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Danaher Corporation (NYSE:DHR)

Q2 2014 Earnings Conference Call

July 17, 2014 08:00 AM ET

Executives

Matt Gugino - VP, IR

Larry Culp - President and CEO

Dan Comas - EVP and CFO

Analysts

Scott Davis - Barclays

Nigel Coe - Morgan Stanley

Steve Tusa - JPMorgan

Steven Winoker - Sanford Bernstein

Julian Mitchell - Credit Suisse

Jeff Sprague - Vertical Research Partners

Isaac Ro - Goldman Sachs

Andrew Obin - Bank of America Merrill Lynch

Brandon Couillard - Jefferies

Deane Dray - Citi

Operator

My name is Tina, and I will be your conference facilitator today. This call is being recorded. At this time, I would like to welcome everyone to the Danaher Corporation Second Quarter 2014 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

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

Matt Gugino

Thank you, Tina. Good morning, everyone, and thanks for joining us. On the call today are Larry Culp, our President and Chief Executive Officer and Dan Comas, our Executive Vice President and Chief Financial Officer. I’d like to point out that our earnings release, a slide presentation supplementing today’s call, our second quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investor section of our website, www.danaher.com under the heading Financial Information-Quarterly Earnings that will remain available following the call.

The audio portion of this call will be archived on the Investor section of our Web site later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until July 24, 2014. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally and the confirmation code is 3625375.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials and our second quarter Form 10-Q describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to earnings, revenues and other company-specific financial metrics relate to the second quarter of 2014 and relate only to the continuing operation of Danaher's businesses, and all references to period-to-period increases or decreases in the financial metrics are year-over-year.

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 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.

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

Larry Culp

Matt, thanks. And good morning everyone. Our team executed well in a modest growth environment in the second quarter. Revenues increased 3% and were largely consistent with what we have seen over the last 12 months. Geographically, high growth markets led the way again as we saw continued strength in China and Latin America. The developed markets were up low single-digits, with growth in the U.S. as anticipated and Western Europe slightly below our expectations.

During the quarter the Danaher business system helped many of our businesses accelerate new product introductions and enhance our sales and marketing teams’ effectiveness. These efforts, combined with go-to-market initiatives in high growth markets drove share gains of Hach, ChemTreat, Implant Direct, Leica Biosystems, AB SCIEX and Radiometer.

On the capital allocation front, we’ve been encouraged by the increase in our acquisition activity. Since the beginning of April, we’ve announced or closed 10 acquisitions totaling over $1 billion, including four deals greater than $100 million each. These acquisitions will strengthen our existing businesses in the Environmental, Dental and Life Sciences and Diagnostics segments.

Just last night, as many of you may have seen, we announced Beckman Coulter’s pending acquisition of Siemens clinical microbiology business, a leader in automated diagnostic solutions that help healthcare providers identify infection causing bacteria and determine the best course treatment. This transaction is our largest in over two years. With our robust balance sheet and a healthy acquisition funnel, we remain confident in our ability to deploy our more than $8 billion of M&A capacity.

So with that in the backdrop, let me move to the details of the quarter. Today we reported another record second-quarter for Danaher. Diluted net earnings per share were up 9% to $0.95. Revenues grew 5% to $5 billion, while core revenues were up 3%. The impact of acquisitions increased revenues by 1.5%, while currency translation had a positive impact of 0.5%.

Our second-quarter gross margin expanded to an all-time high of 52.8%. With this increase in gross profit and our continued G&A leverage, we were able to boost or investments in sales and marketing and R&D by approximately $85 million, while improving core operating margins by 45 basis points. DBS helped us deliver strong cash flow performance. Our operating cash flow was $1 billion and free cash was $844 million. Our free cash flow to net income conversion ratio for the quarter was 125%.

Turning to the five operating segments, Test and Measurement revenues were flat, while core revenues declined 2%. Reported operating margin contracted 250 basis points to 18.4% and core operating margin decreased 155 basis points, primarily due to the decline in our high gross margin communications platform.

Our Instruments platform core revenues were flat for the quarter. At Fluke core revenues increased at a low single-digit rate, marking the third consecutive quarter of positive core growth for the team. Orders grew mid-single digits with solid point of sale demand in North America and China.

During the quarter we launched Fluke Connect, a collection of 40 wireless enabled test tools that allow technicians to analyze, share and store data online and in the cloud. We also introduced several new tomography products including the Ti90, and 95 thermal imagers. These imagers feature higher resolution than other entry level models and come standard with Fluke Connect. Orders for both Fluke Connect and the Ti90 and 95 imagers have already exceeded our expectations.

Tektronix core revenues declined low single digits as modest growth in the U.S. military and government sales was offset by weak demand for our video products and a decline in technology spending in Asia. We were encouraged however by our order growth during the quarter, which was positive for the first time since 2011. Core revenues in our Communications platform decreased at a low double-digit rate as a decline in network monitoring more than offset growth in network security solutions and installation tools. As expected, our network monitoring business was adversely affected by delays in wireless carrier spending, which we now believe will also result in negative growth for the platform for the rest of the year.

At Arbor, demand for our network security solutions remain strong with orders increasing more than 20%. Arbor is recognized as the leading security solutions vendor among both enterprise and service providers and was named best overall IT company in the 2014 Hot Companies and Best Products awards in June.

Environmental revenues increased 6% with core revenues up 3.5%. Core operating margin expanded 40 basis points, while reported operating margin decreased 60 basis points to 21%, primarily due to the dilutive effect of recent acquisitions. Our Water Quality platform core revenues grew at a mid-single-digit rate, led by strong demand for our analytical instruments and chemical treatment solutions.

Hach had another solid quarter with high single-digit growth in China and healthy municipal spending in both the U.S. and Europe. Hach’s investment in digital marketing and online distribution hit a major milestone this quarter as our U.S. Web site generated $1 million in weekly sales for the first time ever.

At ChemTreat we saw robust demand for our chemical solutions in both North America and Latin America. You may recall from our Analyst meeting in December that ChemTreat is focused on expanding in Latin America and has increased sales and in the region four fold over the last four years. During the quarter, ChemTreat acquired Chile based Aquasin [ph], a leader in industrial water treatment instruments and services which will further accelerate our growth by expanding our localized product offerings in South America.

Gilbarco Veeder-Root’s core revenues grew low single digits, led by healthy demand for vapor recovery products in China and point of sale solutions globally. Also contributing to the strength was Insite360, our cloud-based platform that allows retailers to remotely control there retail automation and environmental monitoring systems across multiple sites from any PC or mobile device in real-time. Customer reception has exceeded our expectations with more than 100 retailers adopting Insite360 in June alone.

During the quarter, GVR completed the acquisition of ANGI Energy Systems an innovator in compressed natural gas fuelling design and engineering. Compressed natural gas alternative energy solutions are being rapidly adopted, particularly in the truck stop market and we believe ANGI will be able to take advantage of Gilbarco Veeder-Root's leading presence in that space.

In Life Sciences and Diagnostics we had an excellent quarter, with top line growth in operating margin expansion. Revenues for the quarter were up 7% while core revenues grew 5%. We also increased our investments in sales and marketing and R&D nearly 10%, while still expanding operating margins by 145 basis points. The Diagnostics platform continued its solid performance with mid-single digit core revenue growth.

At Beckman Coulter, core sales grew at a mid-single digit rate with double digit growth in immunoassay annual analysis. Geographically high growth market demand remained strong led by mid-teens growth in China, while the developed markets grew at a low single digit rate.

Importantly, the U.S. was up low single digits, marking our first quarter of growth in the U.S. since the acquisition. We believe our higher customer win and retention rates in the U.S. and around the globe are the results of our team’s dedication to regulatory compliance, better service, reliable quality and on-time delivery.

The team has also made significant progress driving efficiencies, improving operating margin by over 150 basis points year-over-year to their highest level since the acquisition. Additionally, Beckman Coulters first made their bolt-on acquisition IRIS, which closed in October 2012, delivering double digit growth and expanding operating margins over 1000 basis points in the quarter.

So we’re very excited last night to announce Beckman’s second sizable bolt-on acquisition of Siemens’ clinical microbiology business. Siemens microbiology produces highly accurate automated instruments and consumables that help hospital and research laboratories identify infection causing bacteria and determine appropriate antibiotic treatments.

Notably these solutions are capable of detecting the bacteria’s resistance to specific drugs, helping doctors to proactively plan the best treatments with their patients. With over $200 million in revenue, this acquisition represents an attractive opportunity for Beckman and the rest of the diagnostics platform and we will spend our already strong presence in both hospitals and reference labs.

We believe the Danaher business system will help Siemens microbiology enhance its workflow automation solutions and develop go-to-market collaboration strategies with our other Diagnostics businesses. This acquisition is subject to customary closing conditions, including regulatory approvals and is expected to close in early 2015.

Radiometer’s core revenues grew high single digits, with growth in all major product lines and Q2 sales were particularly strong, increasing over 40% in the quarter. At the EPG conference in May, we highlighted the many ways in which our platforms harness their scale to enhance growth and augment individual operating company strengths. Within Diagnostics we have seen terrific results from this collaboration as Radiometer utilized Beckman Coulters commercial capability in Turkey, South America and United Kingdom to secure large project orders.

At Leica Biosystems, sales increased at mid-single digit rates, led by high teen’s growth in the high growth markets. Advanced staining grew mid-single digits, as our increasing install base of BOND instruments grow solid consumables growth. Aperio, our ePathology business grew double digits as doctors increasing look to provide more accurate, more secure cancer diagnostics for their patients.

Our digital work flow solutions facilitate global collaboration between doctors and other experts, simplifying the process of developing precise diagnosis and treatment plans. Our Life Sciences platform core revenues increased at a mid-single digit rate. AB SCIEX core revenues were up high single digits, driven by strength in the academic and applied markets in both North America and Europe.

We believe our investments in new products have helped increase our market share over the past several quarters. At the American Society of Mass Spectrometry meeting in June, we launched several innovative new products, including the TripleTOF 6600 and the 3500 Triple Quad. The 6600 enables scientists to obtain results 10 times faster than traditional methods. In combination with our SWATH Acquisition 2.0 software, it is the only system on the market that provides a complete workflow solution for proteomics research.

The 3500 is an easy to solution that provides laboratory a reliable and accurate way to insure food safety and environmental compliance. With the introduction of these products, we were able to meet the needs of researchers across a broader spectrum of disciplines, experience levels and price points.

Leica Microsystems core revenues grew up low single digits with strength in North America, Western Europe and Latin America. Sales of our Confocal microscopy products increased over 20% in the quarter led by robust demand for our flagship SPA product line.

Turning to Dental, segment revenues grew 2.5% with core revenues up 2%. Core operating margin declined 55 basis points, while reported operating margin decreased 50 basis points to 14.8%, due to both weak consumable sales and our continued investments in new product development and commercialization in high growth markets.

During the first half of the year, our core operating margin in Dental increased 50 basis points. Over the last decade our Dental platform has evolved from a collection of individual business to a unified group of market leading equipment, consumables and specialty brands. At last month’s Analyst Day in California, the team did an outstanding job highlighting that evolution as well KaVo Kerr Group’s unique position within the Dental industry and how we use DBS to drive growth and innovation. For those of you unable to participate, I encourage you to watch the replay, which is available on our website.

Dental consumables core revenues grew low single digits as robust growth in our implant business augmented modest increases in our other businesses. During the quarter, we acquired Ducks, a leading -- a leader in restorative and infection control consumables. Ducks nicely complements Kerr’s portfolio and broadens our range of offerings to general practitioners, dental specialists and hygienists.

We also expanded our presence in high growth markets with the acquisition of Reinor Orto, one of Ormco's longstanding South African distributors. Dental technologies core revenues increased low single digits driven by a healthy demand in high growth markets, particularly China, which grew more than 25%. Our expansive of range of imaging products delivered excellent results, growing mid-single digit in the quarter. Notably our focus on innovation in imaging has helped us build a growing install base of more than 6,000 3D imaging units. In addition, at our Analyst Day, we discussed publically for the first time another element of our digital dentistry roadmap, our chairside computer aided design and milling solution.

This digital system will enable dentists to custom design and manufacture crowns, fillings and custom implant abutments in their offices in just minutes, significantly reducing the amount of doctor time and patient office visits required to complete a dental prosthetic procedure. This is a great example of how the KaVo Kerr Group works together to meet customer needs as it will use Ormco’s Lythos digital impression system, i-CAT’s treatment planning software and KaVo’s ARCTICA milling machine.

Turning to Industrial Technologies, revenues increased 5.5% while core revenues were up 3.5%. Core operating margin expanded 45 basis points while reported operating margin increased 30 basis points to 23.8%. Motion platform core revenues increased at a low single digit rate led by project wins in the high growth markets. This marks the first quarter of growth for the platform since the fourth quarter 2012. With our transition out of lower margin businesses largely complete, motion is now more profitable and better positioned for future growth. Core revenues of our Product Identification platform were up low single digits, as solid growth in our inline variable printing and packaging solutions globally was partially offset by a decline in our laser marking business.

Videojet grew to mid-single digit rate, led by healthy demand for equipment and consumables in Europe and the high growth markets. During the quarter, we expanded our coding applications offerings with the launch of the 9550 print and apply labeler. This product’s breakthrough design controls a label from printing to placement, eliminating everyday operational problems such as label jams, mechanical adjustments, worn out parts and failure points.

Esko continues to strengthen its leading position in packaging and workflow solutions with sales increasing mid-single digits. In May, Procter & Gamble chose Esko as an official strategic partner to provide hosting and implementation of our Automation Engine and WebCenter solutions. Automation Engine and WebCenter combine to provide a powerful web based platform that helps brand owners and print professionals manage all aspects of the packaging design workflow. Also during the quarter, we hosted the highly successful EskoWorld’s Conference, where over 400 customers participated in 70 workshops on topics ranging from brand management to 3D package design.

So to wrap up, our team executed well in a modest growth environment, delivering top line performance consistent with the past four quarters. The Danaher Business System continues to help us as we invest in growth, drive share gains, expand margins and improve free cash flow. We believe our robust balance sheet, continued focus on organic growth opportunities and confidence on the acquisition front will drive solid performance in the second half of 2014 and beyond.

So today, we are initiating third quarter GAAP diluted net earnings per share guidance of $0.86 to $0.89, which assumes core growth comparable with the growth rate seen in the first half of 2014. We are also narrowing our GAAP diluted net earnings per share guidance for the full year to $3.67 to $3.72 from the previous range of $3.60 to $3.75.

Matt Gugino

Thanks, Larry. That concludes our formal comments. Tina, we’re now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first one from Scott Davis with Barclays.

Scott Davis - Barclays

Trying to get my arms around the margin numbers and you mentioned dilution from deals a number of times. But it didn’t seem like there is a lot of deals –or at least there is a few -- I mean at least material deals. I guess my question is why weren’t the restructuring actions of kind of a year ago plus DBS and such able to offset the dilution from the deals and maybe just some granularity into when you think about the margin movement, what part of that was deal dilution and what part of it was mix or anything else that might have impacted?

Larry Culp

Scott, I would say that on balance we were actually pretty pleased with the performance in light of the volume. As you see here with core up at 3%, it camouflages a little bit some of the stronger performance we saw in three of the five segments and we had some real standout businesses with water, certainly diagnostics, very pleased with Beckman Life Sciences’ Videojet. It’s a pretty healthy list there. And I think on balance, having three to five segments up 40 basis points in terms of the operating margin expansion and particularly with LSD, Life Sciences and Diagnostics up nearly 150 basis points, a lot to attribute there to DBS, the restructuring you alluded to and the like.

I think the long and the short of it is, is we’ve kind of looked at it, and I don’t mean to suggest we’re in any way content here. We had two businesses with high variable margins that finished softly, more softly than we would have anticipated there in June. We saw some softness in the U.S., in dental consumables sellout that in turn impacted our June there at Kerr particularly. But mainly, and the big issue is it -- Tektronix Communications, the big carriers were soft here in the quarter, far softer than we thought. And we have particularly high variable margins there.

Now fortunately Arbor and Fluke Networks, our security and enterprise businesses were actually pretty good in the quarter, but it was really isolated in that regard. And when we have that sort of revenue with those sorts of margins breaking away from us late in the game, it doesn’t help on the top, but it really does for the bottom all in.

Dan Comas

And Scott just regarding the acquisition, we talked last year, we had about $100 million of restructuring spend generating about $20 million a quarter of savings or we had $20 million -- approximately $20 million of acquisition expense in the quarter. A lot of that's non-cash. You’ve seen an increase in the number of deals and from a GAAP perspective, not from a cash flow perspective, we’re feeling the impact of that on the margin.

Scott Davis - Barclays

Okay. That's really helpful. And then as a follow-up and you think about 3Q guidance, I’m not surprised you’re being conservative, but at the same notion, when you think about Life Sciences and Diagnostics being kind of back in the game, core growth 5% good and that seems, I’m guessing that's somewhat sustainable for the rest of this year and then you made some positive comments about the order rates, particularly in Fluke and your comps are still pretty easy next quarter. Why wouldn’t the core growth accelerate sequentially from here?

Larry Culp

Well, I think that as we look at the third, I think both from a geographic perspective, Scott, and from a segment or platform perspective, what we saw in the second right now was probably what we’re going to see in the third, which is why we’re kind of embracing that first half core performance as a good guide here for the third.

From a geographic perspective we saw a little bit of a tail in June, tail-off in June. I would say that was modest, but it was broad-based. So we’ve got a watchful eye there. Clearly the U.S., there’s a bit of an offset there both in terms of what we saw -- I think some of macro data out there. But net-net, the developed markets are probably where they’ve been.

I think some of our team are probably a bit optimistic in the high growth markets as we go into the third quarter. Brazil’s got some of the noise relative to the World Cup behind it, the Indian Election all of that. I don’t think we’re banking a lot on any sort of uptick there. I don’t know if that's conservative, I suspect that's just being pragmatic.

So we get that core there in line with the first half. We get similar margin performance, in part because the Tek Comms dynamic is going to be with us through the second half. It’s probably going to cost us a couple of pennies a quarter as they are resolved. We will work hard to offset that. We’re not happy with it, but it is what it is. And I think when you put all that together, you get the formal guide that we’re offering this morning.

Operator

We’ll take our next question from Nigel Coe with Morgan Stanley.

Nigel Coe - Morgan Stanley

So just obviously homing in on the test and measurement weakness, and it’s been weak in sort of third year [ph] of (indiscernible) growth and I’m just wondering Larry, can you gave some perspective on how much of this is structural and how much confidence do you have that these businesses can return to an acceptable growth going forward?

Larry Culp

Yes. I think you have to break it down by business, Nigel. And I realize at a high level, may be some of the details don’t matter so much. But at the operating level, I think we’re very encouraged by what we’re seeing at Fluke. Three quarters in a row here of growth is certainly something we can all I think appreciate.

I think what we’re particularly encouraged by is the combination of the new products and Fluke Connect I think is a game changer for them, but also the improved commercial execution around the world. I’m not sure that Fluke’s ever going to be our highest growth business, but can they be a consistent low to mid-single digit grower for us? More so than we have seen in the last couple of years, I believe so, and I think they are building momentum here, very much in that direction. I think Tek as we’ve talked many times, has a different end-market set of drivers there. Technology spending broadly, including spending on the bench has been muted the last several years far more than we would have anticipated. But there again I think the order books are firming up having first positive quarter in years there. Hopefully it’s the beginning of a trend. I think Fluke will in all likelihood outperform Tek in the near to medium-term. And that’s I think is straight as we can call it. I think within Comms, we’ve been very fortunate to be part of the mobile network build out at Tek Comms. It’s been a what a mid to high single-digit grower for us double-digits in many quarter and what we are seeing right now is a delay broadly with a number of those same customers which we think is more timing than anything else. But it’s clearly going to put pressure on us as it did in the second quarter and in second half, and I think we continue to be bullish about that business long-term. And it’s a business that’s well complemented at the platform level by both what we do a security with Arbor and what Fluke Networks does with the enterprise customers. So three different stories, if you will, I think on balance, still good ones but we need to build on the momentum at Fluke and Tek to have a better second half to help offset some of this pressure we know we are going to see in Tek Comms particularly in the second half.

Nigel Coe - Morgan Stanley

Okay, good. That’s very helpful Larry. And just to clarify the -- you talked about very clearly about the pressure in the -- demand trend is going to keep Comms negative for the backlog for the year, just want to clarify that with Comms not be wide at T&M segments?

Daniel Comas

That’s correct, and we expect to -- our Comms platform which was down double-digit in the second quarter, can be down high single-digits, double-digit. In the second quarter we expect instruments to get a little better so we don’t -- we printed down a couple of points here. I think we will do a little bit better than that, but probably not much.

Operator

We will take our next question from Steve Tusa with JPMorgan.

Steve Tusa - JPMorgan

Just on the third quarter guidance. Is there something that’s getting unusually kind of weaker there? I mean, is there anything other than the kind of the tail-offs and maybe in June you said it was kind of broad-based? Maybe if you could just put a little more color around that tail-offs. Because, I mean if I am doing the low-end of the range it gets you actually below 24% other year, modestly below that I mean I haven’t seen that from you guys in the last couple of years. I think so just a straight map on the seasonality would suggest something that’s a few times higher than what you guys have put out there. So is there something seasonally even adjusted for the $0.02 from this quarter? Is something seasonally there that is weaker than expected?

Larry Culp

Well Steve, one of the things impacting the guidance in Q3 is the $1 billion of acquisitions that we have announced to close in the last four months. As you know when we did the SCIEX deal, which was about that size, we called that all the one-time stuff which was pretty significant when it got to a $1 billion. We’re not doing that here. So part of the reason we’re taking down the high-end of our guidance is, we are going to have a fair amount of acquisition knowing a lot of it is non-cash as a result of these five larger deals over the last three months. That’s impacting and we had a little bit of that in Q2 but given these deals have just closed -- in the case of Siemens, we are likely not going to close that until the first quarter, but given it is a carve out transaction, Declan is actually going to have to spend a fair amount of money in the second half year to get ready to -- from a systems point of view to bring that business in. We think it’s a very attractive high return acquisition opportunity, but it’s going to hurt us a little bit from a GAAP EPS perspective over the next couple of quarters.

Steve Tusa - JPMorgan

How much would that type of spending be?

Larry Culp

Well Declan is going to cost them -- it’s going to cost the Life Science and Diagnostics half a cent to a penny in the second half. Add to that the other -- the deal cost, the inventory step-up from the other deal, the other 250 million of revenues that are coming onboard here, we’re going to have $0.03 or $0.04 of additional dilution here that -- again a lot of it is non-cash, but GAAP dilution in the second half.

Steve Tusa - JPMorgan

Just at a higher level, I guess, do you know you guys are going to be at 3% to 3.5% organic for the year, that’s above the mid-point of the annual range yet, you are kind of guiding at the mid-point. We are talking about some acquisition dilution. There is I guess spending to get ready for an acquisition. Again, I just feel, like in the past you guys have kind of blown through all this stuff. There would be may be some left over scraps from restructuring or some other leverage to pull. I also now recall this kind of lumpy mix creating somewhat of a visibility problem perhaps. I mean does this go to just the more complex nature of your portfolio and where the margins are today relative to maybe four or five years ago I mean this just feels a little bit different than what you guys used to kind of blow through in the past?

Larry Culp

Steve, I appreciate the question, but the way I would respond to it is that Danaher that you know is the Danaher you got today. And we had a situation in the second quarter that's going to perpetuate itself in the second half. We are business that has been on a literal care for a long time, it’s not going to contribute to the top-line. It’s not that big of a deal, but Tek Comms has been a real contributor to us. But here for the next several quarters, we’re going to miss that revenue, but we’re really going to miss the variable fall through there. And if that wasn’t going on particularly to the level that we have seen and now we anticipate, we wouldn’t be talking about any of this quite honestly. So I think it’s isolated, not happy about it, but it is what it is. But when you look more broadly across the corporation, there are so many good things going on from a segment, from a platform, from a geographic perspective that we’re not going to lose too much sleep here because we’re building a business for the long-term we feel as confident and as consecutive about that as we ever have.

Operator

We’ll take our next question from Steven Winoker of Sanford Bernstein.

Steven Winoker - Sanford Bernstein

So just I want to go back to Nigel’s question on Tek and specifically on Tektronix not on the communications business. So I think this is the 11th quarter of negative growth, you have talked about order growth turning positive finally here after a very long period of time. But I guess I’d still at a more granular level trying to get the sense for what’s structural versus what’s cyclical here. In your sense when you dive into the different pieces, video et cetera and you analyze the business, what gives you a comfort level that actually this is still the good market overtime and that we’re just in the cyclical kind of trough?

Larry Culp

Well Steve when you talk about 11 quarters, right, that can be a fine line to draw, but I think we continue to be optimistic about Tek and its market. Again I think we’ve seen, well what we haven’t seen is that bounce back in bench spending that is typically followed every major downturn that we studied in the history of the Company. Things have been grinding here for a while. I think we see that on the part of the global technology customers that we serve really without too many exceptions by vertical and by geography. So our task and our challenge is to innovate as best we can and in the face of that execute as well as we can from a delivery, from a service perspective in the field to drive a sort of new order growth which will lead to shipment growth in time. So, I don’t want to blame it all on the market, we certainly gotten better at Tek over the last several years and what we can control. And I think that combination is what fuels that optimism. But you don’t hear spending in the table because we need to prove it to you with real results on a sustained basis.

Steven Winoker - Sanford Bernstein

And is this a place, a particular segment that you would continue to seek to deploy capital externally?

Larry Culp

I think the Tek’s team at Tektronix their primary focal focus here Steve is to grow the business organically.

Steven Winoker - Sanford Bernstein

Okay. And just maybe as a follow-up, maybe on that 150 basis point decline core and you mentioned the high variable margin on the communications side driving most of that, but can you give me some sense as is all that operating leverage or I’m just trying to break out what went well in test and measurement versus what was really just a function of the volume?

Dan Comas

Instruments OP were relatively flat. OP dollars were flat with core growth that was also flat, so there were obviously do some things on the cost side to overcome sort of in inflation and others, but all the OP decline and all the margin hit was not from the comp side, and that is, of our equipment business that's our highest variable margin business.

Operator

We’ll take our next question from Julian Mitchell with Credit Suisse.

Julian Mitchell - Credit Suisse

I just wanted to [indiscernible]…

Larry Culp

Julian, are you there?

Matt Gugino

Operator we can’t hear Julian.

Operator

One moment, we’ll take a question from Jeff Sprague, Vertical Research Partners.

Jeff Sprague - Vertical Research Partners

Hey just a couple of quick ones, does your guide for 2014 assume the Q4 restructuring in the ballpark of what you did last year, I think maybe you were talking 80ish before relative to the 100 as kind of a ballpark idea?

Larry Culp

Jeff, we are going through our planning process now, we would expect to have restructuring in the fourth quarter. We haven’t pinned down a number yet.

Jeff Sprague - Vertical Research Partners

And then I know you haven’t been a fan of programmatic share repurchase but what's your thought process on opportunistic share repurchase?

Larry Culp

I think that’s a word we’ve used with some frequency over the years to describe our philosophy with respect to buybacks.

Jeff Sprague - Vertical Research Partners

And then just thinking about deal valuations, I mean we see what seems as -- what’s kind of ballpark valuation on the other stuff that you’re currently buying?

Larry Culp

Jeff, so we brought in roughly, if you look at kind of 2015, just run rate, we brought in about a $0.5 billion of revenues over the last four months, not all that close but either signed or announced. And we paid approximately a $1 billion all with one exception which is more of a start-up all profitable businesses, so pretty good I’d say overall EBITDA sort of multiples and situations where we on a deal-by-deal expect to get to a -- exceed a 10% return within three years so I feel pretty good. And we’ve done five deals here between 90 million and 500 million in the last five, over the last three months and feel pretty good about the valuations as well.

Jeff Sprague - Vertical Research Partners

Do you think something is actually changed or is this kind of the random walk of deals where your, there’s nothing and then there’s something and you can’t time them or do you have some confidence that things are actually picking up on the M&A front?

Dan Comas

Again, in kind of what we have seen in sort of the mid-size deals each 100 to a billion dollar type transactions, we’re pretty encouraged by the quality that not only the number of situation but obviously along these lines of this five situations where all things are cheap, we can get deals done under our return parameters. I think we’re still having active conversations on the larger opportunities as well, I think there is a net-net and an encouraging sign here, but until we pull something bigger down, don’t want to sort of declare any victory.

Larry Culp

Jeff, what I think stands out for me, to build on what Dan both in terms of what we’ve announced here and what we think and how we think about the funnels, it is really the breath of these dynamics. If it was in one space, it might be a bit more of a random walk but it is undercurrent is broad-based, I think that’s a good sign and part of the confidence and a conviction we’re reiterating this morning on the M&A front.

Jeff Sprague - Vertical Research Partners

Thanks. And just finally from me, on this June stay, is that a U.S. comment?

Larry Culp

No.

Jeff Sprague - Vertical Research Partners

Is that a global comment?

Larry Culp

Jeff, really we were referring to Western Europe. That was one geography that was, if you rolled up our -- everybody came in line with what we thought at the beginning of the quarter. Western Europe was slightly below what we thought at the beginning of the quarter and that was most pronounced, it wasn’t terrible but it was most pronounced in June, a little bit of a tail-off there.

Operator

We’ll take our next question from Julian Mitchell, Credit Suisse.

Julian Mitchell - Credit Suisse

Good morning. Just on the equipment versus consumables mix, I think you’d called out in Q1 that equipment sales were up, 3.5% the best in a very long time. How did that play out in Q2?

Larry Culp

The, it was more or less in line Julian with what we have seen consumables broadly were good, I they led the way. Unfortunately we had a little bit of a lag there in equipment but it wasn’t broad-based, again it kind of comes back to the issue with the -- we flagged earlier around communications with Tek Comms being so soft that was really the major break on the equipment trend that we have seen the last several quarters, otherwise the general mix was very much in line with what we’ve seen fortunately.

Julian Mitchell - Credit Suisse

Got it. And then within just a follow-up on Western Europe, you talked about the slowdown there in June, I guess it seems like it’s very, very short-term, so it’s maybe hard to read too much into it, but I guess is your sense that, it’s more that the, you had expected that to accelerate as we went through the year and it’s just hit kind of a ceiling on growth, or was there actually some softness on order intake below sort of what you’d thought?

Larry Culp

Julian it was a, we had good growth in context. It just down ticked broadly versus our expectations in that quarter. So I don’t think we’re going to try to extrapolate that too far here too soon, but it is something we’re watching carefully as we start the second half here. Again in part because of, it seemed to be broadly based, as opposed to the U.S. which was strong and where we saw softness at Tek Comms and consumables that was particularly isolated.

Julian Mitchell - Credit Suisse

Got it. And then lastly very quickly, environmentally you talked about weakness in U.S. municipal spend continuing, looking at sort of local government’s finances, those have been improving in terms of tax receipts and so on for 18 months now, when do you think that will start to feed through?

Larry Culp

Maybe we didn’t get that right in the script. Actually our muni spend and which has begun to bounce back in Europe and has continued bounce back in the second quarter in U.S. so [indiscernible] had good muni spend in the U.S. in the second quarter.

Operator

We will take our next question from Isaac Ro with Goldman Sachs

Isaac Ro - Goldman Sachs

On Tek Comms, I just wanted may be one more question on that. Talk a little bit about the product specific trends there and the reason I ask is I think in the past we have talked a little bit about the secular shift towards software and you guys were taking some steps with Arbor Networks. So I am just wondering if there is an element of product innovation there that is factoring into your demand profile and what -- well can you shed light on there, relative to yourselves as well as the competition?

Larry Culp

Yes I think as we look at those dynamics, I think we are really talking about specific customers, specific programs and the time they are in and that’s where we enter the quarter thinking that the rest of the year was going to play out in one way. At this point, it’s going to play out in other way and again not a way that is necessarily helpful for us. But these are long-term relationships we feel good about the value that we provide, the function that Tek Comms provides to these mobile operators. So we are going to take the long view and continue to invest in and persevere though it clearly put some pressure on the margins in the near-term.

Isaac Ro - Goldman Sachs

Okay. And then just a follow-up question on the healthcare side of the business, specifically Beckman, you guys saw the mid-single digit growth. I am wondering if you could talk a little bit your view on the sales funnel for that business just given the uncertainty with hospital capital budgets around ACA. And as a corollary to that, the Siemens business that you acquired is I think about microbiology, the secular trends there are okay, but not great. So we are just trying to get a sense of your plan to create growth and maybe grow faster in the end-markets in that business?

Larry Culp

Sure. You really have to like a Beckman headline number here in terms of the core and particularly that turn in the U.S. I think the funnels are healthy, but again the funnels are healthy because of the underlying actions the team has really been hard at work and progressing over the last several years. So when you look at those funnels and more importantly the retention wins rates that come as a function of those funnels, we couldn’t be happier. And in turn and then to see those revenues come into the business, because as you know Isaac, we can see 6, sometimes a 12 month lag from the time our customer makes a decision before we can recognize that revenue. I think that the microbiology lab is a good or the micro bio space is a good space. It’s not a space that we’ve been in. And frankly, we’ll take a mid-single growth business with the platform that we will get from Siemens and do there I think what we’ve done like in bio, in radiometer, more recently with the Irish business in urinalysis and really work hard to turbo charge that business. And I think you’ve seen us do that from an innovation perspective, I think you’ve seen us do that with respect to the some of the go to market fundamentals. And that in concert with the synergies we should get from the rest of the diagnostics platform is really the high level game plan that we have for this business ones we get it into Danaher. As Dan alluded to a few minutes ago, it can take a little while as carve outs is not the cleanest integration that we’re going to see. But frankly, given the degree of difficulty at both SCIEX and at Beckman Coulter in the team’s subsequent success we feel pretty confident, they are going to knock this one down in the end.

Operator

And our next question is from Andrew Obin, Bank of America Merrill Lynch.

Andrew Obin - Bank of America Merrill Lynch

I guess I have just a question on cash flow. If I look, last year cash flow was relatively flat versus the previous year and I understand why. But it also seems that year-to-date free cash flow once again is relatively flat versus a year ago. And as a company that sort of we look again cash flow basis, A, what’s going on? If there is anything wrong, and if it’s just timing and if it’s just timing, should we expect a pick-up in free cash flow in the second half?

Dan Comas

Andrew, it’s Dan, you are right, our year-to-date free cash flow is relatively flat. But as you remember in the first quarter, our year-on-year cash flow was down a fair amount. We thought that was timing we thought that we’d catch up to about last sport by the mid-year. That occurred I think it’s trending well and generated almost 850 million of cash in the quarter versus less than 400 million in the first quarter. I expect that positive trend to continue.

Andrew Obin - Bank of America Merrill Lynch

Terrific and any more color just from printing ID on the short cycle business, anything stems out on a positive and negative side to you in the quarter?

Dan Comas

Within the product ID Andrew?

Andrew Obin - Bank of America Merrill Lynch

Yes, product ID, yes.

Dan Comas

I think the Videojet team continues to lead the way, they are up mid singles. If you look at the last four -- if you look at the last eight quarters, I think we are very pleased both on an absolute and on a relative basis with respect to what Videojet and company are doing. I think Esko slowed down a little bit here but has been a very strong performer for us as well and the noisome that we shared with you relative to Procter & Gamble, I think it’s important as we continue to digitize these packaging design workflow solutions on the Web that really are the major growth drivers for Esko. So I think all-in-all, we are pleased with where those businesses are today.

Andrew Obin - Bank of America Merrill Lynch

But from a macro standpoint, no particular segment or geography really stood out?

Larry Culp

Not really.

Operator

And we have a -- our next question from Brandon Couillard with Jefferies.

Brandon Couillard - Jefferies

Larry, in Life Sciences, back on your comments around strength in the academic market at AB SCIEX, to be clear, have seen an uptick in the market or that more of a function of better execution in AB SCIEX specifically?

Larry Culp

I think we are feeling good about the execution there, but it’s probably frankly a combination that is hard to titrate out, one versus the other.

Brandon Couillard - Jefferies

Okay, then with respect to the Siemens Microbiology DL, can you give us a sense of how do you see the competitive landscape evolving in that ID/AST arena particularly around NASPEC and other emerging direct from blood technologies. Can you leverage AB SCIEX to launch their own, NASPEC based solution in that market?

Larry Culp

As you know, it’s a complex landscape, not only in terms of some of the strong and outstanding competitors that we have there but also the competing and evolving technologies. I think, our view particularly with the spectrum aspect is that what we get with Siemens is quite complementary to what happens with NASPEC. We don’t provide the product today from SCIEX, I am sure you know. I think, over time we need to be careful with how many fronts AB SCIEX takes on, because we are seeing broad potential application in NASPEC technologies. We don’t want SCIEX to try to be at all things to all the people, so there will be situations where we have relationships with others that were we may compete in one space and collaborator cooperate in others. And I think that’s very much the creativity and the nimbleness that we are going to need the SCIEX team and the Beckman team is well here to embrace and engage as we go forward.

Operator

We will take our final question from Deane Dray with Citi.

Deane Dray - Citi

Thank you. Just a quick clarification on the guidance for the third quarter, what was very helpful was when Dan added that there was going to be $0.03 or $0.04 of deal dilution in the second half, and I think he said on top of that its half a penny to a penny in the integration cost you will have to do for the Siemens Microbiology. So that’s $0.04 or $0.05 for the second half. How much of that is reflected in the third quarter guidance?

Larry Culp

It’s probably -- it’s about a $0.02 impact in the third quarter and probably a comparable impact in Q4.

Deane Dray - Citi

So pretty linear, and is it split between what non-cash and cash?

Larry Culp

It’ll be more non-cash. There will be some cash because of the Beckman integration, but I don’t have any more. I don’t have the exact breakdown of that.

Deane Dray - Citi

Operator

This concludes today’s question-and-answer session. Mr. Gugino, at this time I will turn the conference back over to you for closing remarks.

Matt Gugino

Thank you. That concludes our formal remarks and Q&A we are around all day for questions.

Operator

This does conclude today’s conference. Thank you for your participation.

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Source: Danaher's (DHR) CEO Larry Culp on Q2 2014 Results - Earnings Call Transcript
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