Danaher Corporation (DHR) Earnings Call Transcript & Summary

My name is Chelsea and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's Second Quarter 2026 Earnings Results Conference Call. [Operator Instructions] I will now turn the call over to Ms. Rachel Vatnsdal, Vice President of Investor Relations. Ms. Vatnsdal, you may begin your conference.

Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer; and Matt Gugino, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, quarterly report on Form 10-Q, the slide presentation supplementing today's call the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call and a note containing details of historical and anticipated future financial performance are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A dial-in replay of this call will also be available until August 4, 2026. During the presentation, we will describe certain of the more significant financial factors that impacted year-over-year performance. Our Form 10-Q and the supplemental materials I referenced describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the second quarter of 2026 and all references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make 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, and actual results may differ materially from any forward-looking statement 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, except as required by law. With that, I'd like to turn the call over to Rainer.

Thank you, Rachel, and good morning, everyone, and we appreciate you joining us on the call today. We delivered a solid second quarter with better-than-expected revenue, earnings and cash flow. We were particularly pleased to see an acceleration in core growth versus the first quarter, driven by good commercial execution, recent innovation and recovery in our end markets. Our Life Sciences businesses delivered their strongest quarter in several years. Diagnostics continued to perform well. And while customer project timing impacted bioprocessing revenue, underlying order trends remain robust. Improved growth across our portfolio paired with benefits from our recent productivity initiatives, helped drive high single-digit earnings growth. This strong execution and the earlier-than-expected close of Masimo enables us to again raise our full year adjusted EPS guidance. The quarter illustrates the benefit of our balanced end market and geographic diversification, while reinforcing our outlook for accelerating revenue and earnings growth in the second half and beyond. Now across our end markets, we saw encouraging signs of stabilization and improvement. Demand from large pharma and biopharma customers remain healthy while improved biotech funding supported improved funnel and order activity. academic and government markets have largely stabilized while clinical and applied remains consistent sources of strength across the portfolio. As we look to the second half of 2026 and beyond, we're encouraged by the momentum across our businesses and the long-term value creation opportunities ahead for us. We're well positioned in attractive end markets with strong secular growth drivers and our capital deployment by wheel is active, supported by significant balance sheet optionality. The Danaher Business System and our team are powerful differentiators helping us drive both growth and productivity. So with that, let's take a closer look at our second quarter 2026 results. Sales were $6.3 billion in the second quarter, and core revenue was up 3% year-over-year. core growth, excluding respiratory testing revenue, which highlights improvement in the underlying business trends that I mentioned a moment ago was up 4.5% and a 150 basis point acceleration from the first quarter. We were encouraged to see growth accelerate with improving trends across our end markets and recent innovation is further driving growth across our businesses. Let me briefly highlight a few examples of how these innovations are strengthening our competitive position and helping customers bring life-changing therapies and diagnostics to patients faster and more efficiently. In biotechnology, Cytiva launched the Biacore 8S SPR system, a high throughput screening and characterization platform that helps researchers evaluate how potential drug candidates interact with their targets. By combining rapid screening with high-quality molecular characterization and AI-powered data analysis in a single automated platform, Biacore 8S help customers identify the most promising drug candidates faster. In Life Sciences, SCIEX reinforced its leadership position in mass spectrometry with the introduction of the novus V55 at June's American Society of mass spectrometry meeting. This AI-enabled triple quadrupole system delivers enhanced sensitivity, high throughput and helps reduce operating costs for pharmaceutical, food, clinical and environmental testing labs. In Diagnostics, Beckman Coulter introduced the Access brain-derived p-Tau217 research use-only assay and received the CE Mark approval for the Access p-Tau217 assay, 2 blood-based Alzheimer's biomarker tests for use on the Dxi 9000. Those assays further strengthen Beckman's positioning as a leader in the important and growing area of neurodegenerative diagnostics. Now these are just a few of many examples across Danaher and how we're positioning our businesses for continued growth and delivering on our commitment to help customers solve some of the most important challenges impacting patients around the world. Geographically, core revenues in developed markets declined slightly as both North America and Western Europe were impacted by shipment timing in biotechnology and lower respiratory revenue year-over-year. Core revenues in high-growth markets increased more than 10% with healthy growth across our major regions, including mid-single-digit growth in China. In China, Biotechnology delivered another quarter of solid growth as local companies continue to partner with Cytiva in the development of novel molecules and the manufacturing of commercial therapy. Life Sciences market conditions continue to stabilize, while Diagnostics improved sequentially as we began to move beyond the most significant year-over-year impact of volume-based procurement and reimbursement changes that began in late 2024. Our gross profit margin for the second quarter was 57.6%. Our adjusted operating profit margin of 27.1% was down 20 basis points as lower respiratory revenue year-over-year more than offset the favorable impact of higher nonrespiratory volumes and disciplined cost management. Adjusted diluted net earnings per common share of $1.94 were up approximately 8% year-over-year. We generated $1.3 billion of free cash flow in the quarter and $2.4 billion in the first half of the year, resulting in a year-to-date free cash flow to net income conversion ratio of 124%, further underwriting the differentiated quality of our earnings. We also made significant progress on our capital deployment priorities during the quarter and into July. On the M&A front, we closed our acquisition of Masimo in early June, ahead of our initial expectations. We expect Masimo to be immediately accretive both strategically and to adjusted EPS. The business delivered high single-digit revenue growth in the first half of the year and is off to a great start as part of Danaher, including an FDA 510(k) clearance for an AI-enabled opioid-induced respiratory depression detection solution. In fact, the team has already completed their first operating review where they further validated opportunities to drive productivity and efficiency improvements, capture customer account synergies and strengthen the innovation process using the Danaher Business System launch excellence tools. Additionally, Leica Biosystems announced the pending acquisition of StatLab a leading manufacturer of consumables across the anatomical pathology workflow. StatLab has built a strong reputation with customers for its quality, innovation and customer intimacy. We believe the acquisition will strengthen Leica Biosystems value proposition by bringing together consumables, instruments, automation and digital pathology into a more complete workflow solution. It also supports our broader integrated delivery network strategy and our goal of helping clinicians diagnose cancer faster and more precisely. StatLab generated approximately $250 million in revenue for the full year of 2025 and has an attractive business model with more than 85% recurring revenue. We expect the business to grow high single digits over the long term and to be accretive to adjusted EPS in our first full year of ownership. While the transaction remains subject to customary closing conditions, including regulatory approvals, we expect to close by the end of 2026. Lastly, we deployed approximately $900 million of capital to repurchase 5 million shares of Danaher common stock. We believe these repurchases will provide an attractive return given the trajectory of our long-term organic growth, earnings and cash flow outlook. So now let's take a closer look at our results across the portfolio and give you some color on what we saw in our end markets. Core revenue in our Biotechnology segment increased 2.5%. Core revenue in Discovery and Medical increased mid-single digits, with solid growth in pharma and biopharma and a more stable academic and research funding environment. Core revenue in bioprocessing grew low single digits in the second quarter with low single-digit growth in both consumables and equipment. We were encouraged to see equipment growth in the second quarter following several quarters of improving order trends supported by customer investments in manufacturing capacity. Consumables growth came in below our expectations as a few large shipments for programs at our commercial customers moved out of the quarter. To give you some additional color, this was a shift in shipment timing at a few large commercial drug manufacturers for molecules that we're spec-ed into. Now while revenue was impacted by customer timing, underlying demand remained very healthy with mid-teens order growth in both consumables and equipment. The trends we're seeing in the business, together with healthy underlying demand, reinforce our confidence in the high single-digit long-term outlook for Cytiva's bioprocessing franchise. Cytiva is well positioned to support capacity expansion as we expect onshoring activity to accelerate and commercial production to remain robust, particularly in monoclonal antibodies. At the same time, new molecules continue to progress through development pipelines and into commercialization, creating what we believe is a durable long-term growth opportunity given Cytiva's leading and expanding specked in position on molecules in preclinical and early-stage clinical development phases. Now turning to our Life Sciences segment. Core revenue increased 5.5%. Core revenue in Pall's applied Filtration business increased approximately 10%, led by strength in its microelectronics product line. Now this business provides mission-critical filtration solutions across the semiconductor manufacturing workflow and has been a consistent growth driver for Pall over the last several years. Core revenue in our life sciences instrument businesses increased mid-single digits in the quarter. Across our end markets, investment from large pharma and biopharma customers continue to strengthen while biotech demand benefited from a more favorable funding environment. Academic demand improved modestly as the quarter progress, but remained below normal levels. By operating company, we saw solid growth at Beckman Life Sciences, like a microsystem and science. Beckman Life Sciences saw notable growth in automation where the team is well positioned to benefit as customers invest in the lab infrastructure needed to support autonomous labs and AI-enabled drug discovery. Core revenue in our life sciences consumables businesses collectively grew low single digits. IDT was up in the quarter led by demand for MRD testing solutions. And Abcam's growth continued to accelerate, delivering its best quarter since acquisitions as academic markets have started to improve and commercial initiatives, particularly around biopharma and diagnostic end markets gained further traction. As end market conditions continue to improve, we expect commercial and go-to-market execution, including autonomous lab catalyzed demand to further support growth acceleration across Abcam, IDT and Aldevron. Now moving to our Diagnostics segment. Core revenue increased 2%. Core growth, excluding respiratory testing revenue was up 5%. Core revenue in our clinical diagnostics businesses was up mid-single digits with high single-digit growth outside of China. Leica Biosystems and Radiometer were collectively up high single digits with solid growth across both instruments and consumables. Segment culture diagnostics was up mid-single digits globally with another quarter of solid immunoassay revenue and installed base growth. At Beckman, declines in China began to moderate as pricing stabilized and volumes improved. In Molecular Diagnostics, Cepheid's core nonrespiratory revenue increased low double digits, led by growth in hospital-acquired infections and sexual health assays. This strong performance was supported by continued adoption of recent menu expansions, including the multiplex GI panel as well as several notable key account wins with large hospital networks. Respiratory revenue was in line with our expectations for the second quarter, though down year-over-year due to lower seasonal infection rates. During the quarter, Cepheid supported the Ebola outbreak response in the Democratic Republic of Congo and Uganda through the donation of expert hemorrhagic fever panel test. Working with global health partners, Cepheid's decentralized gene expert platform is helping expand testing capacity in affected regions and support faster isolation, treatment and containment of this deadly virus. Now moving to how we are thinking about the second half of the year. We expect third quarter revenue growth to be approximately 2% to 3%, which includes an approximately 250 basis point year-over-year headwind from respiratory testing. This implies that core growth, excluding respiratory will be approximately 5%, an acceleration versus what we saw in the second quarter. We continue to expect to exit Q4 at a mid-single-digit core revenue growth rate as we move past some of the headwinds from the first 3 quarters of the year. This results in a full year 2026 core revenue growth outlook in the range of 3% to 4%. Our updated outlook reflects higher anticipated core revenue growth in our Life Sciences segment as we expect these markets to recover faster than our initial expectations, offset by a slightly more conservative outlook for bioprocessing given some of the customer-driven timing dynamics we saw in the second quarter. Additionally, given our second quarter earnings beat and the earlier-than-anticipated completion of the Masimo acquisition, we're raising our full year adjusted diluted net EPS guidance to a range of $8.45 to $8.60 versus our previous range of $8.35 to $8.55. Finally, we expect the third quarter adjusted operating profit margin of approximately 26.5%. So to wrap up, we're pleased to deliver better-than-expected second quarter results and are encouraged by the underlying momentum that is built across our portfolio. Growth accelerated, reflecting improved end markets. strong commercial execution and the power of our balanced portfolio. Traction on recent product launches also drove growth and share gains across a number of our businesses. At the same time, our teams executed at a high level, and we see meaningful benefits from our recent productivity initiatives. So we remain confident that growth will accelerate toward mid-single-digit exit rate this year. As markets recover, we expect our growth initiatives to gain further traction. At the same time, we believe AI will strengthen the Danaher Business System, reinforcing our culture of continuous improvement and supporting our work to achieve margin expansion and earnings growth. So looking ahead, our leading portfolio, significant capital deployment optionality and talented team, all powered by the Danaher Business System will continue to position us to help customers move from discovery to delivery faster, accelerate the impact of science and technology and create sustainable long-term value for shareholders. So with that, I'll turn the call back over to Rachel.

Thanks, Rainer. That concludes our formal comments. We're now ready for questions.

[Operator Instructions] And our first question will come from Michael Ryskin with Bank of America.

Not a surprise, I'm going to start on the bioprocess business and Biotechnology segment. I think that was the biggest surprise for us in 2Q. Here all your comments on commercial customer delays, timing. I think certainly, that's a little bit unpredictable. But why is that revenue not coming back in 3Q and 4Q, would we have to dig into that a little bit more. By our math, 2Q came in about $75 million light. But then if I got the full year bioprocess guide, it goes from high single to mid-single, that's about $150 million plus. So you're not catching it back in 3Q, 4Q. Is this a multi-quarter rebate? Sort of walk us through the timing of that and when we could expect that to come back?

Sure, Mike. Thanks. So to recap, our bioprocessing business grew low single digits this quarter, and that was both for equipment and consumables. And as I said, earlier, bioprocessing consumables revenue was lighter than we thought. Later in the quarter, we had a few large chromatography resin shipments that were slated primarily for Q2 and Q3 move out of the year. So as a reminder, these shipments tend to be about $10 million to $30 million and are destined to large batch manufacturing. And these delays were at our customers' request due to production schedule changes and site readiness challenges, which we have seen occasionally. Now these shipments were primarily for commercial programs that we're spec-ed into. So there's really no change to the underlying trends, even given what we saw in the quarter. And we think our portfolio is differentiated and that's supported by our strong order book trends as consumables and equipment orders both grew mid-teens in the second quarter.

Yes, Mike. And just on the numbers here. I think your numbers you quoted maybe a touch high, but in the ballpark. I think in the second quarter, we saw about a 500 basis points impact to that overall bioprocessing growth given the dollars probably more in that $50 million, $60 million type range. And then for the full year, we saw a little bit north of $100 million that shifted out of that Q2, Q3 into next year. So that's a couple of hundred basis points to our bioprocessing growth for the full year. Obviously, there's some chance of this moving back into Q4. That's not within our planning assumption today. I think the other thing just to note here on Q2 is that outside of chromatography resins that Rainer referenced, we saw a pretty good performance in the quarter in consumables, and that included strong double-digit growth in our upstream consumables business. So no change to our view, the bioprocessing is high single digit over the long term as we noted.

Okay. All right. I mean I'll use a follow-up on the same topic then. I guess just -- is there anything that's changed with visibility in the business? Is there anything I mean you kind of alluded to that this happens from time to time, but it is a pretty meaningful pretty meaningful swing. I know we spent a couple of years worrying about destocking, and it seems like we've moved past that, but still there's a lot of questions on visibility, confidence in the pipeline. I mean you've got a strong order funnel you've been talking about for a while. So it's still a little bit of a surprise how quickly bioprocess can swing given expectations not stabilized. So if you could just talk about maybe funnel ability to backfill with other customers, given the order strength you've seen elsewhere.

Mike, I mean, this delay in shipments is really fairly concentrated around a few commercial customers. We don't see any broad-based change in the demand here as you can see by the order data, which refers to both equipment as well as consumables. And to be sure, if we reflect back on the days of the post-pandemic inventory glut, you'll recall that we put in a great deal of process to ensure that we have great visibility across our customer base and to understand their inventory positions. And those processes are in place. They are functioning appropriately, and they are part of our forecasting mechanism. And what that data shows is, in fact, that the inventory levels more broad-based in the market are actually quite a bit lower than they have been in prior years. And that makes a lot of sense to us. One, the market continues to be robust. We see scripts continuing at their strength. We see the Phase 2 and 3 molecules continue to move through. And of course, the lead times that we had as an industry, but also that we had at Cytiva are significantly shorter now, allowing those safety stocks to come down. So we really, from the perspective of the demand and the broad-based inventory in the market don't see any change in the dynamic, and that's what the data shows.

Our next question will come from Tycho Peterson with Jefferies.

Rainer, I want to actually pick up on the bioproduction theme on just on the equipment side, it was nice to see the return in equipment revenues. We've been kind of waiting for that. You've had 4 quarters in a row prior to sort of order growth. Maybe just talk a little bit about whether you're ready to call a turn in equipment. Are these any reshoring data points you can point to? And I guess, how are you feeling about the bioproduction equipment using the back half of the year into '27?

Thanks for the question. So in fact, we are pleased with the fact that we're starting to see revenue growth here on the equipment side. And in fact, we do believe that this is a twofold signal that we are starting to see some of that reshoring brownfield expansion, not just playing through in the order strength that you've seen over previous quarters, but we're also starting to see some of that in the revenue line. That's one aspect. The other aspect, and this comes back to Mike's question a little bit, there continues to be robust demand for biologic molecules therapeutics, and we haven't had a lot of investment, as you know, in capacity expansions over the last several years. And so there is this need to continue to invest in capacity expansion, coupled with the reshoring dynamic. Now as it relates to the greenfield investments, we're quoting for those. Those are out there being looked at by our customers. But that's going to take 2 or 3 years until we see that play through. But we continue to believe that we're in the early innings here of a multiyear CapEx cycle that is required both to support the growing volumes of biologic therapeutics but also the reshoring dynamic.

Okay. And then for the follow-up, I want to dig into the life science consumable piece. It was good to hear the commentary on Abcam IDT. I don't think you called out all Aldevron, but you're talking about increased confidence overall in the Life Sciences. Is this biotech funding converting to spending? Is it pharma starting to train LLMs? It doesn't sound like academic is really picking up. So maybe just talk on the drivers for the increased enthusiasm on the life science side on the consumables.

So on the consumables side, we do see biotech funding stronger. We're seeing that funding that we see in all the announcement starting to play through. Previously, it was just in the funnel. Now we're starting to see some orders there. And also on the margins, we're starting to see some revenue. And that does, in fact, play into what you see here in our consumables business. But I think what's really driving it is IDT continues to be making real progress in MRD as one end market to call out here. We see Aldevron continuing to make progress aside from those 2 large customers that we've talked about previously, and that is supported by increased biotech funding. There are more projects going on there. That's certainly encouraging. . And then on Abcam, we've got -- we've had the best quarter here that we've had since the acquisition where you see not only the work that we're doing, driving growth and share capture. But we're also seeing some more stability in academic markets. I wouldn't say they're back to normal. And then lastly, at Abcam, they're making real progress in diversifying that end market from primarily academic to also pharma and diagnostic end markets. So very encouraged by all the progress that we're making there on the consumables side.

Our next question will come from Dan Leonard with RBC.

Circling back to biotech for a moment, is there any common thread you can call out between those few customers that delayed shipments, whether it be decisions on where to put manufacturing or inventory drawdowns? Anything that would unite the few.

So this is primarily related to resin shipments, Dan, that's about the one commonality that we can see here. And then look, building new plants and site readiness and so forth, just is not -- it's a complex business. It's -- it's not that scientific. So there are delays in that regard. But this is not related, let's say, on the back end to any one molecule that's out there in the market or just one customer, although it is just a few large commercial manufacturers where we're spec-ed into those molecules and of course, supporting their needs.

Okay. That's clear. And then just shifting to a diagnostics follow-up. Of the flat assumption for Q3, given the magnitude of the respiratory headwind that you're going to face implies a step-up in the core growth rate to high single digits from that 5% figure in Q4 -- or I'm sorry, in Q2. Could you elaborate on what drives that acceleration?

Sure, Dan. So obviously, we have some variability here with the respiratory headwinds from quarter-to-quarter. But I think if you unpack it, excluding respiratory diagnostics was solid mid-single digits in the second quarter. I think we're encouraged by some of that execution we're seeing commercially across the platform as well as some of those new product innovations that are driving accelerated growth like that Dxi 9000 of Beckman, the improved -- [indiscernible] expansion at Cepheid. So I think our view is these trends, underlying trends continue. And as respiratory headwinds moderate in Q4, we'll exit at that overall mid-single-digit rates. Also remember here, Dan, we do have China policy that is starting to those headwinds are starting to lessen, so you see a little bit lower of a headwind here in Q3 and Q4, which are driving a bit more of the overall step-up as well.

Our next question will come from Scott Davis with Melius Research.

You only own Masimo for, I guess, a month, but can we get a little bit of an early read on it? Would you be willing to give us maybe the growth rate that they put up for the quarter? Or any information about it, that would be helpful.

Sure. First of all, Scott, thanks. We're really excited by the fact that we were able to get that acquisition closed a little bit earlier than we thought. And in our initial operating reviews, this is every fit the company that we thought it was. You might have heard there that we are already launched with a new 510(k) on a new assay. And so that's gone very well for us. And as we think about the growth rate, we validated that, that was high single digits here for the quarter, and that's certainly very encouraging, and there's potential upside there as we go forward.

Okay. That's super helpful. And I guess I want to back up a little bit and go into like the academic and the government outlook. And what -- is there pent-up demand there? Like what does the shape of that recovery look like when we get to the other side of it. And -- and what is the other side? Is it -- do we have to wait till 2028? Is it -- can we get a bigger snapback in 2027? And is it a V-shape? Or is it just too hard to say?

Well, it is difficult to say because what we're seeing in the academic funding area, Scott, is related to government policies. And if those government policies become more constructive to supporting the research industry, if we can call it that, universities the central labs that are out there, of course, the NIH. But also as we think about around the world, we need to see a more constructive perspective on academic funding before we're ready to call an inflection point. So what we see for now, and I think that's what we're going to see for a while is stability in the academic markets, and we can build off of that. You may recall that for ourselves, academia as an end market is less than 5% of our revenues. And so we watch that with great interest because in many ways, it's a catalyst to innovation going forward. But as an economic driver to Danaher's growth and earnings flywheel, the impact is fairly limited.

Our next question will come from Jack Meehan with Nephron Research.

I wanted to dig a little more into the Life Science business, specifically start with Pall Industrial. So the 10% growth that you had in the quarter, is there any color you can give on the relative growth for semi versus the remaining customer classes? And then just more broadly, how are you feeling about the macro recovery with your industrial customers?