced between the split between the 2.

[Jeffrey T. Sprague:]

And could you give us a little bit more color on what you're seeing in muni markets both in the U.S. and Europe?

[H. Lawrence Culp:]

Yes, I think if you look across where we have that muni exposure, it's been steady in both places. I think as we -- and we're certainly having a very good year at Trojan in that regard, I think on both sides of the Atlantic, again very much in line with the headlines. The teams are maybe a bit cautious thinking about next year, particularly with some of the bigger ticket products. But be it on the drinking water side or on the wastewater side, I think we saw good growth here in the third quarter, expect to do same in the fourth quarter and see no reason why that -- I was going to say same in that [ph] platform isn't a grower for us next year.

[Daniel L. Comas:]

But again we alluded to the more significant muni softness has been in China, but what's in Europe and U.S. is held in pretty nicely.

[H. Lawrence Culp:]

And the signs in China again are encouraging as we get towards the end of the year here, that is, slow start to this new 5-year plan is perhaps fading a bit on us, which will be welcome.

[Jeffrey T. Sprague:]

Do you actually see, Larry, any sign from this kind of the chatter or people you talk to over there that the foot starts coming off, the break from a credit standpoint or other kind of economy cooling types of initiatives that it had in place?

[H. Lawrence Culp:]

I have heard that from a number of people who have, I think, thoughtful perspective on China. The exact timing and the magnitude is a bit perhaps a bit of a guessing game. But yes, I have heard that.

[Jeffrey T. Sprague:]

And then finally, just on tax, Dan, how much more of these type of opportunities do you think you have? And it looks like they're starting to push down your structural tax rate even a little bit lower. As we roll into next year, should we think that the underlying structural tax rate it's still kind of on a southward trajectory here?

[Daniel L. Comas:]

Well, I think it appeared that with Beckman coming in it's probably taking our effective rate down maybe about 100 basis points from 25 and change to 24 and change. Absent any changes out there, whether it's U.S. or internationally, I think we're probably in that zone probably in that sort of 24%, 25% rate, which is below obviously what we're kind of running at the first half of the year.

[Operator:]

Our final question will come from Deane Dray from Citi Investment Research.

[Deane M. Dray:]

I wanted to follow up on the comments earlier about the opportunity in network security analysis. And it seems like every day there's another part of a security breach or hacking or so forth, but what is the commercial opportunity both at the enterprise level, local area networks for Fluke Networks and then broader, from the carriers with TEK Communications?

[H. Lawrence Culp:]

Dean, as you just highlighted, we see a breadth of opportunities both on our Tektronix Communications and our Fluke Networks and Arbor brands that plug in to both the physical security challenges that are out there for network operators, both on the enterprise and the carrier -- more on the enterprise side. But also in terms of some of these so-called hacking or cyber security threats. Clearly, we acquired Arbor for TEK Communications to give them an outstanding position in that application with the carriers. That business has been probably one of the top 3 growers for Danaher this year. They continue to be just choc-full of opportunity in their sales funnel and we expect them to have a very strong run here going forward. That's not the only play in and around TEK Communications. Obviously, much of what we do in the network management space is akin to what Arbor does most directly as networks tackle the challenge not only of growth, but security. Clearly, part of what we've done at Fluke Networks, particularly with a recent acquisition called AirMagnet, it improved our wireless test capability with again a strong slant there with respect to enterprise security. So that's a very hot topic that courses through all the businesses. So whether we're talking about the carriers, whether we're talking about corporate IT, we think we're well-positioned and the good growth we've seen this year is in no small part because of that exposure to cyber security broadly defined.

[Deane M. Dray:]

Is this still -- do have all the right pieces to be able to address the market opportunity? You had the Arbor acquisition, but will this be homegrown from here or are there still pieces that you might need?

[H. Lawrence Culp:]

Well, Dean, as you well know and this is a rapidly evolving space, I think we really like not only what we have today, but the R&D capabilities we have in those businesses. So it's hard for me to say that we have everything we need for all time given that we'll certainly be relying largely on our organic bets, but I wouldn't be surprised and you shouldn't either if you see us make some other inorganic bets to complement what we have currently going forward.

[Deane M. Dray:]

And then just last question would be on TEK Communications. What's the quote activity like on the carrier network, your next-generation systems, and any change in the competitive dynamics there?

[H. Lawrence Culp:]

I wouldn't say we've seen any marked change there over the last 90 days, Dean. They are exceptionally busy as you can imagine given the wireless growth and the challenges that they help carriers tackle. It can be, at times, a bit of a lumpy business, but they came into the third quarter thinking they were going to have a good quarter. They had a very good quarter given the urgency certain customers had around installations. That will soften them up a bit here in the fourth quarter. But I think if you look long term, that part of TEK Communications, really perhaps in many respects the unsung hero in the Tektronix acquisition, should continue to be a strong growth contributor to Danaher.

[Operator:]

And at this time, I'd like to turn the conference back to the presenters for any additional or closing comments.

[Matt R. McGrew:]

Thanks, everyone. Dan and I are around all afternoon today for follow-ups.

[Operator:]

And that does conclude today's conference. Thank you for your participation.