Danaher Corp (DHR) 2014 Q2 法說會逐字稿

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.

(Operator Instructions)

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

Mr Gugino, please begin your conference.

Thank you, Tina.

Good morning everyone.

Thanks for joining us.

On the call today are Larry Culp, our President and Chief Executive Officer and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, a slide presentation supplementing today's call, our second quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investor Section of our website, www.danaher.com, under the heading Financial Information - Quarterly Earnings and will remain available following the call.

The audio portion of this call will be archived on the Investor 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 24, 2014.

The replay number is 888-203-1112 in the US and 719-457-0820 internationally.

The confirmation code is 362-5375.

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 impact the year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to earnings, revenues and other Company specific financial metrics relate to the second quarter of 2014 and relate only to the continuing operation of Danaher's businesses.

All references to period-to-period increases or decreases in financial metrics are year-over-year.

During the call, we will make forward-looking statements within the meaning of the Federal Securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filings and actual results may differ materially from any forward-looking statements that we make today.

These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements.

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

Matt, thanks.

Good morning, everyone.

Our team executed well in a modest growth environment in the second quarter.

Revenues increased 3% and were largely consistent with what we have seen over the last 12 months.

Geographically, high-growth markets led the way again, as we saw a 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 team's effectiveness.

These efforts combined with go-to-market initiatives in high-growth markets drove share gains at Hach, ChemTreat, Implant Direct, Leica Biosystems, AB SCIEX and Radiometer.

On the capital allocation front, we've been encouraged by the increase in our acquisition activity.

Since the beginning of April, we've announced or closed 10 acquisitions totaling over $1 billion, including 4 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.

So 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 0.5%.

In 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%.

In 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-enable 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 Ti95 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 Ti95 imagers have already exceeded our expectations.

Tektronix's core revenues declined low single-digits, as modest growth in the US, 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 the 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 in the 2014 Hot Companies and Best Products Awards in June.

Environmental revenues increased 6%, with core revenues up 3.5%.

Core operating margin expanded 40 basis points, while reported operating margin decreased 60 basis points to 21%, primarily due to the dilutive effect of recent acquisitions.

Our water quality platform core revenues grew at a mid-single-digit rate led by strong demand for our analytical instruments and chemical treatment solutions.

Hach had another solid quarter with high single-digit growth in China and healthy municipal spending in both the US and Europe.

Hach's investment in digital marketing and online distribution hit a major milestone this quarter, as our US website generated $1 million in weekly sales for the first time ever.

At ChemTreat, we saw a robust demand for our chemical solutions in both North America and Latin America.

You may recall from our Analyst's meeting in December that ChemTreat has focused on expanding in Latin America and has increased sales in the region four-fold over the last four years.

During the quarter, ChemTreat acquired Chile-based [Aqua-San], 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 grew low single-digits, led by healthy demand for vapor recovery products in China and point-of-sale solutions globally.

Also contributing to the strength was Insite360, our cloud-based platform, that allows retailers to remotely control 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 Insite360 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.

We believe ANGI will be able to take advantage of Gilbarco Veeder-Root's leading presence in that space.

In life sciences and diagnostics, we had an excellent quarter with topline 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 immunoassy 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 US was up low single-digits, marking our first quarter of growth in the US since the acquisition.

We believe our higher customer win and retention rates in the US 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.

So we were 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 diagnostic business.

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 install base of bond instruments grow solid consumables growth.

Aperio, our ePathology 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 by developing precise diagnoses and treatment plans.

In our life sciences platform, core revenues increased in the mid-single-digit rate.

AB SCIEX core revenues were up high single-digits driven by strength in the academic and applied markets in both North America and Europe.

We believe our investments in new products have helped increase our market share over the past several quarters.

At the American Society of Mass Spectrometry meeting in June, we launched several innovative new products including the TripleTOF 6600 and the 3500 Triple Quad.

The 6600 enables scientists to obtain results 10 times faster than traditional methods.

In combination with our SWATH acquisition 2.0 software, it is the only system on the market that provides a complete workflow solution for proteomics research.

The 3500 is an easy to 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 consumables 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 specialist and hygienists.

We also expanded our presence in high-growth markets with the acquisition of Reinor Orto, one of Ormco's long-standing South American -- South African distributors.

Dental technologies core revenues increased low single-digits driven by 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 install 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.

A solid growth in our in-line variable printing and packaging solution globally was partially offset by a decline in our laser marking business.

Videojet grew to mid-single-digit rate, led by healthy demand for equipment and consumables in Europe and the high-growth markets.

During the quarter, we expanded our coding application offerings with the launch of the 9550 Print & Apply labeler.

This product's breakthrough design controls a label from printing to placement, eliminating every day 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 in 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.

So to wrap up, our team executed well in a modest growth environment, delivering topline performance consistent with the past four quarters.

The Danaher Business System continues to help us as we invest in growth, drive share gains, expand margins and improve free cash flow.

We believe our robust balance sheet, continued focus on organic growth opportunities and confidence on the acquisition front will drive solid performance in the second half of 2014 and beyond.

So today, we are initiating third quarter GAAP diluted net earnings per share guidance of $0.86 to $0.89, which assumes core growth comparable with the growth rates seen in the first half of 2014.

We are also narrowing our GAAP diluted net earnings per share guidance for the full year to $3.67 to $3.72 from the previous range of $3.60 to $3.75.

Thanks, Larry.

That concludes our formal comments.

Tina, we are now ready for questions.

(Operator Instructions)

Scott Davis, Barclays.

I'm trying to get my arms around 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 -- I mean, at least material deals.

I guess my question is, why weren't the restructuring actions of kind of a year ago plus DBS and such, able to offset the dilution from the deals?

Maybe just some granularity into when you think about the margin movement, what part of that was deal dilution?

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 3 of the 5 segments.

We have some real standout businesses with water and certainly diagnostics, very pleased with Beckman, life sciences, Videojet.

It's a pretty healthy list there.

I think on balance having 3 of the 5 segments up 40 basis points in terms of the operating margin expansion, 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.

I don't mean to suggest we're in any way content here.

We have 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 US in dental consumable sellout.

That in turn impacted our June there at Kerr particularly.

But 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.

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 acquisition, we talked last year.

We had about $100 million of restructuring spend generating about $20 million a quarter of savings.

But we had $20 million -- approximately $20 million of acquisition expense in the quarter.

A lot of that's non-cash.

You've seen an increase in the number of deals.

From a GAAP perspective, not from a cash flow perspective, we're feeling the impact of that on the margin.

Yes.

Okay.

That's really helpful.

Then 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.

That seems -- I'm guessing that's somewhat sustainable for the rest of this year.

Then you made some positive comments about the order rates particularly in Fluke.

Then -- and your Coms are still pretty easy next quarter.

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 in June -- tail-off in June -- I would say that was modest but it was broad-based.

So we've got a watchful eye there.

Clearly the US is a bit of an offset there both in terms of what we saw and I think some of the macro data out there.

But net net, the developed markets are probably where they've been.

I think some of our team are probably a bit optimistic in the high-growth markets as we go into the third quarter.

Brazil's got some of the noise relative to World Cup behind it, the Indian election, all of that.

I don't think we're banking a lot on any sort of uptick there.

I don't know if that's conservative, I suspect that's just being pragmatic.

So we get that core there in-line with the first half.

We get similar margin performance in part because the Tek Coms dynamics are 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 are 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.

Thanks Scott.

Nigel Coe, Morgan Stanley.

So just help us maybe hone in on the test and measurement weakness.

There's been weakness.

This is the third year of soft to no growth.

I'm just wondering, Larry, if you can give some perspective on how much of this is structural?

How much confidence do have that these businesses can return to an acceptable rate of growth going forward?

Yes.

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.

But at the operating level, I think we're very encouraged by what we are 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.

Fluke Connect I think is a game changer for them but also the improved commercial execution around the world.

I'm not sure that Fluke's ever going to be our highest growth business but can they be a consistent low to mid-single-digit grower for us?

More so than we've seen the last couple of years?

I believe so.

I think they're building momentum here very much in that direction.

I think Tek -- as we talked many times, has a different end market set of drivers there.

Technology spending broadly, including spending on the bench, has been muted the last several years far more than we would have anticipated.

But there again, I think the order book's firming up having the first positive quarter in years there.

Hopefully it's the beginning of a trend.

I think Fluke will, in all likelihood, outperform Tek in the near to medium term.

That's I think is as straight as we can call it.

I think within Coms, we've been very fortunate to be part of the mobile network build-out at Tek Coms.

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 Network does with the enterprise customers.

So three different stories if you will.

I think on balance still good ones.

But we need to build on the momentum at Fluke and Tek to have a better second half to help offset some of this pressure we know we're going to see at Tek Coms particularly in the second half.

Okay.

Good.

That's very helpful, Larry.

Now just to clarify, you talked about -- very clearly, about the pressure in the margin that's going to keep Coms negative for the back half of the year.

I just want to clarify if that was Coms not the wider T&M segment?

That's correct.

We expect our Coms platform which was down double-digit in the second quarter to be down high single-digit, double-digit in the second quarter.

We expect instruments to get a little better so 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.

Thanks, Larry.

Thank you, Nigel.

Steve Tusa, JPMorgan.

Just on the third quarter guidance, is there something that's getting unusually kind of weaker there?

I mean is there anything other than the tail-off in the -- maybe in June you said it was kind of broad-based.

Maybe if you could just put a little more color around that tail-off?

Because if I'm doing the -- 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 last couple of years.

So just to straight map on the seasonality would suggest something that's a few pennies higher than what you guys have put out there.

So is there something seasonally even adjusted for the $0.02 from this quarter -- Is something seasonally there that is weaker than expected?

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.

When we did -- as you know, when we did the 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 are 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 -- we had a little bit of that in Q2 but given these deals had just closed.

In the case of Siemens, we are likely not going to close that until the first quarter but 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 quarters.

How much would that type of spending be?

Well, at Beckman -- it's going to cost them -- it's going to cost the life science and diagnostics $0.005 to $0.01 in the second half, add to that the other -- the deal cost, the inventory step up from the other deals, the other $250 million of revenues that are coming on board here.

We are going to have $0.03 or $0.04 of additional dilution here that -- from again, a lot of it's non-cash but GAAP dilution in the second half.

Just at higher level I guess, you guys are going to be at 3% to 3.5% organic for the year.

That's above the midpoint of the annual range, yet your kind of guiding at the midpoint.

We are talking about some acquisition dilution.

There is I guess spending to get ready for an acquisition.

I mean it's like in the past you had kind of blown through all of this stuff.

There be maybe some leftover scraps from restructuring or some other levers to pull.

I also don't recall this kind of lumpy the mix creating a somewhat of a visibility problem perhaps.

Did this go to just the more complex nature of your portfolio in 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 kind of 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've got -- we had a situation in the second quarter that's going to perpetuate itself in the second half.

Where business has been on a literal care for a long time is not going to contribute to the topline.

It's not that big of a deal.

But Tek Coms has been a real contributor to us.

But here for the next several quarters, we are going to miss that revenue but we are really going to miss the variable fall through there.

If that wasn't going on, particularly at the level that we've seen and that now we anticipate, we wouldn't be talking about any of this, quite honestly.

So I think it's isolated -- not happy about it -- but it is what it is but when you look more broadly across the Corporation, there'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.

Steven Winoker, Sanford Bernstein.

I want to go back to Nigel's question on Tek and specifically on Tektronix not on the Communications business.

So I think this is the 11th quarter of negative growth.

You've talked about order growth turning positive finally here after a very long period of time.

But 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 were just in the cyclical kind of trough?

Well, Steve, when you talk about 11 quarters, right?

That can be a fine line to draw.

But I think we continue to be optimistic about Tek and its market.

Again, I think we've seen -- what we haven't seen is that bounce back in bench spending that has typically followed every major downturn that we have 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 -- customers that we serve, really without too many exceptions by vertical and by geography.

So our task and our challenge is to innovate as best we can 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.

So I don't want to blame it all on the market.

We've certainly gotten better at Tek over the last several years in what we can control.

I think that combination is what fuels that optimism.

But 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 Tek's team -- at Tektronix, their primary focal focus here, Steve, is to grow the business, organically.

Okay.

Just maybe as a follow-up, maybe on that 150 basis point decline core and you mentioned the high variable margin on the Communications side driving most of that.

But can you give me some sense, 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.

So they have -- obviously do to some things in the cost side to overcome sort of inflation and other.

But all the OP decline and all the margin hit, we got from the Com 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.

Julian Mitchell, Credit Suisse.

I just wanted to follow-up -- (technical difficulty)

Julian, are you there?

Operator, we can't hear Julian.

Jeff Sprague, Vertical Research Partners.

Just a couple quick ones.

Does your guide for 2014 assume the Q4 restructuring in the ballpark of what you did last year?

I think maybe you were talking $80 million-ish before relative to the $100 million 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 number yet.

Then, 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 buyback.

Then just thinking about deal valuations, I mean we see what Siemens is.

What's kind of ballpark valuation on the other stuff that you're currently buying?

Jeff, so we brought in roughly -- if you look at kind of 2015 just run rate, we brought in about $0.5 billion of revenue over the last four months.

Not all that closed but either signed or announced.

We paid approximately $1 billion.

All -- with one exception, which is more of a start-up, all profitable businesses.

So pretty good I'd say overall EBITDA sort of multiples and situations where we, on a deal by deal basis, expect to get to a -- exceeded 10% return within three years.

So I feel pretty good.

We've done five deals here between $90 million and $500 million in the last five -- over the last three months and feel pretty good about the valuations as well.

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?

Or do have some confidence that things are actually picking up on the M&A front?

Again, and kind of what we've seen in sort of the mid-sized deals, these $100 million to $1 billion type transactions, we're pretty encouraged by the quality that -- not only the number of situations, but obviously along these lines of these five situations where while things aren't cheap, we can get to -- we can get deals done under our return parameters.

I think we're still having active conversations on the larger opportunities as well.

I think there's a net net, an encouraging side here.

But until we can pull something bigger down, I 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 -- what we think 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 just -- 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.

Then just finally from me on this June state, is that a US comment?

No.

Is that a global comment?

Jeff, really we were referred to Western Europe.

That was one geography that was -- if you rolled up our geography -- 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.

That was most pronounced -- it wasn't terrible but it was most pronounced in June, a little bit of a tail-off there.

Great.

Thank you.

Julian Mitchell, Credit Suisse.

Hi.

Sorry about that.

No worries, Julian.

We slapped Matt here for doing that to you.

(laughter) Good morning.

Good morning.

Just on the equipment versus consumables mix.

I think you'd called out in Q1 that equipment sales were up 3.5%, the best in a very long time.

How did that play out in Q2?

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 with -- that we flagged earlier around Communications with Tek Coms 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.

Then within -- just to follow-up on Western Europe, yes, you talked about the slowdown there in June.

I guess it seems like it's very, very short-term, so it's maybe hard to read too much into it.

But I guess, is your sense that -- it's more that the -- you had expected that to accelerate as you went through the year and it's just hit kind of a ceiling on growth?

Or was there actually some softness on order intake below sort of what you'd thought?

Julian, it was a -- we had good growth in context.

It just down-ticked broadly versus our expectations mid-quarter.

So I don't think we're going to try to extrapolate that too far here too soon.

But it is something we're watching carefully as we start the second half here.

Again, in part because it seemed to be broadly based as opposed to the US, which was strong and where we saw softness at Tek Coms and in dental consumables that was particularly isolated.

Got it.

Then lastly, very quickly, environmental you talked about weakness in US municipal spend continuing.

Looking at sort of 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 to --

Julian, maybe we didn't get that right in the script.

Actually, our muni spending which has begun to bounce back in Europe and has continued to bounce back in the second quarter in the US.

So Hach had good muni spend in the US in the second quarter.

Understood.

Thank you.

Thanks Julian.

Isaac Ro, Goldman Sachs.

On Tek Coms, I just want to -- maybe one more question on that.

Sure.

Could you talk a little bit about the product's specific trends there?

The reason I ask is, I think in the past, we talked a little bit about the secular shift towards software.

You guys have taken some steps with Arbor Networks.

So, I'm just wondering if there is an element of product innovation there that's factoring into your demand profile?

What can you shed light on there relative to yourselves as well as the competition?

Yes.

I think as we look at those dynamics, Isaac, we're really talking about specific customers, specific programs and the time 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.

Again, not a way that's necessarily helpful for us.

But these are long-term relationships.

We feel good about the value that we provide, the function that Tek Coms provide to these mobile operators.

So 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.

Then just a follow-up question on the healthcare side of the business, specifically Beckman.

Yes.

You guys called it in the mid-single-digit growth.

I'm wondering if you could talk a little bit about your view on the sales funnel for that, that has just given all the uncertainty with hospital capital budgets around ACA?

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.

You really have to like the Beckman headline number here in terms of the core and particularly that turn in the US.

I think the funnels are healthy.

But again, the funnels are healthy because of the underlying actions the team has really been hard at work in progressing the last several years.

So 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 -- then to see those revenues come into the business, because, you know Isaac, we can see a 6-month 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 is a good -- or the by 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 it like a bio.

At Radiometer, more recently with the IRIS business and urinalysis and really work hard to turbo charge 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 of where we are going to see.

But frankly, given the degree of difficulty at both SCIEX and at Beckman Coulter, and the teams subsequent success we feel pretty confident they're going to knock this one down in the end.

Got it.

Thanks guys.

Thank you, Isaac.

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.

I understand why.

But it also seems that year-to-date free cash flow once again is relative flat versus year ago.

As a Company that's sort of -- we look at the end 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 pick-up 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.

But as 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 midyear.

That's occurred.

I think it's trending well.

We've generated almost $850 million of cash in the quarter versus less than $400 million in the first quarter.

I expect that positive trend to continue.

Terrific.

Any more color just for printing ID on the short cycle businesses?

Anything stands out on a positive or negative side to you in the quarter?

Within the product ID, Andrew?

Yes.

Product ID.

Yes.

No, I think the Videojet team continues to lead the way.

They were up mid-singles.

You look at the last four, then you look at the 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 of course 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.

So I think all-in-all, we are pleased with where those businesses are today.

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

Not really.

Thank you.

Thanks, Andrew.

Brandon Couillard, Jefferies

Larry, in life sciences, back on your comments around strengthening the academic market today would be 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.

But it's probably a, frankly, a combination that is hard to titrate out, one versus the other.

Okay.

Then with respect to the Siemens microbiology deal, could you give us a sense of how do 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 complimentary 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.

So there'll be situations where we have relationships with others that -- 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.

Deane Dray, Citi.

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 a $0.03 or $0.04 of deal dilution in the second half.

I think you said on top of that is the -- $0.005 to $0.01 in the integration costs, you'll have to do for the Siemens microbiology.

So that is $0.04 or $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.

So pretty linear.

The 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 any more -- I don't have the exact breakdown of that.

Great.

That's real helpful.

Thank you.

Thanks, Steve.

This concludes today's question-and-answer session.

Mr Gugino, at this time, I will turn the conference back over to you for closing remarks.

Thank you.

That concludes our formal remarks and Q&A.

We're around all day for questions.

This does conclude today's conference.

Thank you for your participation.