Good morning. My name is Debbie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2014 Earnings Results Conference Call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then number one on your telephone keypad. If you would like to withdraw your question, press star two. I will now turn the call over to Matt McGrew, Vice President of Investor Relations. Mr. McGrew, you may begin your conference.
Thanks, Debbie. Good morning, everyone, and thanks for joining us. On the call today are Tom Joyce, our President and Chief Executive Officer, and Dan Comas, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, a slide presentation supplementing today's call, our third quarter Form 10-Q, and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investors section of our website, danaher.com, under the heading Financial Information-Quarterly Earnings, and will remain available following the call. The audio portion of this call will be archived on the Investors section of our website later today under the heading Investor Events and will remain archived into our next quarterly call. A replay of this call will also be available until October 23rd, 2014.
The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally. The confirmation code is 9389793. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the supplemental materials in our third quarter Form 10-Q for additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and accompanying presentation to earnings, revenues, and other company specific financial metrics relate to the third quarter of 2014, and relate only to the continuing operations of Danaher businesses. All references to period-to-period increases or decreases in the financial metrics are year-over-year. I'd also like to note that we're making some statements during the call that are forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.
These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. It is possible that actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, we do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events and developments or otherwise. With that, I'd like to turn the call over to Tom.
Thanks, Matt. Good morning, everyone. We're pleased with the quarterly results we announced this morning. Earnings came in above our expectation, thanks to the Danaher team's very strong execution. The Danaher Business System continues to drive superior margin expansion, increased cash flow, and healthy top-line performance in a modest growth environment. The investments we've made in innovation and expansion in high growth markets drove share gains in many of our operating companies. Fluke, Hach, Veeder-Root, Radiometer, AB SCIEX, Implant Direct, and Esko are among the businesses that we believe outperformed relative to their markets during the quarter. These share gains and the team's execution also helped drive more than 85 basis points of core operating margin improvement in four of our five segments. Our cash flow performance was also very good, resulting in free cash flow to net income conversion ratio of 128%.
We're encouraged by our increased M&A activity of late as we've announced $3.3 billion of deals across our portfolio in the first nine months of the year. These acquisitions will strengthen our dental, life science and diagnostics, environmental, and Test and Measurement segments. Cultivation funnels across our portfolio remain full, giving us confidence in our ability to deploy our substantial M&A capacity in a strategic and disciplined way. With that as a backdrop, let's get into the details of the quarter. This morning we reported diluted net earnings per share of $0.95, up 13% and representing another record third quarter for Danaher. Revenues grew 4.5% to $4.9 billion, with core revenues up 3%. The positive impact of acquisitions increased revenues by 2%, while currency translation reduced revenues by 50 basis points. Geographically, high growth markets led the way, increasing high single digits.
Despite the headlines in China, our businesses grew double digits, led by our T&M instruments, Gilbarco Veeder-Root, Diagnostics, and dental platforms. Developed markets remained relatively stable as the U.S. and Western Europe both grew low single digits. Our gross margin expanded 80 basis points or approximately $140 million to 52.7%. This increase in gross profits enabled us to increase our sales and marketing and R&D spending by nearly $60 million in the quarter and deliver 70 basis points of core operating margin expansion. Turning to our five operating segments. Test and Measurement revenues increased 1.5%, while core revenues decreased 1%, primarily due to a decline in our communications platform. Reported operating margin declined 170 basis points, while core operating margin decreased 115 basis points.
On Monday, you saw that we announced an agreement to combine our communications business with NETSCOUT Systems to create a premier global provider of network management solutions for both carrier and enterprise customers. We're excited about this transaction, which is the culmination of a multi-year discussion with NETSCOUT about working together. This is a powerful opportunity to combine highly complementary businesses in a transaction that we believe will benefit all Danaher and NETSCOUT stakeholders, associates, shareholders, and customers alike. Danaher's premier troubleshooting, cybersecurity, and engineering solutions, combined with NETSCOUT's high-performance monitoring technologies, will give customers access to the most expansive suite of best-in-class products in the industry. The combined company will offer even greater breadth and depth across both carrier and enterprise networks, expanding opportunities for innovation and growth, and improving our customers' overall experience.
We anticipate that this transaction will close in 2015, subject to customary closing conditions, including regulatory, NETSCOUT shareholder, and other approvals. Upon close, our Executive Vice President, Jim Lico, will join NETSCOUT's board of directors while retaining his responsibilities at Danaher. Now, back to the results from the quarter. Our communications platform core revenues decreased at a double-digit rate. High teens growth in our security solutions business was more than offset by a decline in network management solutions due to spending delays from our wireless carrier customers, primarily in North America. Despite the revenue decline, we were encouraged by the positive order growth for the platform that we believe will continue for the remainder of the year. At Arbor, demand for Pravail enterprise security products grew more than 50% as IT security customers continue to rely on Arbor to prevent and mitigate attacks on their networks.
Around the world, conducting business has become increasingly virtual, Arbor is responding with flexible solutions to help customers of all sizes quickly and cost-effectively launch or expand best-in-class security solutions. Fluke Networks saw robust demand for its enterprise TruView system and portable network tools, which were each up 15%. FNet's TruView system continues to receive industry recognition and was honored with the 2014 Communications Solutions Product of the Year Award from the global media company TMC. Our instrument platform's core revenues increased at low single-digit rate with growth in most major geographies. Fluke core revenues were up mid-single digits, representing its highest quarterly growth rate in over 3 years. Growth was solid across most major product lines, led by calibration and biomedical, which each increased double digits. Distribution sell-out remained strong globally, particularly in North America and China, where growth was mid-single digits or better.
Fluke plans to build on this momentum by launching Fluke Connect in China later this month. At Tektronix, core sales were up slightly, with modest growth in point of sale in North America and healthy demand for power supplies and oscilloscopes in China. Turning to our environmental segment, revenues increased 10.5%, with core revenues up 5%. Segment core operating margin improved 85 basis points, with reported operating margin down 30 basis points due to the dilutive effect of recent acquisitions. Water quality core revenues increased at a mid-single digit rate with strength in analytical instrumentation and chemical treatment solutions. Hach executed well in a temperate municipal spending environment, driving above-market growth in both North America and Europe. Sales were also healthy in China, growing double digits. This month, Hach will launch the SL1000 Portable Parallel Analyzer, or PPA, a breakthrough system that dramatically streamlines water quality testing.
The PPA system is the only testing solution on the market that uses a disposable cartridge to improve ease of use and reduce the manual steps by over 50% in an EPA-compliant drinking water testing environment. Importantly, it provides technicians of all experience levels with a fail-safe way to achieve highly accurate and consistent results. At Trojan, demand for large municipal projects remained weak globally. Encouragingly, we received two ballast water treatment system orders that will be installed in a total of 15 ships. We anticipate the delivery of these systems will start in the second half of 2015. On the regulatory front, we received Alternative Management System, or AMS, acceptance from the U.S. Coast Guard for our full suite of UV ballast water treatment products in July.
This is a temporary designation that allows customers to use Trojan solutions in U.S. waters while our application for U.S. type approval is pending. Gilbarco Veeder-Root's core revenues grew mid-single digits, with robust demand for our dispensers, vapor recovery products, and point-of-sale solutions. Vapor recovery sales grew more than 50% in China as businesses continued to work towards compliance with environmental regulations. In point of sale, North American customers are choosing GVR's reliable and affordable payment security solutions as they upgrade their systems in advance of the new EMV regulations that begin to take effect in 2015. In the quarter, Gilbarco Veeder-Root acquired FuelQuest, a leading provider of fuel management solutions for suppliers, distributors, and buyers of petroleum products. This acquisition further expands the capabilities of our Insite360 cloud-based fuel management platform by allowing our customers to remotely monitor fuel acquisition, planning, and distribution.
Moving to life sciences and diagnostics. Revenue increased 4%, with core revenues up 3%. Core operating margin was up 120 basis points, while our reported operating margin increased 100 basis points. Core revenues in our diagnostics platform grew mid-single digits. At Beckman Coulter, core revenues increased at a mid-single-digit rate with double-digit growth in immunoassay, urinalysis, and automation. Growth was particularly strong in China, where revenues grew over 20%. Beckman received FDA 510 clearance for its PowerXpress sample processing system in the quarter, further expanding its world-class suite of automation products. The PowerXpress is a scalable, high-speed system designed to automate sample processing in labs of all sizes across all core disciplines, including chemistry, immunoassay, and hematology. The PowerXpress is just one of several new FDA-cleared solutions that will help our U.S. customers improve efficiency and reduce turnaround times for critical diagnostic tests.
Radiometer's core revenues increased at a mid-single-digit rate, led by more than 35% growth in AQT sales. High growth market sales were up more than 20% as we continued to expand our market position in China. Leica Biosystems core sales were up low single digits as mid-teens growth in high-growth markets was offset by weakness in core histology instruments in Europe. Advanced staining instrument placements were particularly strong as revenues increased over 20% in the quarter. We expect our advanced staining growth rates to remain healthy as our growing installed base continues to drive sales of reagents and other consumables. Core revenues in our life science platform grew at a low single-digit rate compared to high double-digit growth in the third quarter of last year. Sales in the U.S. and Western Europe were positive, we continue to experience uncertainty in tender timing and funding in China.
AB SCIEX core revenues grew mid-single digits with strength in academic, clinical, and applied markets. We continue to expand our in vitro diagnostic offerings by launching the TripleQuad 4500 MD and QTRAP 4500 MD systems. The 4500 series offers greater flexibility, exceptional sensitivity, and faster data acquisition, affording doctors and patients quicker access to reliable and accurate diagnostic test results. Leica Microsystems core sales increased low single digits. Our SP8 microscope continued to be very well-received and drove double-digit growth for our confocal microscope systems. Last Wednesday, the Nobel Prize in Chemistry was awarded to three scientists, including Leica's longtime collaborator and key opinion leader, Professor Stefan Hell. Professor Hell and others were recognized for their work in developing a way to use optical microscopy to study the molecular processes in living cells.
This work is especially meaningful to Leica as we collaborated with Professor Hell to commercialize the first microscope that uses this technology back in 2004. Remarkably, this is the fourth year in a row that Leica microscopes have been cited in Nobel Prize-winning work, and we are honored that our products continue to be used to support this and other important scientific research. Turning to dental, segment revenues increased 3.5%, while core revenues were up 2%. Our core operating margin increased 100 basis points, and reported operating margin increased 110 basis points to 17.2%. The team has done a terrific job in using DBS to drive productivity and improve segment margins over the past several years. In early September, we announced the pending acquisition of Nobel Biocare, a premier global brand and a pioneer in dental innovation.
Nobel Biocare's expertise in implant dentistry, digital prosthetics, and software, combined with our extensive capabilities in 3D imaging, intraoral scanning, and digital restorative solutions, will benefit both patients and dentists by further optimizing clinical workflows. We believe DBS will make a significant impact on Nobel Biocare's performance by helping to drive further innovation, growth, and collaboration with our other dental companies. We are confident that Nobel Biocare is an outstanding fit for Danaher, and we look forward to working with this capable team. The purchase price of $2.2 billion equates to approximately 3x revenues and less than 4x gross profit, which we believe positions us well from a return perspective. The acquisition remains subject to customary closing conditions, including regulatory approvals, and is expected to close in the fourth quarter of 2014 or the first quarter of 2015.
Dental Consumables core revenues grew low single digits as healthy demand in China and the Middle East was partially offset by a modest decline in the developed markets. In the U.S., the sluggishness we saw in the second quarter continued. Encouragingly, demand for our implant products remained robust, increasing globally at a double-digit rate. Dental Technologies core revenues were up mid-single digits, driven by demand for our dental handpieces and imaging equipment globally. In mid-September, we introduced the newest member of our family of cone beam 3D imaging products, the i-CAT FLX MV, for a medium field of view. The FLX MV allows dentists to capture a high-resolution, lower radiation 3D image of the upper and lower teeth. Our Tx STUDIO 5.3 software is also integrated into the FLX, allowing dentists to both scan patients' mouths and prepare a full digital treatment plan from one location on a touchscreen.
In our Industrial Technology segment, revenues increased 2%, while core revenues were up 4.5%. Core operating margin expanded 145 basis points, and reported operating margin increased 170 basis points to 24.3%. Motion core revenues increased at a low single-digit rate, marking the second consecutive quarter of growth for the platform. Demand in the high-growth markets was particularly strong, led by industrial automation in China. During the quarter, we completed the divestiture of our electric vehicle systems and hybrid product lines, which had annual revenue of approximately $100 million. Core revenues in our product identification platform grew mid-single digits as Europe and the Middle East both saw double-digit growth. At Videojet, core revenues grew mid-single digits as a growing installed base of equipment and solid execution in service helped drive high single-digit aftermarket revenue growth. During the quarter, Videojet launched its 1000 Line of continuous inkjet printers.
These printers feature an extended life printing core that reduces downtime and enables customers to print almost continuously for five years. Esko also experienced robust demand in the quarter with double-digit growth in our workflow automation software and digital imaging products. In September, Esko released its new packaging design and workflow automation software, Suite 14. This comprehensive set of software tools helps brand owners interact with their global supply chains in the cloud, improving efficiency and control at every stage of the packaging design and pre-production process. Reception of Suite 14 has been exceptional, and over 1,000 customers have already upgraded since launch. To wrap up, the Danaher team executed well this quarter using the Danaher Business System to expand margins, generate strong cash flow performance, and deliver higher than expected earnings.
Across the portfolio, our expanding presence in high-growth markets, investments in innovative new products, and focus on improving sales and marketing have helped our businesses continue to take share in their markets. As we plan for 2015, we remain mindful of the challenging macroeconomic outlook, including the recently strong dollar. We're continuing to invest in high-impact areas while also increasing spending on productivity initiatives to approximately $125 million in the second half of 2014. We believe our focus on growth investments and margin expansion, combined with our robust balance sheet and M&A capacity, position us to finish 2014 well and drive long-term results. We're initiating fourth quarter diluted net EPS guidance of $1 to $1.04, which assumes fourth quarter core revenue growth similar to the first three quarters of 2014.
Before we go to Q&A, I wanted to take a moment to share a few thoughts after the first six weeks of my time as Danaher's CEO. When this transition began, I knew that Danaher's future was bright. My belief is now firmer than ever. The caliber of our team, the depth of incredible talent, their deep commitment to DBS, and our culture is second to none. Financially, our balance sheet has never been stronger. Much as we've done in the past, and more recently, with the $3.3 billion we have committed so far this year, I look forward to channeling this strength to build upon our leading portfolio of companies. At Danaher, we compete for shareholders, and that is on the top of my mind every day.
We continue to look for smart ways to create value for our shareholders and other stakeholders, such as this week's announcement regarding the combination of our communications business with NETSCOUT, the recent divestiture of our electric vehicle and hybrid motor product lines, and our pending acquisition of Nobel Biocare. As you know, we're always in the process of evaluating our portfolio, and our focus will be on acquiring smartly, partnering smartly, and managing smartly. Our team's culture of continuous improvement using the Danaher Business System will remain our primary focus because that is who we are, and that is what truly defines our competitive advantage.
Thanks, Tom. That concludes our formal remarks. We're now ready for questions.
Thank you. Ladies and gentlemen, the question and answer session is conducted electronically. If you have a question, you may press star one to get into the queue. In order to answer as many questions as possible today, we ask that you please limit yourself to one question and one follow-up. We'll take our first question today from Scott Davis with Barclays.
Hi. Good morning, guys.
Good morning, Scott.
Welcome, Tom, to the game.
Thanks. Thanks, Scott. Game on.
Game on, yeah. Look, speaking of that, the equity markets are telling us that there's bad stuff out there, you guys don't seem to sense any panic amongst your customers or anything, do you? Can you tell us if anything has changed in October? Any activity amongst your customers, particularly in your more cyclical businesses like industrial tech or Fluke that folks are starting to hunker down a bit?
Scott, it's obviously still pretty early here in October, I'm sure they're all watching their screens or reading the paper day to day. I think the simple answer to your question is no. We've seen a start to October here that is pretty consistent with what we've seen through the last couple of quarters. That's certainly not to suggest that as this environment unfolds day to day here, that those screens and those headlines won't start to influence people's behavior. Obviously, over time, we've seen that happen. Frankly, not that the last week has necessarily been the overriding influence on us, but concerns over the macroeconomic situation, obviously the changes in currency, the shifts and the strengthening of the dollar, have all influenced the way we want to position ourselves going into 2015.
Again, going back to the short answer to your question, no, we're not seeing customer panic in the order book at the moment.
Okay. Then, the natural follow-on to that is the sellers. Bid-ask spreads have been a little frustrating, I think, for most guys in industrials the last couple of years, and the sellers have gotten a little, I don't know what to call it, greedy, but it's certainly opportunistic. Have you seen your phone light up in the last couple of weeks where sellers might be a little bit more amenable to compromise?
Again, I don't know that there's necessarily been any particular inflection in the last couple of weeks or phone lines lighting up. I would say that as a general direction, we have seen some increased activity. We have seen the sellers interested in taking advantage of what are still some pretty rich valuations. Those same sellers are interested in a transaction. I think we would generalize by saying that we're pleased with how the funnels are sitting today. The cultivation conversations are good, and we seem to be making progress in some of those conversations. Directionally, we feel pretty good about where we are.
Okay. Thank you. I'll pass it on. Good luck, Tom, and hope for all the best here.
Thanks, Scott.
We'll go next to Nigel Coe with Morgan Stanley.
Thanks. Good morning. Just wanted to pick up on the comments about what might be changing. You're obviously planning for a pretty similar growth environment to what we've seen both in 3Q and year to date. I'm wondering if the mix of that 3% is somewhat different. Obviously, Europe is the focus of attention here. Are you projecting a weaker Europe, but maybe stronger U.S.? Any change in the mix of that 3%?
Thanks, Nigel. Good morning. I wouldn't necessarily say we're thinking about any dramatic shifts in that mix. I would say there are probably a few things to note. I'd say we've seen, and perhaps would expect to see some marginal improvement here in the U.S. I would say while the European environment has been stable quarter to quarter, obviously there's a bit of concern out there right now about Germany and some potential slowing there. As Germany goes, as we know, sometimes Europe goes. I think there's a reason for some caution as it relates to Europe. More recently, we've seen softness in Latin America, specifically in Brazil. Of course, the situation in Russia has changed the trajectory of that market.
I think when you put all that together, then you add some continued very good growth in China, maybe not quite as hot as over a long period of time, certainly some continued very good growth. I think you see some shifts on the margins, but we'd still consider the high growth markets to be the leaders. The developed markets sort of hanging in there. Maybe within each of those two major, that split, you might see some shifts here and there.
Okay.
Nigel, may I maybe just add one thing on Europe. As Tom and I went through the strategic reviews here over the summer and the fall, we actually think on a relative basis, Europe's one of the places we're doing pretty well.
Some businesses where we felt we were taking share, a chunk of that was in Europe.
Yeah.
Hard not to be worried about all the headlines here in Europe, the news about Greece today, and their sudden rise again in interest rates, foreign rates over there. We're actually at a relative basis, feel like we're performing pretty well there.
Okay. Those things just growth effects and market share gains there. That's pretty clear. Just digging a little bit deeper, one of the hospital providers called out some benefit from the Affordable Care Act on their patient volumes, and I'm wondering if you're seeing some benefit from that on your consumables. On top of that, life sciences remains pretty challenging in China. I'm wondering if you have a line of sight on when that might start improving.
Sure. On the Affordable Care Act and the impact on consumables, first of all, we're very encouraged by the progress that we're making at Beckman. I would say, largely, the progress we're making there at Beckman, and frankly, across the entire diagnostic portfolio, is very good execution across those businesses. Those businesses, I think particularly Radiometer, taking share and Leica Biosystems doing very well, particularly in advanced staining, which is an important area of future growth and one of the better market segments. We think utilization is probably marginally improved, as a function of the Affordable Care Act. I think there are some out there who would certainly say that the states with Medicaid expansion are the ones where we're seeing that uptake. We're also seeing improvements in hospitals' balance sheets with a little bit of pressure taken off the bad debt side.
You put those things together and yeah, there's a marginally improving environment there. Relative to any improvement beyond that right now, I think it's probably still a little early to tell, but improvements on the margin. In terms of life science and in China specifically, that's probably one of the most challenging environments out there today. You've heard us talk and perhaps others talk about some of the delays in funding in the life science market, some of the concerns around compliance in that market that may be underpinning some of those delays as China enforces what we believe are ultimately good policies for how that market will operate. Nevertheless, that is a market that continues to be a slow market today.
We don't think that's necessarily a phenomenon that's going to ease up here in the next couple of weeks, let alone perhaps even in the next couple of months. I think we're sort of thinking that that could be something that continues to be under some pressure, a slower growth market, maybe into 2016.
Okay. Thanks, Tom, and best of luck.
Thank you, Nigel.
We'll take our next question from Steven Winoker with Bernstein Research.
Thanks, and good morning. Tom, maybe a little perspective on Tektronix specifically. It's been, I guess, this is the first quarter in 11 quarters, almost three years, I suppose, where it's turned positive, even if, as you said, it was up low single digits, but slightly. Is this the start of something a little more significant? What drove that turn? Is there something fundamental that's starting to shift a little bit in that business that you're seeing?
It's obviously been a challenging time over a number of quarters. We are very encouraged by what we've seen in the last couple of quarters in the change there. I think that team has executed very well. I think they've done some very good things from a product and from a go-to-market standpoint. Stringing two data points together is always a good thing to do on the positive side. I think that's still a business that will be probably a low single-digit grower here over the near term. I would probably attribute it a little bit more on the execution side than necessarily a fundamental shift or an inflection point in the markets. There are some things going on that will drive market growth over time. I'd put a little bit more on the team's execution here more recently.
You mentioned ballast water for Trojan. That's another encouraging sign. Is this just a one-off, you think, or something more significant again?
No, we would not consider this to be just a one-off. We would consider it to be just the beginning, an early and very positive indication of the market acceptance. I think it's just important to remember that these regulatory approvals are really kind of threshold events for starting to bring this market to an inflection point of higher growth. We were excited by the approval that we got, the AMS approval that I mentioned. That's not as big a deal, quite frankly, as getting the formal U.S. type approval that I mentioned that we expect next year. More to come on that. A very encouraging early indication of acceptance, and it's, I think, an indication of good things to come.
If I could just sneak one more in. On the separation earlier this week, the value of the business combination, you've made it abundantly clear. Just maybe a little more thinking on the shareholder value of doing this outside of Danaher rather than within Danaher.
Steve, it's Dan. I think it's a reflection of our long-held view, NETSCOUT's long-held view that there was a lot of this is a one plus one equal three. It was a little bit like our tools joint venture, but again, we think with a greater growth profile. We just ultimately concluded this was the best way to effect that.
Okay, all right. Great. Thanks, guys.
Thanks, Steve.
We'll take our next question from Steve Tusa with JP Morgan.
Hey, good morning.
Morning, Steve.
You mentioned ballast water, and I guess, are there any other businesses, maybe Beckman perhaps, that just from some company-specific dynamics should perhaps look better at this time next year versus what they're doing now just outside of the macro?
Steve, I think I saw several opportunities that businesses had as I came through the strategic reviews that would point towards growth potential in a number of businesses. I think, for example, if you think about Gilbarco Veeder-Root and what we're seeing around the early indications around the customer base moving towards compliance with the EMV regulations that I've mentioned, I think that's an indicator of some momentum that we could see later in 2015. I think you mentioned Beckman Diagnostics specifically. I think as Beckman continues to drive their improvements in quality, in service, in delivery, in the overall customer experience, and then you combine that with some of the new product clearances and then the introduction of our molecular diagnostics platform, VERIS, next year, I think that too has exciting potential for Beckman.
I think those would be two I would cite, and there would be a number of others if we walked across the portfolio.
Right. From a macro perspective, it sounds like this is a 3% type of economy. It doesn't sound like you think, even though you highlight the macro challenges out there, it doesn't sound like you think this is kind of a 1%-2% economy. This is just kind of a stable and steady growth type of environment we're in right now.
I don't think we want to go Chicken Little on you here, but I think we want to be ready for what comes. We've done that, obviously, over a long period of time when cycles move through. We try to anticipate where challenges come, and we think there's some indications out there that'd be challenges, but we're not trying to call a crisis here.
One last question, just on portfolio mix. By buying Nobel and doing this deal for the comms business, I would assume this kind of reinforces the view that you guys aren't particularly stuck in a frame of mind of a certain percentage from healthcare and a certain percentage from industrial businesses. You're going to go where the opportunities provide the best strategic and financial returns.
Steve, I probably couldn't have said it any better than you just said it. We are not stuck on percentages, we absolutely move to where we can add the greatest value for our shareholders by making those portfolio moves that come our way and that we can make happen over time.
Is it too late for sellers to get something done by the end of this year? Is everybody just kind of looking more towards 2015? How robust is the pipeline?
Well, Steve, there's not a tax driver here. On the margin here, the last two, three months and just what we've seen the last four or five months has been encouraging regarding conversations.
Okay, great. Thanks.
Thanks, Steve.
We'll take our next question from Jeff Sprague with Vertical Research Partners.
Thank you, gents. Good morning. Just a quick one or two. Just on the sales side of things, Tom, the NETSCOUT deal is interesting, right? In an environment where it's tough to buy, perhaps it makes sense to sell a few things. I just wonder, I think we're all fairly acquainted with your portfolio, but what's the prospect for other moves, perhaps structured in different ways, but kind of pruning opportunities in the portfolio?
Morning, Jeff. First of all, it's important to recognize that there was no motivation behind the partnership with NETSCOUT that had to do with it being tough to buy. We thought that was just a great opportunity, no matter what, as you might have expected. We will continue to evaluate the portfolio and make sure that our businesses are well-positioned for the future. I think we have a tremendous portfolio today. I think going across the strategic plans that I did, and not that I saw every operating company during the season, but I saw all the major operating companies, and certainly all of them from a platform point of view. I think there's just a lot of potential that we have across the entire portfolio today.
That being said, you've heard Larry say it over a long period of time, that no business has a permanent home at Danaher. We'll continue to evaluate whether each one of our businesses is well-positioned in the portfolio. If we see opportunities for smart partnering or an opportunity where that business is better served to be in a better place, we'll certainly look to make that happen. In general, I'm thrilled with the portfolio we have today.
Right. I was just wondering if we could get a little additional color on just what's going on restructuring, just kind of a couple questions and points around that. Tom, I think you said $125 million in the second half, implying some of it started in Q3. I'm wondering, Dan, if you can just give us a little color, kind of Q3 versus Q4, if there's any change in deal costs and other things that are going on in the fourth quarter. Maybe just a little thought, if you could, on where the activity's taking place and what the payback might be.
Jeff, on the point about where it's taking place, obviously a lot of communication to do here, we're going to avoid to get into specifics. The $125 million is largely in the over 90% of this will be in the fourth quarter. Broad-based, we would expect about a little bit less than a one-year payback. On an annualized basis, expect about $100 million of savings or roughly $0.10 a share. Probably don't get all that until we get to the end of the first quarter, given there's often some kind of lag effect. Found a lot of good projects here and obviously made the decision to execute upon them.
Any change in deal cost?
Jeff, if I just might add to that. I think as Dan and I went through each of the individual businesses, both during the operating reviews earlier in the year and during the strategic plan reviews, it was clear that the businesses were already thinking ahead as to where those opportunities might be and how to take advantage of them. We were really pleased with how the businesses looked broadly across the portfolio and came up with really a terrific group of projects.
Jeff, just in terms of deal cost, we highlighted some of that in July. I don't think it's changed much. Clearly, losing the Motion business and the earnings in the fourth quarter, that's obviously in the guide here. We continue to work on the integration of the Siemens business. That's going well, but we're spending money on that. The only thing that could be of significance, and we would call it out, is if we were to close Nobel here in the fourth quarter, which is a possibility, we would have some one-time expense, which given the magnitude, we would call out separately.
Right. Thank you, guys.
Thanks, Jeff.
We'll take our next question from Julian Mitchell with Credit Suisse.
Hi. Thank you. Just a question on dental, firstly. In sort of earlier in the quarter, you talked about U.S. sell-through of consumables being a little bit better. Doesn't seem to have shown up yet in your numbers. Is that something you think reverses pretty soon? Also on dental, very strong core margin improvement performance in Q3. That was after a pretty weak Q2. What do you think the kind of steady state run rate on that dental margin trajectory should be?
On the dental consumables, Julian, it clearly is a business that is still closely tied to what we think is a fairly slow growth macro environment. While I think we're doing a good job from an execution standpoint. I think clearly we don't have any tailwind from a market standpoint. We've got work to do there, but I don't think there's anything perhaps any more noteworthy than the environment in which that business is performing today. Dan will comment in a second on kind of an outlook on margins, but you're right to note certainly the good performance from Dental on the margin side in Q3. Dental Technologies in particular, did a very good job on driving margins. Some of that a function of some things we did last year around productivity, some of that just continuing good work this year from an execution standpoint.
A little bit of help overall across the segment from a mix standpoint with consumables, despite the slightly slower growth that you commented on, generally providing a pretty good mix for the segment overall.
Julian, in terms of margins for the full year, there'll be some noise in Q4 obviously because of restructuring, but from a core basis, we would expect core margin expansion in that 75 to 100 basis points of core margin improvement during the year. You obviously saw more than that here in the third quarter. It's a little bit hard for me to kind of quote a number here given the expectation of Nobel coming in. We'll have a lot of noise for a couple of quarters, but ultimately with Nobel, what we have, we think this is a 20% segment in four to five years from now.
Thank you. Just on the outlook. You obviously talked about the restructuring measures you're enacting now. You talked earlier about the decent increases in SG&A and R&D in Q3 funded by the gross margins. Have your own spending plans, whether OpEx or CapEx changed in light of the macro conditions that you cite, or for now you're kind of proceeding as you were, and you'll just watch the order book closely for changes?
Well, Julian, probably important to note here that we're just now entering into the budget season here. We'll have work to do with each of the individual operating companies, to understand how they're positioning for 2015. I think one of the things we try to make sure we do through that process is to recognize that there's not a one size fits all across the portfolio when it comes to investment and where those gross margin improvements either come from and/or where they get reinvested. As we walk across the businesses, we'll be, I think, thoughtful as we've always been about making sure that we're investing smartly into those businesses that have the best opportunities, that are the best positions in their markets. That's where you'd see lifts, for example, in R&D and in sales and marketing.
Perhaps in some other spots, you might see us stay a little tighter.
Thanks, Julian.
We'll take our next question from Richard Eastman with Robert W. Baird.
Just a couple of quick questions. On Siemens, is that transaction that is tracking on the timeline, is that a first quarter close? Dan, could you just give the IT integration expenses in Q3 and Q4, are those still kind of summing to maybe $10 million split between the quarters?
That is directionally correct. I do not have the breakdown. We just debriefed with the Beckman team the other day on the integration. It is going well, all our expectations are for a Q1 close.
Okay. Also, Tom, just in terms of China, we continue to put up some very nice double-digit growth there, as mentioned. I think we understand the issues in the life sciences marketplace there and being regulatory, hopefully they clear sooner rather than later. But it feels a little bit contradictory, your growth in China coming in some of these more cyclical markets, T&M, I think Motion was mentioned. It seems contrary maybe to the macro perspective that people have in China. Do you attribute your double-digit growth to your initiatives, distribution, sales, marketing, or how do you reconcile that?
Sure. Rick, thanks for the question. Jim Lico and I were together in China, I think it's now two or three weeks ago, for a number of days. We sat with each one of our individual businesses. In many cases, I was sitting with businesses that I was less familiar with. Clearly I think what we saw was a very good group of people, an outstanding set of teams, that are continuing to build commercial reach in those markets. We're seeing teams now putting innovation-related resources on the ground, product planning resources. We're adding to our local R&D presence, developing products for that local market and commercializing those products in ways that I think are helping to drive our growth.
You're right to observe that that growth is coming fairly broadly across, not just, for example, places where we've talked about it in the past, like Beckman Diagnostics, that continues to do an excellent job. Of course, that's a very big business over there. That's obviously a part of that growth, but it is broad-based. The dental team, for example, an outstanding team over there that's continuing to drive double-digit growth, and that's not only a good market, but the team executing very well. I think you put that all together and it's a good portfolio, well-positioned in a number of good markets with good teams that are continuing to invest aggressively.
Okay. Rick, thank you.
Thank you, Rick.
Thanks, Rick.
This will be the last question. We'll take our next question from Isaac Ro with Goldman Sachs.
Good morning, guys. Thank you.
Hi, Isaac.
Hey, just one follow-up question on the life science business. If I look at your comments here, you did cite a combination of pressure in China, both in terms of the overall demand environment as well as budget delays. I was wondering, which of the two was maybe a bigger factor, just to give us some insight on what your visibility is on a recovery there heading into next year.
Isaac, tough to parse, what you describe as budget delays versus overall demand. If I were to try to generalize, we know that there has been and continues to be scrutiny over particularly the larger tenders, the instrumentation-related tenders, and whether you call that budgetary or you call it demand, I'm not sure. Now, that being said, there is another dimension, which is where on a macro basis are investments going at the moment? Clearly we see investments going into the diagnostics, more the healthcare side of the house, and we're seeing obviously the benefit of that in our business is doing very well there. Perhaps that means slightly less into the true research side of the house. I think it's a little tough to parse that much more precisely.
Isaac, I would say compared to 90 days ago, and this really goes to kind of Rick's previous question, there are some parts in China that we actually incrementally feel a little better about. I think to be fair on life science, we'd have to say we're incrementally a little bit more negative than we were 90 days ago.
Yeah.
Then on T&M, you guys, I think in the Form 10-Q did call a little bit out, expectations for continued negative growth there in the wireless business into 2015. Just wondering how broad-based that is across your customers and just confirming that you don't think it's an issue of market share, just more of the environment?
We think it's largely environment, and I think the thing that's kind of most encouraging here is we saw orders turn positive in the third quarter for the platform. That trend actually looks pretty good heading here into Q4 as well. The issue there is we often get some of those orders, we actually get upfront payment. You see that in some of the numbers in our cash flow statement, but we actually won't book revenues for six, nine, 12 months out. We're seeing a nice turn in terms of orders. The next couple of quarters are going to be challenged here. I don't think that's changed, but I think the outlook's looking a little better here.
Got it. Thanks so much, guys.
Thanks, Isaac.
Ladies and gentlemen, that does conclude our question and answer session. Mr. Gugino, I'll turn it back to you for closing remarks.
Thanks, everyone for joining us. We'll be around all day for questions.
Ladies and gentlemen, thank you so much for your participation this morning. This does conclude today's conference.