Please stand by. 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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star and then the number 2. I will now turn the conference over to Mr. Matt McGrew, Vice President of Investor Relations. Mr. McGrew, please begin your conference.
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 Investors section of our website, www.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 until our next quarterly call. A replay of this call will also be available until July 24th, 2014.
The replay number is 888-203-1112 in the U.S. and 719-457-0820 internationally, and the confirmation code is 3,625,375. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. The supplemental materials in 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 continued operations of Danaher's businesses, and all references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we may 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.
Matt, thanks, and good morning, everyone. Our team executed well in a modest growth environment in the second quarter. Our revenues increased 3% and were largely consistent with what we've 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 US 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 at Hach, ChemTreat, Implant Direct, Ligabio Systems, 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 of 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. With that as a 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 1/2 of 1%. 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 our 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, our 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 thermography 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 remained strong, with orders increasing more than 20%.
Arbor is recognized as a leading security solutions vendor among both enterprise and service providers, and was named Best Overall IT Company at 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. website 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 in the region fourfold over the last four years. During the quarter, ChemTreat acquired Chile-based Aguasin, 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 Insight 360, our cloud-based platform that allows retailers to remotely control their 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 Insight 360 in June alone. During the quarter, GVR completed the acquisition of ANGI Energy Systems, an innovator in compressed natural gas fueling, 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 & Diagnostics, we had an excellent quarter with top-line growth and 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 and urinalysis. 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 result 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 margins by over 150 basis points year-over-year to their highest level since the acquisition. Additionally, Beckman Coulter's first major bolt-on acquisition, IRIS, which closed in October 2012, delivered double-digit growth and expanded operating margins over 1,000 basis points in the quarter.
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 for their patients. With over $200 million in revenue, this acquisition represents an attractive opportunity for Beckman and the rest of the Diagnostics platform and will expand 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. AQT 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 Coulter's commercial capabilities in Turkey, South America, and the United Kingdom to secure large project orders. At Leica Biosystems, sales increased at a mid-single-digit rate, led by high-teens growth in the high-growth markets. Advanced Staining grew mid-single digits as our increasing installed base of BOND instruments drove solid consumables growth. Aperio, our e-pathology business, grew double digits as doctors increasingly look to provide more accurate, more secure cancer diagnostics for their patients.
Our digital workflow solutions facilitate global collaboration between doctors and other experts, simplifying the process of developing precise diagnoses 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 for 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-use solution that provides laboratories a reliable and accurate way to ensure 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 were 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 SP8 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.
Through 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 businesses 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 as 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 DUX, a leader in restorative and infection control consumables.
DUX 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 Rynor Ortho, 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 range of imaging products delivered excellent results, growing mid-single digits in the quarter. Notably, our focus on innovation in imaging has helped us build a growing installed base of more than 6,000 3D imaging units. In addition, at our Analyst Day, we discussed publicly 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 of 2012.
With our transition out of lower-margin businesses largely complete, Motion is now more profitable and better positioned for future growth. Core revenues for 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 at a 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 application offerings with the launch of the 9550 Print & 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 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 Conference, where over 400 customers participated in 70 workshops on topics ranging from brand management to 3D package design. 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. Today, we are initiating third-quarter GAAP diluted net earnings per share guidance of $0.86-$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-$3.72 from the previous range of $3.60-$3.75.
Thanks, Larry. That concludes our formal comments. Tina, we're now ready for questions.
Thank you. We ask that you limit your questions to one question and one follow-up question. Again, please press star one to ask a question. We will take our first one from Scott Davis with Barclays.
Hi. Good morning, guys.
Good morning, Scott.
I'm trying to get my arms around it, the margin numbers. You mentioned dilution from deals a number of times, but it didn't seem like there's a lot of deals, or at least there's a few, 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? 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?
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. 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 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, far softer than we would have anticipated there in June. We saw some softness in the U.S. in dental consumables sell-out. That in turn impacted our June there at Kerr, particularly. Mainly, and I think this is the big issue, is that at 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. 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 hurt the bottom all in.
Scott, just regarding the acquisitions, we talked last year. We had about $100 million of restructuring spend generating about $20 million a quarter of savings. We had 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.
Yeah. Okay. That's really helpful. As a follow-up, when 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 I'm guessing that's somewhat sustainable for the rest of this year. You made some positive comments about the order rates, particularly in Fluke, and your comps are still pretty easy next quarter. I mean, why wouldn't core growth accelerate sequentially from here?
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 is 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-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. is a bit of an offset there, both in terms of what we saw and I think some of the macro data out there. 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. We get that core there in line with the first half. We get similar margin performance, in part because the Tech 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 a result. We're going to work hard to offset that. We're not happy with it, but it is what it is.
I think when you put all that together, you get the formal guide that we're offering this morning.
Okay. Hopefully you're conservative. Thanks, guys. Good luck.
Thank you, Scott.
I'll take our next question from Nigel Coe with Morgan Stanley.
Oh, thanks. Good morning.
Morning, Nigel.
Obviously homing in on the Test & Measurement weakness, it's been weakness for the third year of soft and no growth. I'm just wondering, Larry, if you could give some perspective on how much of this is structural and how much confidence do you have that these businesses can return to an acceptable rate of growth going forward?
Yeah. Well, I think you have to break it down by business, Nigel. I realize at a high level, maybe some of the details don't matter so much. 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. Can they be a consistent low to mid-single digit grower for us, more so than we've seen the last couple of years? I believe so, and I think they're building momentum here very much in that direction.
I think Tech, 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. There again, I think the order books firming up, having the first positive quarter in years there, hopefully is the beginning of a trend. I think Fluke will, in all likelihood, outperform Tech, in the near-to-medium-term. That I think is as 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 Tech Comms. It's been a, what, a mid-to-high-single-digit grower for us, double-digits in many quarters.
What we're 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 the second half. I think we continue to be bullish about that business long term. It's a business that's well complemented at the platform level by both what we do in security with Arbor and what Fluke Networks does with the enterprise customers. Three different stories, if you will, I think on balance, still good ones, but we need to build on the momentum at Fluke and Tech to have a better second half to help offset some of this pressure we know we're going to see at Tech Comms, particularly in the second half.
Okay, good. That's really helpful, Larry. Just to clarify, you talked very clearly about the pressure in network monitoring is going to keep Comms negative for the back half of the year. I just want to clarify if that was Comms, not the wider T&M segment?
That's correct. We expect that our comms platform, which was down double-digit in the second quarter, could be down high-single-digit, double-digit in the second quarter. We expect instruments to get a little better. We printed down a couple points here. I think we'll do a little bit better than that, but probably not much.
Okay. Thanks, Dan. Sounds heavy.
Thank you, Nigel.
We'll take our next question from Steve Tusa with JP Morgan.
Hey, good morning.
Good morning, Steve.
Just on the third quarter guidance, is there something that's getting unusually weaker there? Is there anything other than the tail off? Maybe in June you said it was broad based. Maybe if you could just put a little more color around that tail off. Because if I'm doing the low end of the range gets you to actually below 24% of your year, modestly below that. I haven't seen that from you guys in the last couple of years. Just the straight math on the seasonality would suggest something that's a few pennies higher than what you guys have put out there. Is there something seasonally even adjusted for the $0.02 from this quarter? Is there something seasonally there that is weaker than expected?
Well, Steve, one of the things impacting the guidance in Q3 is the $1 billion of acquisitions that we've announced or closed in the last four months. As you know, when we did the AB SCIEX deal, which was about that size, we called out all the one-time stuff, which was pretty significant when it got to $1 billion. We're not doing that here. 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 noise, a lot of it's non-cash, as a result of these five larger deals, over the last three months.
Right. Okay.
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're likely not going to close that until the first quarter. Given it's a carve-out transaction, Beckman's actually going to have to spend a fair amount of money in the second half here to get ready, 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.
How much would that type of spending be?
Well, Beckman, 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 deal cost, the inventory step-up from the other deals, the other $250 million of revenues that are coming on board here. We're going to have $0.03-$0.04 of additional dilution here that, again, a lot of it's non-cash, but GAAP dilution in the second half.
Just at a higher level, you guys are going to be at 3%-3.5% organic for the year. That's above the midpoint of the annual range. Yet, you're guiding at the midpoint. We're talking about some acquisition dilution. There's spending to get ready for an acquisition. It just feels like in the past, you guys have blown through all this stuff. There'd be maybe some leftover scraps from restructuring or some other levers to pull. I also don't recall this lumpy mix creating somewhat of a visibility problem, perhaps. 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? This just feels a little bit different than what you guys used to blow through in the past.
Steve, I appreciate the question, but the way I would respond to it is that the Danaher that you've known is the Danaher you've got today. We had a situation in the second quarter that's going to perpetuate itself in the second half, where our business that has been on a literal tear for a long time is not going to contribute to the top line. It's not that big of a deal. Tech Comms has been a real contributor to us. 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. If that wasn't going on, particularly to the level that we've seen and that we anticipate, we wouldn't be talking about any of this, quite honestly. I think it's isolated, not happy about it, but it is what it is.
When you look more broadly across the corporation, there's 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 and feel as confident and as convicted about that as we ever have.
Right. Okay. Thanks.
Thanks, Steve.
Thank you, Steve.
We'll take our next question from Steven Winoker, Sanford Bernstein.
Thanks, and good morning.
Good morning, Steve.
Just, I want to go back to Nigel's question on tech, but specifically on Tektronix, not on the communications business. I think this is the 11th quarter of negative growth. You've talked about order growth turning positive finally here after a very long period of time. I guess I still, at a more granular level, am 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 a good market over time and that we're just in a cyclical trough?
Well, Steve, when you talk about 11 quarters, that can be a fine line to draw. I think we continue to be optimistic about tech and its market. Again, I think what we haven't seen is that bounce back in bench spending that has typically followed every major downturn that we've 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. Our task and our challenge is to innovate as best we can in the face of that, execute as well as we can from a delivery, from a service perspective in the field, to drive the sort of order growth which will lead to shipment growth in time.
I don't want to blame it all on the market. We've certainly gotten better at tech over the last several years in what we can control. I think that combination is what fuels that optimism. You don't hear us banging the table because we need to prove it to you with real results on a sustained basis.
Is this a place, a particular segment that you would continue to seek to deploy capital externally?
I think the Tech Comms at Tektronix, their primary focus here, Steve, is to grow the business organically.
Okay. Just maybe as a follow-up, maybe on that 150 basis point decline core, you mentioned the high variable margin on the Communications side driving most of that. Can you give me some sense, is all of 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?
Instruments OP were relatively flat. OP dollars were flat with core growth that was also flat. They obviously do some things on the cost side to overcome sort of inflation and others. All the OP decline and all the margin hits was up from the Comm side. That is of our equipment business. That's our highest variable margin business.
Okay. All right. Thanks, Dan. Thanks, Larry. Thanks, Matt.
You bet, Steve. Thank you.
We'll take our next question from Julian Mitchell with Credit Suisse.
I just wanted to follow.
Julian, are you there?
Operator, we can't hear Julian.
One moment. We'll take a question from Jeff Sprague, Vertical Research Partners.
Thank you. Good morning, gents.
Good morning, Jeff.
Hey, just a couple quick ones. Does your guide for 2014 assume a Q4 restructuring in the ballpark of what you did last year? I think maybe you were talking $80-ish before relative to the $100 as kind of a ballpark idea.
Jeff, we're going through our planning process now. We would expect to have restructuring in the fourth quarter. We haven't pinned down the numbers yet.
I know you haven't been a fan of programmatic share repurchase, but what's your thought process on opportunistic share repurchase?
I think that's a word we've used with some frequency over the years to describe our philosophy with respect to buybacks.
Just thinking about deal valuations, we see what Siemens is. What's kind of ballpark valuation on the other stuff that you're currently buying?
Jeff, we brought in roughly, if you look at kind of 2015 and just run rate, we brought in about a half a billion dollars of revenues over the last four months. Not all that's closed, but either signed or announced. We paid approximately a billion dollars. With one exception, which is more of a startup, all profitable businesses. Pretty good, I'd say, overall EBITDA sort of multiples and situations where we, on a deal-by-deal basis, expect to exceed a 10% return within three years. It feels pretty good, and we've done five deals here between $90 million and $500 million over the last three months, and feel pretty good about the valuations as well.
Do you think something has actually changed, or is this kind of the random walk of deals where there's nothing and then there's something and you can't time them? Do you have some confidence that things are actually picking up on the M&A front?
Again, kind of what we've seen in sort of the mid-size deals, these $100 to billion-dollar type transactions, we're pretty encouraged by the quality. Not only the number of situations, but obviously along these lines of these 5 situations where, while things aren't 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 this is net an encouraging sign here, but until we pull something bigger down, don't want to sort of declare any victory.
Jeff, what I think stands out for me, to build on what Dan's saying, both in terms of what we've announced here and how we think about the funnels, is really the breadth of these dynamics. If it was in one space, it might be a bit more of a random walk, but this undercurrent is broad-based. I think that's a good sign and part of the confidence and conviction we're reiterating this morning on the M&A front.
Thanks. Just finally from me, on this June fade, is that a U.S. comment?
No.
Is that a global comment?
Jeff, really, we were referring to Western Europe.
Western Europe.
That was the one geography that, if you rolled up our geo, 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 was most pronounced in June, a little bit of a tail-off there.
Great. Thank you.
We'll take our next question from Julian Mitchell, Credit Suisse.
Hi. Sorry about that.
No worries, Julian. We've slapped Matt here for doing that to you. Good morning.
Yeah, good morning. Just on the equipment versus consumables mix, I think you'd called out in Q1 that equipment sales are up 3.5%, the best in a very long time. How did that play out in Q2?
It was more or less in line, Julian, with what we had seen. Consumables broadly were good, and 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 that we flagged earlier around communications with Tech Comms being so soft. That was really the major break on the equipment trend that we've seen the last several quarters. Otherwise, the general mix was very much in line with what we've seen, fortunately.
Got it. Just to follow up on Western Europe, you talked about the slowdown there in June. I guess it seems like it's very short-term, so it's maybe hard to read too much into it. I guess, is your sense that it's more that you had expected that to accelerate as we went through the year and it's just hit kind of a ceiling on growth? Was there actually some softness on order intake below what you'd thought?
Julian, we had good growth in China. It just downticked broadly versus our expectations mid-quarter. 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 it seemed to be broadly based as opposed to the U.S., which was strong, and where we saw softness at Tech Comms and in Dental consumables, that was particularly isolated.
Got it. Lastly, very quickly, Environmental, you talked about weakness in U.S. municipal spend continuing. Looking at local government 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?
Julian, maybe we didn't get that right in the script. Actually, our muni spending, which had began to bounce back in Europe and has continued, bounced back in the second quarter in the U.S. Hach had good muni spend in the U.S. in the second quarter.
Understood. Thank you.
Thanks, Julian.
We'll take our next question from Isaac Ro with Goldman Sachs.
Good morning, guys. Thanks. On Tech Comms, I just wanted maybe one more question on that.
Sure.
Can you talk a little bit about the product-specific trends there? The reason I ask is I think in the past, we've talked a little bit about the secular shift towards software, and you guys have taken some steps with Arbor Networks. I'm just wondering if there's an element of product innovation there that's factoring into your demand profile, and what can you shed light on there relative to your sales as well as the competition?
Yeah, I think as we look at those dynamics, Isaac, we're really talking about specific customers, specific programs and the timing they're in. That's where we entered 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 another way, and again, not in a way that's necessarily helpful for us. These are long-term relationships. We feel good about the value that we provide, the function that Tech Comms provides these mobile operators. We're going to take the long view and continue to invest and persevere, though it clearly puts some pressure on the margins in the near term.
Okay. Just a follow-up question on the healthcare side of the business, specifically Beckman.
Yeah.
You guys called out the mid-single-digit growth. I'm wondering if you could talk a little bit about your view on the sales funnel for that business, just given all the uncertainty with hospital capital budgets around ACA, and as a corollary to that, the Siemens business that you acquired. As I think about microbiology, the secular trends there are okay, but not great, so just trying to get a sense of your plan to create growth and maybe grow faster than the end markets in that business.
Sure. Well, you really have to like the Beckman headline number here in terms of the core, and particularly that turn in the U.S. I think the funnels are healthy. Again, the funnels are healthy because of the underlying actions the team has really been hard at work in progressing the last several years. When you look at those funnels, and more importantly, the retention and win rates that come as a function of those funnels, we couldn't be happier. In turn, and then to see those revenues come into the business, because as you know, Isaac, we can see a six to sometimes a 12-month lag from the time a customer makes a decision, before we can recognize that revenue. I think that the microbiology lab, or the microbio space is a good space. It's not a space that we've been in.
Frankly, we'll take a mid-single-digit growth business with the platform that we'll get from Siemens and do there, I think what we've done at Leica Biosystems, at Radiometer, more recently with the IRIS business and urinalysis, and really work hard to turbocharge that business. I think you've seen us do that from an innovation perspective. I think you've seen us do that with respect to some of the go-to-market fundamentals. 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 once we get it into Danaher. As Dan alluded to a few minutes ago, it's going to take a little while to carve out, so it's not the cleanest integration that we're ever going to see.
Frankly, given the degree of difficulty at both SCIEX and at Beckman Coulter, and the team's subsequent success, we feel pretty confident they're going to knock this one down in the end.
Got it. Thanks, guys.
Thank you, Isaac.
Our next question from Andrew Obin, Bank of America Merrill Lynch.
Yes, just a question on cash flow. If I look, last year, cash flow was relatively flat versus the previous year, and I understand why. It also seems that year-to-date free cash flow, once again, is relatively flat versus year ago. As a company that sort of, we look at you on cash flow basis, A, what's going on, if there's anything going on, or if it's just timing? If it's just timing, should we expect a pickup in free cash flow in the second half?
Andrew, it's Dan. You're right. Our year-to-date free cash flow is relatively flat. 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 we'd catch up to about flat by the mid-year. That's occurred. I think it's trending well. We've generated almost $850 million of cash in the quarter versus less than $400 in the first quarter. I expect that positive trend to continue.
Terrific. Any more color just from Printing & ID on the short-cycle businesses? Anything stands out on a positive or negative side to you in the quarter?
Within Product ID, Andrew?
Yeah. Product ID, yeah.
Yeah. No, I think the Videojet team continues to lead the way. They were up mid-singles. You look at the last four, you look at the last eight quarters, I think we're 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. The announcement that we shared with you relative to Procter & Gamble, I think is important as we continue to digitize these packaging design workflow solutions on the web that really are the major growth drivers for Esko. I think all in all, we're pleased with where those businesses are today.
From a macro standpoint, no particular segment or geography really stood out?
Not really.
Thank you.
Thanks, Andrew.
Our next question from Brandon Couillard with Jefferies.
Thanks. Good morning.
Good morning, Brandon.
Larry, in Life Sciences, back on your comments around strength in the academic market at AB SCIEX, to be clear, have you seen an uptick in that end market, or is that more of a function of better execution at AB SCIEX, specifically?
I think we're feeling good about the execution there. It's probably, frankly, a combination that is hard to titrate out one versus the other.
With respect to the Siemens microbiology deal, could you give us a sense of how you see the competitive landscape evolving in that ID AST arena, particularly around mass spec and other emerging direct from blood technologies? Can you leverage AB SCIEX to launch your own mass spec-based solution in that market?
Well, 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 respect to mass spec, is that what we get with Siemens is quite complementary to what happens with mass spec. We don't provide that product today from SCIEX, as I'm sure you know. I think over time, we need to be careful with how many fronts AB SCIEX takes on, because we're seeing broad potential application of mass spec technologies. We don't want SCIEX to try to be all things to all people. There'll be situations where we have relationships with others where we may compete in one space and collaborate or cooperate in others.
I think that's very much the creativity and the nimbleness that we're going to need the SCIEX team and the Beckman team as well here to embrace and engage as we go forward.
Super. Thank you.
Thank you.
We'll take our final question from Deane Dray with Citi.
Thank you. Just a quick clarification on the guidance for the third quarter. What was very helpful is when Dan added that there was going to be $0.03-$0.04 of deal dilution in the second half. I think you said on top of that is the half a penny to a penny in the integration costs you'll have to do for the Siemens microbiology. That's $0.04-$0.05 for the second half. How much of that is reflected in the third quarter guidance?
There's about a $0.02 impact in the third quarter and probably a comparable impact in Q4.
Pretty linear. Is it split between what's non-cash and cash?
It'll be more non-cash. There'll be some cash because of the Beckman integration, but I don't have the exact breakdown of that.
Great. That's real helpful. Thank you.
Thanks, Deane.
This concludes today's question and answer session. Mr. McGrew, at this time, I'll turn the conference back over to you for closing remarks.
Thank you. That concludes our formal remarks. Thank you. We're around all day for questions.
This does conclude today's conference.