Categories Earnings Call Transcripts, Industrials

Danaher Corp. (DHR) Q2 2020 Earnings Call Transcript

DHR Earnings Call - Final Transcript

Danaher Corp. (NYSE: DHR) Q2 2020 earnings call dated Jul. 23, 2020

Corporate Participants:

Matthew Gugino — Vice President of Investor Relations

Thomas P. Joyce — President and Chief Executive Officer

Analysts:

Derik De Bruin — Bank of America Merrill Lynch — Analyst

Tycho Peterson — JP Morgan Chase & Co. — Analyst

Vijay Kumar — Evercore ISI — Analyst

Scott Davis — Melius Research — Analyst

Doug Schenkel — Cowen and Company — Analyst

Stephen Beuchaw — Wolfe Research — Analyst

Presentation:

Operator

Good morning. My name is Maria, and I’ll be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation’s Second Quarter 2020 Earnings Results Conference Call. [Operator Instructions]

I will now turn the call over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, you may begin your conference.

Matthew Gugino — Vice President of Investor Relations

Thanks, Maria. Good morning, everyone, and thanks for joining us on the call.

With us today are Tom Joyce, our President and Chief Executive Officer, and Matt McGrew, our Executive Vice President and Chief Financial Officer.

I’d like to point out that our earnings release, the slide presentation supplementing today’s call, our second quarter 2020 Form 10-Q and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call 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 & Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until August 6, 2020.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials 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 refer to results from continuing operations and relate to the second quarter of 2020 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 only available in certain markets.

During the call, we’ll 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 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 except as required by law.

As a result of the size of the Cytiva acquisition and its impact on Danaher’s overall core revenue growth profile, we’re presenting core revenue on a basis that includes Cytiva sales. References to core revenue growth including Cytiva sales and the calculation of period-to-period sales growth compare the current period Cytiva sales to the historical period Cytiva sales prior to the acquisition.

With that, I’d like to turn the call over to Tom.

Thomas P. Joyce — President and Chief Executive Officer

Thanks, Matt, and good morning, everyone.

We’re very pleased with our second quarter results, especially in such a challenging environment. Our solid core revenue growth, strong cash flow generation and more than 30% EPS growth are testament to our team’s commitment to the Danaher business system and the outstanding portfolio of businesses that comprise Danaher today. We’re tackling the challenges and opportunities presented by the COVID-19 pandemic head on and are fortunate to do so from a position of strength.

These circumstances have showcased the resilience of our portfolio, a unique collection of market-leading franchises and technologies with a high level of recurring revenue and a foundation of continuous improvement. We believe that this powerful combination differentiates Danaher and will enable us to continue generating sustainable long-term value for shareholders for many years to come.

Before we run through our second quarter results, I’d like to provide an update on a few of the ways we are directly contributing to the fight against COVID-19 today and well into the future. Diagnostic testing has been a critical component of the global community’s attempts to better understand and ultimately curb the spread of COVID-19, and Cepheid has been a leader in this effort. In March, Cepheid launched the first rapid molecular test for COVID-19 that provides highly accurate results within 45 minutes. Multiple independent studies indicate that Cepheid’s test performance is best in class versus other point of care platforms on the market today, providing superior virus detection with one of the fastest time to results.

The team has meaningfully increased production capacity since the test was launched, shipping more than 6 million test cartridges in the second quarter. As a testament to Cepheid’s commitment to tackle this global health crisis, the team recently announced the development of a rapid 4-in-1 combination test for COVID-19, flu A, flu B and RSV from a single patient sample. The symptoms for each of these viruses are very similar but the treatments are very different, so the test is being designed to provide critical answers within 35 minute to ensure the best patient outcome. The 4-in1 test is expected to launch in the third quarter, ahead of the upcoming flu season.

In addition to ramping test production, Cepheid also delivered a record number of new instruments to customers in the second quarter. The installed base grew double digit, and the number of new instrument placements was more than 4 times that of a typical quarter. This significantly increases Cepheid’s installed base which now totals more than 26,000 instruments globally, bringing essential diagnostic information closer to more patients and communities around the world.

Another addition to our diagnostic testing capabilities was the launch of Beckman Coulter Diagnostics’ serology test in June. This highly sensitive and specific assay can identify IgG antibodies to the virus which typically begins to develop within the first 14 days of infection. Antibody assays could potentially play an important role in understanding immunity and in turn improving the world’s ability to manage COVID-19 going forward.

As we look beyond testing, the global race is on to find effective treatments for COVID-19, and we’re proud to support the scientific community in their pursuit of new vaccines and therapeutics for the virus. Pall and Cytiva’s products and solutions are involved in the majority of the more than 200 vaccine and therapeutic projects currently underway around the world, including participation on every COVID-19 vaccine that is in human clinical trial today. Our unique offering across the bioprocessing workflow positions us exceptionally well to help bring vaccines and therapies to market faster.

In addition to our market-leading filtration, chromatography and single use technologies, Pall and Cytiva’s innovative teams provide customers with extensive technical expertise to enable breakthrough development and production capabilities. One such example is Pall’s process development services team, which is helping customers scale up their vaccine production processes significantly faster and in one instance, accomplishing in just a few weeks what typically takes months or even years. These innovative bioprocessing solutions are just a few examples of how we’re helping to accelerate the pursuit of COVID-19 prevention and ultimately cure.

Now let’s look at our second quarter results. We generated $5.3 billion in sales, with 3.5% core revenue growth. The impact of foreign currency translation decreased revenues by 2%. We also saw strong order growth in the quarter, just under 10%, led by our Life Sciences & Diagnostics platforms. Geographically, revenues in the developed markets was up mid single digits, led by North America and Western Europe. High growth markets were up slightly, driven by a meaningful sequential improvement in China which was up low single digits year-over-year.

Gross profit margin of 53.8% and operating profit margin of 15. 9% were both down, primarily as a result of fair value adjustments related to the Cytiva acquisition. Excluding these adjustments, both gross and operating profit margins increased by more than 150 basis points year-over-year. Core operating profit margin was down 80 basis points, driven by slightly lower volume, excluding Cytiva; foreign exchange rate movements; and higher corporate expense.

Adjusted diluted net earnings per common share of $1.44 were up 32% versus last year.

We generated $1.3 billion of free cash flow in the quarter, and $2 billion year-to-date, both up approximately 35% or more year-over-year. Our outstanding free cash flow, combined with a strong balance sheet, positions us well to actively pursue strategic M&A opportunities in this environment.

We’re also accelerating growth investments across Danaher, most notably at Cepheid and many of our life science businesses where we are expanding production capacity to support the fight against COVID-19.

Now let’s take a more detailed look at results across the portfolio. Life Sciences’ core revenue was up 8%, led by high teens or better core growth at Cytiva, Pall Biotech and IDT. More specifically, Cytiva achieved more than 20% core revenue growth in its first full quarter as part of Danaher, exceeding our expectations.

Demand for our bioprocessing, genomic and automation solutions was driven by ongoing global efforts to develop COVID-19 testing and treatment. This was partially offset by declines in our more instrument oriented businesses: Sciex and Leica Microsystems. Academic and research lab closures delayed installations of existing instrument orders and new capital purchases particularly across developed markets.

And despite this difficult environment, Sciex successfully launched multiple new products earlier this month, including the Triple Quad 7500 mass spectrometer. The new 7500 marks Sciex’s most significant launch of the last five years and reinforces their market leadership in quantitative mass spectrometry. This is another great example of how we’re continuing to invest for growth across Danaher and enhancing our competitive advantage through innovation.

Moving to Diagnostics. Reported revenue was up 2.5%, with 5% core revenue growth, led by continued strength at our point of care businesses: Cepheid and Radiometer. Global demand for Cepheid’s COVID-19 test and GeneXpert instruments helped drive more than 100% core revenue growth at Cepheid in the quarter. Radiometer delivered double-digit core revenue growth as elevated levels of COVID-19 hospitalizations drove demand for blood gas testing. A record number of new AVL blood gas analyzers were delivered during the quarter, further expanding Radiometer’s market-leading global installed base.

This strong performance was partially offset by declines at Beckman Coulter Diagnostics and Leica Biosystems, our core laboratory and pathology businesses. Patient volumes were down meaningfully as elective procedures and wellness visits resumed slowly throughout the quarter, particularly across the US and Europe. This was partially offset by improvements in China where hospital visits began to approach pre-pandemic levels.

Moving to our Environmental & Applied Solutions segment. Reported revenue was down 10.5%, and core revenue declined 8.5%. By geography, declines in North America and Western Europe were partially offset by double-digit growth in China. At our water quality platform, mid single digit core revenue declines were driven by industrial end market softness, while municipalities remained stable. Steady demand for our consumables and chemistries globally was offset by delayed equipment purchases, particularly in the developed markets. However, we were encouraged by strong results in China during the quarter as activity returned to more normalized levels across the region.

Core revenue at our product identification platform was down double digits, largely due to equipment revenue declines as mission-critical operating expenses were prioritized over larger capital investments. At Videojet, positive consumables growth was led by demand across the consumer packaged goods and food end markets. Service performed well as well as we continued to support customers throughout the pandemic, helping to keep their essential business operations up and running.

So with that as a context for what we saw by segment, let’s take a closer look at recent trends across our end markets. Encouragingly, the dynamics of the quarter were largely a continuation of what we outlined in early May. April appeared to be the trough, with modest improvements as we moved through May and June. Geographically, we continued to see improving activity in China, with Europe following suit, albeit at a slower pace. Resumption of activity in the US is mixed, with many states only recently beginning phased reopenings and others experiencing setbacks in the process.

Within Life Sciences, we continue to see a bifurcation across our end markets. The recent surge in COVID-19 related research and development among our biotech and pharmaceutical customers is generating strong demand for our bioprocessing, genomic and automation solutions. Non-COVID related bioprocessing activity also remains very healthy, contributing to demand for filtration, chromatography, single-use and cell and gene therapy products.

Cytiva and Pall Biotech comprise the majority of our exposure to the bioprocessing end market, and collectively, these two businesses had more than 40% growth in their order book in the quarter, a strong indication of the longer-term opportunities we’re seeing here. Meanwhile, widespread shutdowns continue to impact non-COVID related research lab activity. Labs in the US recently started to reopen but are operating at limited capacity and with distinct variations by region. The story in Europe is similar to the US, while China is further along and activity appears to be approaching pre-pandemic levels. We estimate that approximately 50% to 60% of academic research labs in developed markets are now open in some capacity. That number is closer to 90% in China where installations have resumed and instrument order books are building.

Looking across clinical diagnostics, we continue to see very strong demand for molecular point of care and acute care testing which is also driving a significant increase in instrument placements globally. Across hospital labs and reference labs, we were encouraged to see patient volumes ramp up as we moved through the quarter, with elective procedures and wellness checks resuming across much of the developed markets. Today, we estimate that patient volumes in North America are approximately 85% to 90% of historical levels, with Europe slightly ahead and China even further along, given their earlier reopenings.

In the applied markets, the divergence of demand between consumables and equipment appears to be lessening. Consumables remain solid as customers sustain essential business operations like testing and treating water and safely packaging consumer product goods, food and medicine. Equipment declines are starting to moderate, and we’re encouraged by recent order book trends.

In light of these recent dynamics, we expect to deliver mid to high single digit core revenue growth in the third quarter. We anticipate COVID-19 related revenue tailwinds will be similar to what we saw in the second quarter. By segment, we expect core revenue growth at Life Sciences to be up double digit — low double digits; Diagnostics up high-single digits; and Environmental & Applied Solutions to be approximately flat.

So, to wrap up, we’re proud of our results this quarter. Our team stays focused on executing and continue to find innovative ways to tackle the challenges and opportunities presented by this pandemic. We’re excited about the portfolio that we have today and how it will continue to differentiate us going forward. And we’re fortunate to navigate through this environment from a position of strength with our solid balance sheet and outstanding cash flow generation, enabling us to be nimble and opportunistic. We believe that the combination of our talented team [Indecipherable] [0:20:05] driven execution and resilient portfolio uniquely position Danaher to outperform in 2020 and well into the future.

With that, Matt, I’ll turn the call back over to you so that we can start taking questions.

Matthew Gugino — Vice President of Investor Relations

Thanks, Tom. That concludes our formal comments.

Maria, we’re now ready for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Derik De Bruin of Bank of America.

Derik De Bruin — Bank of America Merrill Lynch — Analyst

Hi, good morning. Thanks for taking my question.

Thomas P. Joyce — President and Chief Executive Officer

Good morning, Derik.

Matthew Gugino — Vice President of Investor Relations

Hey, Derik.

Derik De Bruin — Bank of America Merrill Lynch — Analyst

Hey. I got a couple — I got a couple to start with. I think the first one is, can you — we’re getting a number of questions on the margin math for the second quarter and the inventory step-ups. Can you talk about the dynamics of that? And the more important question is like kind of how does the gross and operating margins progress now that Cytiva is fully into the numbers and how should we think about the rest of the year.

Matthew Gugino — Vice President of Investor Relations

Yeah, sure, Derik, I’ll take it. So the gross margin — we saw kind of a decline of 200 basis points sort of year-over-year. Like Tom said in the prepared remarks, that is entirely driven by inventory step-ups related to the Cytiva acquisition in the quarter. So if you exclude that impact, our gross margins are, call it closer to 58%, which would have been up 200 basis points year-over-year, and again, I think largely driven by Cytiva. So — and that should be sort of one-time here in the quarter, Derik, that we get by as we start to move. That’s a one-time thing here in the quarter. So going forward, you shouldn’t see that.

Derik De Bruin — Bank of America Merrill Lynch — Analyst

Okay. That’s — yeah, thought I’d just want to clarify that. And how should we sort of — and how should we think about the SG&A and R&D, the opex lines?

Matthew Gugino — Vice President of Investor Relations

I don’t know that we had a tremendous amount of kind of step-up issues in either of those two lines. I think — I think about the R&D line — I think while I do think we will continue to kind of invest in accelerating some spend here in the second half, I think more or less the R&D line should stay pretty constant again outside of the investments that we’re going to make here in the second half, largely around Cytiva. I think — probably a little bit heavier investing there. But generally speaking, I think we’re biased here in this environment to continue to try and spend to make sure that we position ourselves not only for where we are in the short term here in ’20, but to make sure that as we head into 2021 that we’re in the best position possible. So, might be high I think about it going forward.

Derik De Bruin — Bank of America Merrill Lynch — Analyst

Great.

Thomas P. Joyce — President and Chief Executive Officer

Yeah, I would — I would add to that, Derik, just echoing Matt’s comments. We’re obviously very fortunate to have a portfolio that now includes businesses like Cytiva, Pall Biotech, obviously Cepheid driving outsize performance and with outstanding operating margins. And I think you know our track record historically is, we — we like to take advantage of situations like this to continue to invest for the future. And some of that investment shows up in the sales line, some in the marketing line and certainly some in the R&D line. And I think you’ll see us continue to try to do that because we feel well positioned in our markets and we think that there are selective opportunities to continue to invest for growth and that will set us up exceptionally well, not only for the rest of this year, but most importantly, I think, for next year as we see the environment improve.

Derik De Bruin — Bank of America Merrill Lynch — Analyst

Great. If I can squeeze in one Diagnostics question. You mentioned the 4-in-1 test coming out. Like how are you pricing that multiplex test? And also just talk about Cepheid capacity expansions. I mean, you’ve obviously pitched it up since you — since March, but how should we think about where your cartridge development can go or your production can go over the next couple of quarters?

Matthew Gugino — Vice President of Investor Relations

Sure. We’re not yet at a point where we are in a position to talk about pricing on the 4-in-1 test, but certainly, this is a test that is going to be incredibly important in the market. We’re going to continue to produce standalone tests as well. But there is no question, our customers have expressed very strong interest in a targeted respiratory panel that brings together COVID, flu A, flu B and RSV. So we’ll will be sizing up the opportunities relative to pricing over the next several weeks and be coming back with that. So we think there is a tremendous opportunity there.

Relative to Cepheid capacity, we continue to build on our output capabilities. You’ll recall, in the first quarter, I think we were at about 2 million tests and we were just ramping. We ramped well throughout the course of the quarter to 6 billion tests and we’re going to — we’ve released a significant amount of capital to continue to build that capacity. Some of that capital that we’ve released is going to take a little bit of time to come online. We’ll see some modest growth in the — in the third quarter here, and even more significant growth as we go into the fourth quarter and then certainly throughout 2021.

I think key to this, Derik, is our view that there is a tremendous amount of durability and sustainability to the testing benefits that Cepheid delivers to the market. Certainly there is a lot of variables, there’s plenty of competition, but when you look at the speed and the accuracy that we deliver and the value that we deliver associated with the diagnosis, there is no doubt that that demand is going to be sustained over time. So we’re going to continue to ramp that capacity and sustain our strong positions in the market.

Derik De Bruin — Bank of America Merrill Lynch — Analyst

Great. Thank you.

Matthew Gugino — Vice President of Investor Relations

Thanks, Derik.

Operator

Our next question comes from the line of Tycho Peterson of JPMorgan.

Thomas P. Joyce — President and Chief Executive Officer

Good morning, Tycho.

Tycho Peterson — JP Morgan Chase & Co. — Analyst

Hey, thanks. Good morning. Tom, on the COVID tailwinds, you noted 3Q [Technical Issues] So what [Technical Issues] more material in 3Q versus 2Q? [Technical Issues] comment on Cepheid. How much of the volume do you expect to go to 4-in-1 versus standalone COVID test agent going forward?

Thomas P. Joyce — President and Chief Executive Officer

Tycho, I’m assuming you can hear me clearly. We couldn’t hear anything on your question unfortunately just except for the very last part of the question around 4-in-1. So I’m going to try the 4-in-1 answer and then we’ll see if you come through clear in the next attempt.

Tycho Peterson — JP Morgan Chase & Co. — Analyst

Okay.

Thomas P. Joyce — President and Chief Executive Officer

So I think your question was how much volume is going to move to the 4-in-1. We do not know the answer to that at this point. It’s — we believe it will be significant and material, but in terms of putting a number on it quite yet, we just don’t have enough voice of customer yet. Obviously we haven’t developed the pricing model yet, and we’re building capacity. So we’ll have to come back to you probably in the next couple of months with a better sense of how we see that volume ramping. Again, we continue to produce the standalone test. So there’ll be a balance there. Time will tell on the overall volume. So let’s try the earlier part of your question again.

Tycho Peterson — JP Morgan Chase & Co. — Analyst

Yeah. It’s just [Technical Issues] vaccine or therapeutic work? Why shouldn’t you see a more material COVID tailwind in 3Q?

Thomas P. Joyce — President and Chief Executive Officer

Okay. We only caught — and we really apologize. We only caught the tail end of that. I’m looking at my team on video, and they can’t — they couldn’t hear that either. But let me just try to — let me try to hit it a bit. Because I think you asked about — about vaccines and the [Speech Overlap]

Tycho Peterson — JP Morgan Chase & Co. — Analyst

So why wouldn’t the tailwind — why wouldn’t the 3Q tailwind be more material than 2Q for COVID?

Thomas P. Joyce — President and Chief Executive Officer

Why? Let me see if I got that. You were asking about the Q3 tailwind?

Tycho Peterson — JP Morgan Chase & Co. — Analyst

For COVID. Why isn’t that more material, given how much you’ve grown the Cepheid installed base and you’ve got Cytiva and Pall, why wouldn’t it be more material in 3Q versus 2Q?

Thomas P. Joyce — President and Chief Executive Officer

Sure, sure. Absolutely. Sorry. I apologize. The transmission was so poor. But I think we’ve got it now. We’re going to — we’re going to see that volume continue to track. I think there was — there was an outsized impact certainly at Cepheid during the course of the second quarter with that instrument volume boosting at the rate that it did. We don’t expect that that necessarily will continue to grow quite at that rate. So I think that’s one mitigating factor.

And I think as it relates to both Pall Biotech and Cytiva, I think we’ll see continued traction there. But at the moment, we think that what we’re seeing from customers is the demand that is — again, given the quick ramp that was associated with the 200 or so vaccine and therapeutic related efforts that are going on, those are likely to be more consistent in the third quarter rather than differentially higher. So those are just some of the factors. Perhaps that’s a little bit conservative. If so, we’ll take that. But in line, that’s our best estimate at the moment.

Tycho Peterson — JP Morgan Chase & Co. — Analyst

And then, Tom, can you put any — go ahead, Matt.

Matthew Gugino — Vice President of Investor Relations

Yeah, no, I just — I just wanted to kind of — kind of get at — we are expecting — from a tailwind perspective, we are expecting a modestly higher benefit here in the quarter for everything Tom talked about, sort of more or less the same volumes at Cepheid but with a bit of a tailwind or headwind here on the — on the instrument side.

But I mean, I think if you — you think about what we’re going to be doing here in the fourth quarter and into ’21, particularly around the buildout on Cytiva and if you think about our tailwinds that — build on Cytiva — sorry, build on Cepheid capacity that’s coming online, and then probably as importantly — we had 40% growth in orders at both Cytiva and Pall Biotech here in the quarter.

And while we don’t expect all of that to show up here in Q3, it does portend well for what we think the second half will sort of look like and as we head into ’21, and that was not just on vaccines, but that was sort of kind of evenly split between vaccines and the therapeutics, which you know are a big part too. So while we may have a more modest expectation for the third quarter, I think that there is a ramp as we head through the second half and in particular through ’21.

Tycho Peterson — JP Morgan Chase & Co. — Analyst

And then lastly, is there any color you can put on the vaccine and therapy work for Pall and Cytiva? I mean you’re not doing fill-finish work. So there is no kind of per dose calculation, but can you just help us think about the magnitude of that work?

Thomas P. Joyce — President and Chief Executive Officer

You know, there are — it’s gas. I mean, we’re certainly working on that. And given our exposure across the broad range of human clinical trials that are going on right now, we’re starting to get a handle on those opportunities, but there is still so many unknowns that makes sizing it tough. I mean, it’s the number and different types of winning vaccines and therapeutics.

Your question is about production volumes. A number of steps in each process. So I mean there’s no question that it’s going to be a large and sustained opportunity, but it’s just — it’s just become — it’s a very hard number for us to the wrap our minds around today, but I’m sure we’ll get a handle on it as it becomes clearer who the winners are and how that production volume will ramp within any individual winner. We’re not going to have dozens and dozens of winners here. I think we’ll have several winners, and once we have more line of sight to where the winners are, then obviously we can get a better sense of the dosage production volumes, our position there and what that means or when they translate that into sales volume.

Tycho Peterson — JP Morgan Chase & Co. — Analyst

All right. Thanks, guys. Sorry about the quality issues, of course.

Thomas P. Joyce — President and Chief Executive Officer

Yeah. Sorry, Tycho. Thanks, though.

Operator

Our next question comes from the line of Vijay Kumar of Evercore ISI.

Thomas P. Joyce — President and Chief Executive Officer

Good morning, Vijay.

Vijay Kumar — Evercore ISI — Analyst

Hey, good morning, Tom. Thanks for taking my question and congrats on the solid execution there. Maybe I’ll start with Cytiva. 40% order growth. The implication of that is — I mean if that business is contributing about 400 basis points of growth right now and the order book is running at 2x that of the growth rates right now, the implication is that the business should contribute 400 basis points to 500 basis points of growth in the fiscal ’21 if assuming all of the orders that we’re seeing flow through, get recognized as revenues in fiscal ’21. Does that math make sense?

Matthew Gugino — Vice President of Investor Relations

Yeah, I mean I think it’s — this is Matt. I mean, I think the issue with that — the math can make sense, but it’s the assumption around the timing I think that we just are still kind of TBD on, Vijay, whether that starts to flow real hard here in the third or fourth quarter or if it starts in the first half of ’21. I think that’s the only — the only question is really around the timing. But like I said earlier with my comments, I mean, I think we’re pretty encouraged by the start of Cytiva both on the top line, the core business outside of COVID and the COVID opportunity that’s starting to emerge that you saw with that — with that level of orders growth.

Vijay Kumar — Evercore ISI — Analyst

And just on the margin itself, Matt, I mean if you look at — I think the deal model had Cytiva running at mid 30s. It looks like it came in well above 40%. Is that — is there any timing element on those margins or how sustainable is the Cytiva part — on the margin side?

Matthew Gugino — Vice President of Investor Relations

Yeah, sure. Cytiva margins have come in north of 40% in Q2, which is obviously like you said, better than sort of the recent performance that we had seen out of them. I think there’s three things to think about on the reason for that.

One, we had higher volume here. North of 20% core growth does give you lots of opportunities from a fall-through perspective, from a VCM perspective, so we did have higher volumes. The other thing — the second thing is, there’s probably a very favorable mix element here. We had sort of the higher-margin businesses like process chromatography grew double digits, while more of the equipment heavy businesses, call it, low single digits, which was kind of a very favorable mix impact in the quarter. And the third thing is — and I think you’ve seen it of places, we just had a lot lower opex spend given the stay at home orders, right. Travel, trade shows, etc. was sort of much lower. So I think if you add it all up, that’s how we sort of went from where we thought it would be to sort of north of 40%.

But I would sort of maybe temper some expectations here as we head into margin — think about the margins in Q3. Like I said, Q2 was sort of a perfect storm with everything going the right way. But there’s two things I think to think about as we head forward into Q3 and the second half. One is, this is a business that we are going to accelerate the growth investments in not unlike we have done with our other businesses. We alluded to that earlier in the call. But in particular, this business, one, given the plethora of growth opportunities that are out there and across all of their businesses, not just bioprocessing. And frankly, the business has got to invest as much as it would have liked to maybe in the past and we’re very eager to make sure that they have every opportunity afforded to them. So that’s one.

And then two, we’re 90 days into this from a kind of standing it up on its own, if you will. And so our stand-up costs, the number of people we’ve hired, the cost that we’ve put into the business so far to get it stood up and off of sort of the GE kind of apparatus, that is going to ramp as we go through the second half, and that will have an impact here on the margin profile as well.

So good start for sure. A little bit better than we thought on a perfect storm. But I do think there is some moderation coming.

Vijay Kumar — Evercore ISI — Analyst

That’s helpful, Matt. And one big-picture for Tom. Tom, if you look at the balance sheet, $5 billion plus in the cash on hand. Free cash looks like we’re run rating well above $5 billion. I’m just curious, I think at the time of [Indecipherable] you guys made comments about the ways being opportunistic. I’m just curious how your thoughts on cap deployment are evolving in the current environment. Thanks, guys.

Thomas P. Joyce — President and Chief Executive Officer

Sure, Vijay. Thank you. Yes, we are — we’re in a very strong and fortunate position relative to our balance sheet, and that position continues to be reinforced by a really exceptional free cash flow. A $2 billion cash flow number on a year-to-date basis really continues to put us in a great spot. When I talked about opportunistic, that’s the term that we would typically use associated with a very uncertain sort of disrupted environment like we’re coming through in the first quarter and continued to see in the second quarter. And that sometimes creates opportunities that for whatever reason we may not have seen coming. Businesses that get into a spot where all the sudden they have a change of heart about their future, and we’re able to take advantage of that.

But with the — the strength of the balance sheet that we have now on sort of back to the equity offering that we did and the strength of the free cash flow here in the second quarter and what we see is continuing strength in that free cash flow in the third and fourth quarters, that positions us to really continue to work hard on the strategic opportunities that we focus on consistently throughout the course of the year. And that goes across each one of our platforms, Life Sciences, Diagnostics, Water Quality and PID, each of them continuing to focus on key market segments where there are unique opportunities, key product and technology opportunities where we can complement the strength of our existing portfolio, and in some cases bring on a unique and differentiating leg of the portfolio that allows us to add greater value to customers every day.

And so, I think we’re in a great position. We’re starting to see some improvement in the environment in the second quarter. One example of that is the deal that we did for our water quality platform, Aqua Informatics, in the second quarter. That was a deal that we’d essentially put on hold earlier in the — in the first quarter I think it tightened up. But as things started to improve, we were able to reengage and were able to consummate that acquisition in the second quarter. And that’s a tremendous add of a key data management and software capability for our water quality platform and we’re looking forward to that team’s playing a significant role.

That’s just one example. But I would say we’re generally seeing an improving environment, one that we can not only be opportunistic, but I think continue to thrive through our strategic objectives at the same time.

Vijay Kumar — Evercore ISI — Analyst

Thanks, guys.

Operator

Our next question comes from the line of Scott Davis of Melius Research.

Scott Davis — Melius Research — Analyst

Hi, good morning, guys.

Thomas P. Joyce — President and Chief Executive Officer

Is this the author? Is this [Speech Overlap]?

Scott Davis — Melius Research — Analyst

Well, no comment. I should have done it under a pseudonym, I guess, sort of anonymous. I’d get less hate email.

Thomas P. Joyce — President and Chief Executive Officer

I’ve gotten through the — I’ve gotten through the introduction. I didn’t get directly to the Danaher chapter, but thank you. Welcome, Scott. Good morning.

Scott Davis — Melius Research — Analyst

Well, thanks, Tom. It’s very kind. But hopefully the book helps you sleep at night, couple of pages, and you are out like a light, but anyways, I — a lot of good detail already, and you just talked a little bit about M&A. And what do you envision, Tom, in the next kind of 12 months? I mean, this is a strange environment. Is it a better environment for bolt-ons? Is it a better environment to take bigger bets like you did with Cytiva? I mean, just a little bit of color around that just given how strange things are right now.

Thomas P. Joyce — President and Chief Executive Officer

Yeah. Well, first of all, Scott, I think over the next 12 months, I think we will see without any question an improving environment from an M&A and capital deployment perspective. I mean, we all know that March, April — I mean, things were essentially locked down. To a great extent, people were frozen in place in many different ways. And so there is no doubt that you come off of a situation like that. And I think we will see improvement. We are already seeing a little bit of that already.

I would say normally what happens particularly on the back of a very large acquisition, like Cytiva that we have done, you have historically seen us do more, small, mid-size bolt-on acquisitions to our platforms. And I know the teams are working actively on those. Some of those smaller situations can get a little unhinged here in an uncertain environment, and that tends to serve us well. But also in terms of just the way we manage our resources internally, on the back of a big deal, we tend to do a few smaller deals.

Now, all that being said, when the balance sheet is as reinforced as it is right now, we’re in much better shape than we might have been had we not done the equity offering and had the tremendous advantage of the current free cash flow certainly that Cytiva has helped with. So, in general, I think we can be pretty balanced in our approach. I mean, obviously Cytiva was outsized, but I think we can be pretty balanced in terms of taking advantage of an improving environment.

Matthew Gugino — Vice President of Investor Relations

And Scott, it’s Matt. Maybe put some numbers to the context of what Tom just talked about. We’ve got pro forma EBITDA this year that’s going to be close to $6 billion. And as of right now, we are less than 3 times net debt to EBITDA. So to Tom’s point, we have got some flexibility to be aggressive with larger or the smaller stuff.

Scott Davis — Melius Research — Analyst

Yeah, for sure. So a natural follow-on just again, in the context of this is kind of a strange environment and you have got amazing growth rates in so many of your businesses. How do you integrate Cytiva for the long term, I mean, in this environment? And I mean, really specifically, bringing in DBS tools and really culturally, I mean, bringing the best of the Danaher culture kind of into that organization even — obviously talk about standing it up as kind of a decentralized business, but how do you do it and is it at all delayed at all? You don’t want to kind of disrupt the business flow right now given how high the growth rates are. Or is it already begun and you are really — it’s a similar playbook as maybe your past acquisitions?

Thomas P. Joyce — President and Chief Executive Officer

Yeah. Scott, we have had to — we’ve certainly had to be creative in this environment. And I think we’ve been able to do that. I will describe what I mean by that here in a minute, but obviously, with the restrictions on travel and being and what would normally be very much a face-to-face environment with a newly acquired business, particularly a new one, we’ve had to come up with new and different approaches to achieve the same objectives in the early going around DBS orientation and getting a business off to a great start.

So I think this all starts with the fact that the Cytiva business brings with it to Danaher really an exceptional team of people. We got to know them unbelievably well during diligence. Certainly, we had a whole year to regulatory approvals to get to know one another. We’ve gotten a sense of their command of the business, their ability to drive performance, their focus on continuous improvement, the level of humility they bring, all of which sets up for a team and a business that adapts very rapidly to the Danaher environment because they are so culturally like us right at the outset.

Add to that the fact that the team reports indirectly to Rainer. Rainer will continue to have that team report directly into him. And he has maintained that relationship and continued to build those relationships and bring the tools and processes to that team on a virtual basis. So, we’ve gone through what we call ECO. You’ve heard of that before, executive champion orientation. A lot of that’s very familiar to that — that team because they are well down the field in a number of the tools and processes of DBS.

So, yeah, we also have some of our teammates going into that business and that obviously further accelerates the DBS orientation. So, net-net, the combination of using virtual, our electronic and digital tools to conduct DBS training and orientation and communications along with having an outstanding team already, plus some folks from Danaher going into that business, we can safely say right now we’re very much on track to where we would like to have been if we were in a face-to-face environment.

Scott Davis — Melius Research — Analyst

Okay. Good. Thanks. Congrats, Tom. Congrats, Matt and Matt — and good luck for the rest of the year.

Thomas P. Joyce — President and Chief Executive Officer

Thanks, Scott.

Matthew Gugino — Vice President of Investor Relations

Thanks, Scott.

Scott Davis — Melius Research — Analyst

Okay.

Operator

Our next question comes from the line of Doug Schenkel of Cowen.

Thomas P. Joyce — President and Chief Executive Officer

Good morning, Doug.

Doug Schenkel — Cowen and Company — Analyst

Hey, good morning. Thank you for taking my questions. Starting with another one on Cytiva. Your growth, even excluding COVID-19, was definitely a bit above your deal model assumptions. Of course, the role you are playing in advancing COVID solutions helps the growth profile as well. It’s early — but I’m curious how these trends impact your view on Cytiva accretion and returns longer-term, especially given the early and pronounced non-COVID strength.

Thomas P. Joyce — President and Chief Executive Officer

Well, Doug, I will start with the top line, then Matt will jump in with how we see that that flowing through. I mean, you are accurate, they are off to a start that is better than what we anticipated in the growth model. You heard us talk to numbers that were in the — in the 10% range. And that core growth in 2019, if you go back to that, was about in that range. And yet, as we came into this year, they came in with a strong order book, good backlog, and then you had the COVID impact on top of that. And so when you then kind of separate that you see there what you might say there non-COVID base business growth being in the mid teens and the COVID volume obviously taking that volume growth over 20%.

So I think the key message there is, this is a business — as a base business — put COVID aside for a second — that is off to a phenomenal start that continues to lead in its market and is continuing to build the order book day in and day out.

Doug Schenkel — Cowen and Company — Analyst

That’s helpful. It’s actually a good segue to the second question. In your remarks, you commented on the Cytiva and the Pall Biotech order book [Technical Issues] your order book looks like for capital equipment. It’s like the recent [Technical Issues] of airtime in the Q&A today but it’s clearly better than expected in Q2 [Technical Issues] end markets, some momentum building in academic research, but in both categories, it seems like consumable and service were [Technical Issues]. So the reason I’m asking about the broader order book, and answer it however you want, of course, but I’m just wondering if you think there is pent-up capital demand heading into the second half and if there is evidence that this could start to turn into revenue over the course of the year.

Thomas P. Joyce — President and Chief Executive Officer

So Doug, there was a part of that question early on that we didn’t catch. It broke up. But I think I — we definitely caught the back end of your question. So I’m going to hit that assuming we didn’t miss anything at the front end, which was really around — you’re talking about consumables and service versus equipment in my prepared remarks, and you were asking about pent-up capital demand. And I think the simple answer to that question is, yes, there will absolutely be some pent-up capital demand in a number of different areas. I might cite one example.

If I turned to our Environmental & Applied Solutions business segment and I look at Videojet in PID, while you have our consumables business tracking really well, we have seen much more weakness in our — in the equipment side of Videojet. But we know over a long period of time that that equipment, it has a lifecycle, it requires replacement, it requires a certain level of maintenance. You certainly had an expanded utilization of much of that equipment as consumer packaged goods, volumes have grown.

And so I would — I would very much expect to see that — use one example that Videojet equipment start to track back in short order. I think ditto as labs reopen in the life science market, we’re going to see some improvement there. And in fact, we’ve dialed some of that improvement in even the third quarter as we start to see labs reopening. We’re going to see some of those orders that would have normally flowed through in the first and second quarter come through in the third.

Matthew Gugino — Vice President of Investor Relations

And Doug, again…

Doug Schenkel — Cowen and Company — Analyst

Okay.

Matthew Gugino — Vice President of Investor Relations

Doug, it’s Matt. Again, sorry, just to kind of put some maybe some numbers in context to the overview Tom gave. I mean, you saw here in Q2 our order book grew nearly 10% from an order perspective. So, that’s — it’s an encouraging sign to what Tom just talked to. And we have got the core business, if you will, without the Cytiva — or sorry, without the COVID tailwinds was down kind of 3% here in the quarter. And as Tom just mentioned at the end, we’re sort of anticipating because of that nearly 10% order growth, I think you will see an improvement of that minus 3% sort of going to flat here in the quarter.

Doug Schenkel — Cowen and Company — Analyst

Okay. That’s super helpful. I’ll try to sneak in one last one, just a cleanup question. Hopefully you can hear me okay now. In the second quarter, you delivered adjusted earnings growth that was 70% or so higher than reported revenue growth. Is it fair to think that it’s going to be lower than that in Q3 as the mix starts to evolve a bit more towards capital and as you are ramping some of the opportunistic investment you described earlier in this call?

Thomas P. Joyce — President and Chief Executive Officer

Yeah. I mean, maybe the way to think about kind of the third quarter and VCM, etc., I mean, it is a little tricky. I think you do need to sort of look at the core business that is, Danaher ex Cytiva. Maybe the way that I think about it is that from a fall-through perspective, that Danaher non-Cytiva piece is probably going to have a 30% to 35% variable margin on it fall-through, if you will, as we do make some of the investments we have talked about in Cytiva and elsewhere. I think if you then include the assumptions around Cytiva, put those in, I think that sort of gets you from an EPS perspective sort of south of where we were here in Q2 but probably closer to what I think we’re going to end up with.

Doug Schenkel — Cowen and Company — Analyst

Okay. Thank you again.

Thomas P. Joyce — President and Chief Executive Officer

Thanks, Doug.

Operator

Our next question comes from the line of Steve Beuchaw of Wolfe Research.

Stephen Beuchaw — Wolfe Research — Analyst

Hey, good morning. Thanks for the time here.

Thomas P. Joyce — President and Chief Executive Officer

Good morning.

Stephen Beuchaw — Wolfe Research — Analyst

[Indecipherable] could just put a little bit of perspective on in terms of the recovery trajectory. And then I had one less exciting model question. There are two things that we’ve focused on the call here where we have good reason to be at least directionally optimistic about how things evolve. One is vaccines. In the vaccine space, while it’s certainly tough to know exactly how it’s going to look and how big it’s going to be, it would be really helpful if you could just give us a little perspective on what the slope of the curve looks like. If we’re at X today which is a sort of preliminary investment in scaling up in anticipation of vaccines, when we get out to ’21, is it still X or is it X times 2 or X times 3? What does that look like?

And then the other ramp related question I was going to ask actually relates to healthcare utilization. So, Tom, you gave some really helpful commentary on how people are getting back to getting healthcare to some extent in doc office settings, to some extent in hospitals, that’s encouraging. Should we take this to mean you feel good about — this sort of dovetails off of Doug’s question, but the ramp for hardware spend on some of the Beck DX and Leica products that might have been under a little bit of pressure in 2Q. Do we get that back starting in 3Q or given everything that’s going on the hospitals to take a little bit longer? Thanks so much.

Thomas P. Joyce — President and Chief Executive Officer

Yeah, you bet. So, your broader question started out with recovery trajectory, and I want to just hit one quick theme and then I’m going to get your question about vaccines. One of the key things we haven’t really touched on this call, even though I mentioned it in my prepared remarks on the recovery trajectory was China. We saw a significant improvement in our China business over the course of the second quarter.

And if you looked at that, the breadth of that improvement that span not just across Life Sciences and Diagnostics and not just across Cytiva and Pall but — or Cepheid, but our other businesses like Beck LS and LMS, our EAS businesses like Hack [Phonetic] and Videojet, all performed extremely well in China, benefited from the kind of trajectory of recovery that we’re seeing broadly there and across the board, delivered positive low single-digit growth in China in the second quarter. So that’s — I think that’s an important dynamic of this recovery trajectory that we haven’t really touched on today.

But let me get to the core of your question. In terms of the vaccine multiples, again, yes, you are right. It is, as I said earlier, very hard to gauge. But at this point, I mean, you’re talking about a really high multiple of volume versus today — let me give you an example. I mean, today, all of these — all of our revenues associated with this are in the early stages of Phase I, Phase II, early stage human trials, small volumes, etc. I mean, we are nowhere near the stage of talking about tens, let alone hundreds of millions of doses of either a vaccine or a therapy. And so, again, hard to put a number on it, but I can only say it’s certainly a high multiple of where we are today, but with a lot of variables attached to how high that number is.

Relative to your question about healthcare utilization, I think the simple answer is yes. We will be seeing an improvement in our — in the hardware equipment side of the house and yes, it is associated with Beckman Diagnostics and Leica Biosystems [Technical Issues]

Stephen Beuchaw — Wolfe Research — Analyst

A brief musical interlude?

Thomas P. Joyce — President and Chief Executive Officer

A brief musical interlude. Maybe that was associated with the recovery in healthcare utilization. But the issue has been not just around healthcare utilization relative to equipment, but it’s really been about the fact that in a COVID-19 environment, access to hospitals in any area, whether it’s the reference lab area, anatomical pathology, microbiology, access to those labs where hardware installations has been limited, if not in certain cases, zero.

And so just as we are seeing academic and research labs opening up on the life science side, as we’ve started to see hospitals opening up a bit relative to elective procedures and overall utilization, we are now starting to see our ability to get in and install equipment that’s in the order book come along. So we will see some improvement there. It will take some time for that to happen because hospitals are still highly restricted in their access. But as we go into late this year and early next year, we’ll start to see that return to a more normal growth rate.

Stephen Beuchaw — Wolfe Research — Analyst

Okay. That’s incredibly helpful. I know we’re top of the hour here. So I’ll take my financial question offline. Really appreciate all that.

Thomas P. Joyce — President and Chief Executive Officer

Okay. Thanks so much.

Matthew Gugino — Vice President of Investor Relations

Thanks, Steve.

Operator

And ladies and gentlemen, we have reached the allotted time for questions. I’d now like to turn the floor back over to Matt Gugino for any additional or closing remarks.

Matthew Gugino — Vice President of Investor Relations

Thanks, everyone, for joining us today on our call. We are around all day for questions.

Operator

[Operator Closing Remarks]

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