Danaher Corp (DHR) 2017 Q3 法說會逐字稿

My name is Tracy, and I will be your conference facilitator this morning.

At this time, I would like to welcome everyone to Danaher Corporation's Third Quarter 2017 Earning Results Conference Call.

(Operator Instructions)

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

Mr. Gugino, you may begin your conference.

Thanks, Tracy.

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

With us today are Tom Joyce, our President and Chief Executive Officer; and Dan Comas, our Executive Vice President and Chief Financial Officer.

I'd like to point out that our earnings release, the slide presentation supplementing today's call, our third quarter Form 10-Q and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly Earnings.

The audio portion of this call will be archived on the Investors section of our website later today, under the heading Events & Presentations and will remain archived until our next quarterly call.

A replay of this call will also be available until October 26, 2017.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance.

The supplemental materials describe additional factors that impacted year-over-year performance.

Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the continuing operations of the company and the third quarter of 2017, and all references to period-to-period increases or decreases in financial metrics are year-over-year.

We may also describe certain products and devices which we have applications submitted and pending for certain regulatory approvals.

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 might differ materially from any forward-looking statements that we make today.

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

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

Thanks, Matt, and good morning, everyone.

We're pleased with our performance in the third quarter as we delivered mid-teens adjusted earnings per share growth, strong margin expansion and free cash flow and improving core revenue growth.

Our 2 most recent larger acquisitions, Pall and Cepheid, continue to perform well, and both teams have gotten off to a great start as part of Danaher.

With the Danaher Business System as our foundation, the team's commitment to continuous improvement was the key driver of our results.

Our performance in the quarter, combined with a healthy balance sheet, is helping us build momentum for the balance of 2017 and into next year.

So with that as a backdrop, let's move into the details of the third quarter.

Adjusted diluted net earnings per share of $1 exceeded expectations and represents an increase of 15% over last year.

Sales increased 9.5% to $4.5 billion, and core revenue grew 3%.

The impact of currency translation increased revenues by 1 percentage point, and acquisitions increased revenues by 5.5%.

Geographically, core revenue in high-growth markets was up high single digits, led by double-digit gains in China.

The developed markets increased at a low single-digit rate with solid results in the U.S. and Japan.

Gross margin was 56%, an increase of 70 basis points from last year, and our reported operating margin was unchanged at 16.9%.

Core operating margin increased by almost 100 basis points, with the strong performance led by our Life Sciences and Diagnostics segments.

We generated $935 million of free cash flow from continuing operations, resulting in a net income conversion ratio of over 160%.

This outstanding free cash flow generation also represents an increase of more than 20% versus last year, and we continue to anticipate double-digit free cash flow growth in 2017.

In terms of M&A, so far this year, we've closed 5 transactions totaling more than $100 million of spend.

Now let's take a more detailed look at our performance across the portfolio.

In Life Sciences, reported revenue increased 5% and core revenue grew 3%.

Reported operating profit margin increased by 230 basis points to 17.7%, and core operating margin was up 185 basis points.

This marks the fifth consecutive quarter of 100 basis points or better of core margin improvement, and for the first time, our Life Sciences segment EBITDA margin exceeded 25%.

At Beckman Life Sciences, core revenue increased at a high single-digit rate on broad-based strength across all major product lines and regions.

Growth in automation was driven by continued demand for the Biomek i-Series Workstations, the new sample preparation platform that Beckman launched earlier this year.

And in flow cytometry, the team's continuous innovation around the CytoFLEX platform contributed to further share gains during the quarter.

We've expanded CytoFLEX capabilities with the recent launch of 2 new UV laser offerings, providing a higher level of analytical sensitivity on the same platform.

This differentiated technology is driving sales in new research markets by enabling scientists to study a wider variety of advanced cell functions and viability using our system to learn more about diseases and the effectiveness in new treatment options.

Leica Microsystems delivered mid-single-digit core revenue growth, led by strength in North America and Western Europe, primarily in the applied and medical end markets.

Earlier this month, the Nobel Prize in Chemistry was awarded to 3 scientists for their development of cryo-electron microscopy, a visualization technology that enables researchers to observe molecular processes that have never been seen before.

This achievement is particularly meaningful to Leica as the prizewinners used our solutions to conduct their work.

This is the third time in the past 5 years that Leica technology has been cited in Nobel Prize winning work, further evidence of the vital role that Leica plays in such critical and revolutionary scientific research.

Core revenue at SCIEX was up mid-single digits with good growth in Western Europe and China.

Food and forensic testing led the way in the applied markets, and we saw sustained momentum in pharmaceutical testing, driven in part by heightened regulatory requirements in China.

At Pall, core growth declined primarily due to the negative impact of the recent hurricanes in Florida and Puerto Rico.

Our thoughts are with our associates, customers, suppliers and the communities who've been impacted by these events, and we continue to prioritize their safety and wellbeing.

If we take a look at Pall's performance despite the hurricane impact, our microelectronics and single-use businesses continued to be strong through the quarter while we saw slower demand across our medical and lab, food and beverage product lines.

As we look ahead, we're encouraged by mid-single-digit order growth over the last 6 months, including double-digit order growth in our biopharma business this quarter, and we expect Pall's core revenue growth rate to improve meaningfully in the fourth quarter.

Operationally, Pall continues to execute very well, and the team has delivered more than 600 basis points of operating profit margin expansion since we closed the acquisition 2 years ago.

We've reinvested a portion of these savings for growth and used DBS tools like speed design review and strategic product planning to focus our innovation efforts on high-impact opportunities.

These initiatives have resulted in a 50% increase in annual new product introduction since acquisition, and we're getting these new solutions out into the market faster.

Moving to Diagnostics.

Reported revenue increased 19.5%, and core revenue grew 4%.

Reported operating margin increased 80 basis points to 16.8%, and core operating margin was up 245 basis points, driven by the team's solid execution across the platform.

At Beckman Coulter, core revenue increased at a low single-digit rate.

We saw solid growth in North America and in the high-growth markets.

Strength in China and the Middle East offset declines in Latin America.

Our immunoassay product line performed very well with continued installed base growth and strong demand for our vitamin D assay.

Radiometer's core revenue increased high single digits with broad demand across developed and high-growth markets.

The team's execution continued to drive share gains globally in both our blood gas and AQT product lines.

Leica Biosystems achieved mid-single-digit core growth, led by strength in Western Europe and China.

Growth across all major product lines was led by advanced staining and core histology.

We also recently launched the new PELORIS 3 tissue processing system.

PELORIS 3 provides our lab customers with high-quality, traceable results in a shorter turnaround time.

An integrated barcode scanner eliminates the need for manual records and reduces specimen handling, helping us address our customers' workflow challenges and improve their lab processes.

We are approaching the 1-year mark since we closed the acquisition of Cepheid, and we continue to be encouraged by the team's performance.

Cepheid delivered another quarter of double-digit core revenue growth and meaningful margin expansion, sustaining the sizable operating profit improvements achieved over the past year.

Earlier this month, Cepheid received FDA clearance for the Xpert Xpress group A strep test, which provides reliable results in as little as 18 minutes.

The speed and accuracy of this test allows patients and health care providers to access a definitive diagnosis right at the point of care and eliminates the need for lengthy bacterial cultures to confirm the results.

Turning now to our Dental segment.

Reported revenue was up 2.5%, and core revenue increased 1% as growth in our equipment and specialty consumables businesses was mostly offset by continued weakness in traditional consumables.

Reported operating margin decreased 30 basis points, and core operating margin was down 15 basis points.

By product line, performance across our equipment and traditional consumables businesses remained consistent with what we've seen so far this year.

Core revenue growth in equipment was up low single digits while traditional consumables declined meaningfully, driven by continued inventory adjustments in the distribution channel.

While we expect this inventory impact to moderate, the recent realignment of certain distributor and manufacturer relationships may have a negative impact on equipment revenues in the near term.

Turning to the other half of our Dental portfolio.

We were particularly pleased with our specialty consumables businesses achieving mid-single-digit core growth across our orthodontic and implant offerings.

At Nobel Biocare, core revenue growth improved to mid-single digits.

Since acquiring Nobel nearly 3 years ago, we've made targeted growth investments to bolster our innovation capabilities and commercial execution.

We've invested in a double-digit increase in our feet on the street in North America and achieved strong growth in the region during the quarter as we began to gain traction from this go-to-market initiative.

We have also increased our R&D spend meaningfully and launched more than 20 new products since acquisition, delivering breakthrough technologies like our Trefoil system, a revolutionary new treatment option that significantly reduces the time required to restore the lower jaw, now making it possible to place the full restoration on the day of surgery.

By providing customers with superior products on a faster launch timeline, we've enhanced Nobel's competitive position since acquisition and are delivering sustainable core growth improvements.

So moving to our Environmental & Applied Solutions segment.

Reported revenue increased 8%, and core revenue was up 3%.

Reported operating profit margin decreased 190 basis points, and core operating margin was down 105 basis points.

These margin declines were primarily due to the impact of recent acquisitions and incremental growth investments.

In Product Identification, core revenue grew at a mid-single-digit rate, led by strong demand for marking and coding equipment and related consumables across most major geographies.

Sales growth of our packaging and color solutions offerings improved sequentially and was led primarily by increased demand in China and Western Europe.

Videojet core revenue increased mid-single digits in the quarter with broad-based growth across most major product lines and geographies.

Last month, at PACK EXPO, North America's largest packaging event, Videojet showcased 6 new printers and technologies, including the new 6330 and 6530 thermal transfer overprinters.

These medium- and high-speed printers now feature an industry-first, inline print quality assurance system.

The patented sensors on the inside of the printer recognize common code defects to help customers improve quality, productivity and efficiency on their packaging lines.

By identifying customers' workflow needs and delivering advanced technological solutions to fill those gaps, the team continues to meaningfully improve customers' experiences and enhance Videojet's leadership position in the market.

At Esko, core revenue increased at a mid-single-digit rate, driven by strength in our brand owner software and digital hardware businesses.

And at X-Rite, core revenue was up low single digits, with strength in China and Latin America partially offset by declines in North America.

Finally, turning to Water Quality.

Core revenue grew at a low single-digit rate with good demand in China and Western Europe while the high-growth markets saw weakness primarily in Latin America.

Hach's core revenue was up low single digits with solid performance across our core municipal and industrial end markets in North America and Western Europe and continued growth in China.

At WEFTEC , the wastewater trade show in Chicago last month, Hach launched the Claros water intelligence system, a platform that brings together instruments, data and process management to provide customers with valuable operational insights to manage their water processes in real time.

At Hach and many of our other businesses at Danaher, we have an extensive installed base of instruments that generate a tremendous amount of data every day.

Claros is a great example of how we're harnessing this information to create actionable insights for our customers so that they can make the right decisions and be more efficient.

Core revenue at Trojan declined during the quarter due to the timing of certain large projects.

We are, however, very encouraged by healthy order trends at Trojan, and those continued to build on an increasing customer win rate.

We believe this will position Trojan well to deliver better core revenue growth in the fourth quarter.

Finally, at ChemTreat, core revenue grew at a low single-digit rate during the quarter on strength in the oil and gas and food end markets.

So to wrap up, this is a terrific quarter of performance, from core revenue growth to margin expansion, EPS growth and free cash flow generation.

Looking ahead, we're encouraged by a number of strong growth drivers across the businesses, and we'll benefit from recent acquisitions like Cepheid and Phenomenex, becoming part of our core revenue.

One of our 5 core values at Danaher is we compete for shareholders, and we believe that the power of the Danaher Business System, combined with significant opportunities across the portfolio and our strong balance sheet, positions us to create meaningful long-term value for our shareholders going forward.

We are initiating fourth quarter adjusted diluted net EPS guidance between $1.12 and $1.16 and expect core revenue growth to accelerate from current levels.

We are raising our full year 2017 adjusted diluted net earnings per share guidance, which we now expect to be in the range of $3.96 to $4.

Thanks, Tom.

That concludes our formal remarks.

Tracy, we're now ready for questions.

(Operator Instructions) And we'll go first to Tycho Peterson with JPMorgan.

I want to start off with bioprocess.

I'd say there's a fair amount of noise in this channel right now just from our discussions with investors between one of the pre-announcements we saw this week and then Roche getting hit a bit today on the biosimilar stuff.

So you had double-digit biopharma order growth there, which was great to see.

Can you maybe just talk through the various pieces here in your outlook?

I guess Pall was up in North America, but then you commented on the hurricane impact, and then Asia was down.

So I'm just wondering on some of that discrepancy as well.

Sure.

Thanks, Tycho.

We continue to be very positive on the bioprocess market overall, and I think the dynamics in the quarter were such that we obviously saw the related softness on the shipment side that was associated with the hurricane impact.

And those impacts were significant, but I think the order growth that we mentioned and you heard us talk about gives us great encouragement that we're going to see a meaningful acceleration in the top line associated with biopharma in the fourth quarter.

So we feel good about the overall dynamics.

The hurricane impact was significant.

We were shut down for 2 weeks in Puerto Rico.

We were also shut down partially for 2 weeks in Florida, associated with our Beckman Life Science facility.

And so while the recovery has been a challenging one, we expect to get some of that production recovered in the fourth quarter, probably not all of it, some of it will extend probably into the first quarter, but we're very confident in the positive underlying growth drivers in the bioprocessing market.

And have you seen any of the destocking that one of your peers mentioned this week with their pre-announcement on the customer side?

Tycho, we have seen some of that, absolutely.

And we've come to understand those dynamics literally on a customer-by-customer basis, and we're working through those individual customer situations.

I think we have a sense of where each of them are, and we've worked through, I guess, a good deal of that in the last quarter or 2. It wouldn't be unusual, I think, to see a little bit of that carry through into -- through the fourth quarter, particularly given that some of those customers have facilities in Puerto Rico, by the way.

And so that will take a little bit more time to work its way out, but we do think that's certainly a temporary phenomenon.

Okay.

And then for the follow-up, I have one to ask on Dental.

It's great to see Nobel bounce back here.

As we think about kind of anniversary-ing these destocking headwinds, can you maybe just give us a sense as to how you're thinking about that business' return to growth?

And any color you can provide on outlook for traditional versus specialty consumables going forward?

Sure.

Well, clearly, I think, as we all know, 2017 has been a challenging year for the Dental industry broadly defined, but we're actually encouraged by a number of things that we're seeing.

Very encouraged by our -- the performance in our specialty consumables business.

Nobel and Ormco represent nearly half of our Dental segment.

We saw mid-single-digit growth in the third quarter, and it's possible that some of that specialty business growth in those markets are taking a little share of wallet, if you will, from traditional consumables.

And clearly, we've seen some of this -- the sellout impacting sell-in and the resulting inventory destocking.

However, I would say we have a sense that there's a stabilization going on there relative to traditional consumables.

There's probably -- there's certainly still work to do to realign the inventories on the equipment side relative to some of the manufacturer and distributor alignment -- realignments that have gone on.

So I think there's a number of things that we're very positive about and a couple of dynamics that we think we'll still need to work through.

But I think, in summary, if we step back from our relative performance in a challenging market, we feel really good about the execution side of what we've done.

The team has done a number of things associated with our operational improvements that I think have repositioned us very effectively for reinvesting in innovation and go-to-market that will help us in 2018.

And we'll go next to Scott Davis with Melius Research.

Welcome back.

I'm excited to be back, and Tom, only you could talk about PELORIS 3 and get excited about a tissue product, and maybe offline, you can explain to me what a tissue product actually is.

But...

Glad to, Scott, but in all seriousness, we're glad to have you back.

I'll focus in just -- because I don't know how many of us industrial guys are left here, but on the industrial businesses, the -- it seemed like you were increasingly more excited about what you're seeing at Pall.

And I assume your more cyclical businesses like Pall Industrial, Product ID, Videojet, et cetera, are setting up for reasonably accelerating growth.

Is this something you're -- I mean we see it in the macro data, but is that something you're seeing in your order book that's leading some of your enthusiasm there?

I think there's a bit of tailwind there, Scott, in the industrial markets.

But I think if you talk about businesses, for example, like Videojet that you mentioned, that's really more a story of outstanding execution, and it's a combination and execution between terrific new product execution, investments in go-to-market and a tremendous service footprint that creates a real competitive advantage for a business like Videojet.

An area where we've seen a really strong market dynamic would perhaps be -- coming back to your question about Pall and the industrial side of Pall, will be in microelectronics, where we see continued growth in that segment of the business.

Wonderful underlying dynamics, but certainly, in Asia, associated with an accelerating number -- amount of chip production, associated with the sensors that are now increasingly going into whether it's the telecommunications arena, certainly the iPhone, increasing number of sensors in cars.

All of those things are contributing to a pretty strong market in microelectronics.

So that would be an example of something that -- where there's a market tailwind, but I think to a great extent, we're more relying on our underlying execution in our industrial businesses than we really are on the market dynamics themselves.

Okay, fair enough.

And maybe you mentioned, I just didn't hear it, but what was the cause of margins going down in Environmental?

Was it the Trojan revenue decline?

Or was there some sort of mix issue in the quarter?

We clearly had some investments in a number of businesses around Water Quality, and a little bit of the top line softness in ChemTreat had a little bit of impact there.

ChemTreat, by the way, was another one of our businesses that was impacted modestly by the hurricane.

In the case of ChemTreat, it was actually impacted in Houston, where we have a blending facility that had some disruption.

And so just a little bit of the mix on the top line, I think, and some investments that we've made in those businesses was the source of that impact.

But we feel very good about how Water Quality will perform in the fourth quarter.

We'll see some improvement there in the fourth quarter, and we'll see some reasonable margin improvement as well.

And we'll go next to Derik De Bruin with Bank of America.

Back on bioprocess, and I'm not going to go over the diagnostics for the follow-up.

But on the bioprocess, can you just put a little bit more color on the orders?

Are you looking at more traditional biologic manufacturers, biosimilars?

Or are you actually still -- is it orders from some of the small-molecule people because you do sell there?

And I guess, is it just -- could you also parse out sort of like demand on single-use systems versus traditional consumables?

I'm just trying to get a little bit more color on where the demand is.

Sure.

And I don't have a precise breakdown, Derek, let me start with that caveat, around the order rates from small-molecule customers versus large-molecule customers or even by facility in that -- on that basis.

But in general, what we've seen over this year has been a reasonably balanced order book across those 2 segments of the bioprocessing market.

Relative to your question about single-use, single-use continues to be a double-digit growth business for us both in terms of the order book as well as what we saw actually in the top line in the third quarter.

So we feel terrific about how that business is continuing to trend for us.

I think part of the encouragement in the third quarter order book and the improvement, as Tom noted, single-use has been strong throughout the year, including the third quarter, despite some of the hurricane issues from a shipment point of view.

But the order recovered was more broad-based.

Great.

And on Diagnostics, I know it's probably too early to get a read, but are you seeing any signs at all from hospital labs on what their purchasing patterns may look like, order patterns may look like as they sort of gear up for the PAMA pricing world they're facing next year?

It is too early, certainly.

For those on the call that may not be quite as tuned in to this reference that Derek made to PAMA, essentially, there is a dynamic going on in the market associated with reimbursement rates associated with tests that are done or reimbursed on what's called the clinical lab fee schedule.

Derek, there -- it's still early days.

As you know, even that ruling or that -- those recommendations associated with PAMA are in a comment period now.

The industry has raised issues associated with the narrow datasets that was used to compare private payer rates with the actual Medicare reimbursement rates.

And so I think we got a little bit of time here, first of all, to wait to see how does that fee schedule ultimately gets set post the comment period.

And then, I think it's natural to assume that, for the small portion of our business that is in -- essentially in the outpatient environment and reimbursed through that fee schedule, that there'd be some pricing pressure.

But pricing pressure is a natural dynamic, as you know, in that market, and so we'll just have to wait a bit of time and we can come back to you with a little bit more of an update as things settle out.

And we'll go next to Doug Schenkel with Cowen and Company.

I guess I want to stay on the topic of Diagnostics.

You have the highest core growth rate in at least 6 quarters, I believe.

I'm just wondering if you would talk a little bit more about the key drivers to this improvement.

And specifically, how much of this was from the ongoing Beckman stabilization and growth initiatives?

How should we think about sustainability, especially as we're modeling out Q4, 2018 and beyond?

Sure.

Well, we did have a good quarter, without question, in Diagnostics.

We saw really good execution, certainly led by Radiometer, as -- which delivered high single-digit growth in the period; Leica Biosystems, in anatomical pathology, mid-single-digit grower; and we saw improvement in Beckman Diagnostics as well.

So we feel good about that.

I think we can sustain a growth rate there that's certainly probably north of 3%.

But Beckman does face the toughest comp that they will face this year against last year's fourth quarter so we could see a little moderation there against that comp in the fourth quarter.

But we do get Cepheid into the core, only for half the quarter.

If we got it in for the full fourth quarter, we're -- we'd probably be pushing up to -- probably in the 4% neighborhood for the fourth -- for the full quarter.

So we feel good about the progress we're making.

Beckman is absolutely still on a journey of improvement across a number of different fronts, but we're really encouraged by the new product innovations that are coming out.

We're encouraged by some of the talent infusion that we've made in that business.

And certainly, a great start at Cepheid, and the sustained growth rates and operating margin improvements there have allowed us to continue to reinvest across the platform in R&D and sales and marketing.

Put that together with some new product innovations and we think we're setting ourselves up for some continued improvement in 2018.

And that's a good segue to my next question on Cepheid.

It looks like Cepheid grew 15% year-over-year.

And I was looking back at our stand-alone Cepheid model, and the comp was actually pretty tough.

I think they grew 25% year-over-year in the last year quarter.

Could you just talk a little bit about what's going on with Cepheid ? How much of this is a function of DBS efforts?

Essentially, what inning are you in there?

And -- well, why don't I just pause there because I think that's the crux of the question.

Sure, sure.

A terrific quarter, without question, at Cepheid, double-digit core growth, pretty balanced driven -- across both the developed markets and the high-growth markets and most major product lines.

Infectious disease, sexual health, both double digit.

Hospital-acquired infections is a softer market, of course, but we feel good about how we're positioned there.

And so I think both geographically and from a product line perspective, we couldn't be more pleased with what's happening at Cepheid.

And the investments that continues to go on at Cepheid associated with innovation and new products, I think, bodes well for the future.

We also continue to invest in their geographic footprint.

We're building a team in China right now.

It's still early days, but that team is growing nicely, and we expect to see some continued good growth from the high-growth markets over time.

And then relative to the impact of DBS, I mean, DBS is having an impact at Cepheid initially around the operating margin improvements, which you saw jump up pretty significantly just in the first 6 months after we acquired, and we've sustained those and continued to increment those in the 6 months that follow.

And that's really been around a number of initiatives that start with the low-hanging fruit and works then to some of the more challenging things around, procurement and the supply chain, both direct and indirect costs and a number of different opportunities that we've identified.

In addition, DBS is having an impact on continuing to sustain the double-digit growth rate.

We've implemented DBS tools associated with new product introductions to become more efficient and more timely in those new product introductions and introduce products with the highest possible quality right at launch.

So I think there's a number of different areas, and if I step back for a second, I'd say one of the most encouraging things is how readily the tools of the Danaher Business System have been adopted by that team.

It's been just terrific to see.

They've chosen those tools that make the biggest impact on the business and have put them to work, I think, in the areas that made the most sense in terms of overall performance.

So good to go.

We look forward to another good year next year.

And we'll go next to Steve Beuchaw with Morgan Stanley.

I'll throw 2, they're a little bit more financially-oriented, here real quick.

One may be more of a Dan question, one may be more of a Tom question.

Dan, I wonder, now that we have clarity post VERIS on some of the cost savings, how you're thinking about those cost savings as contributive to the margin profile for the Diagnostics business next year.

Does that drop through?

Do we split that between incremental reinvestment on the commercial side?

How should we think about the VERIS savings as accretive to margins.

For Tom...

I think -- go ahead, Steve.

Sorry.

For Tom, on the last call, you introduced or perhaps reintroduced some parameters in terms of how you think about what makes an attractive acquisition target I wonder if you could just give us a sense for as you -- or maybe a little bit more active.

Given where we are relative to the balance sheet and thinking about what the right thing is to do with that capital, how do you think the environment has evolved in terms of the potential returns on capital and how those might be different between smaller versus larger assets?

Steve, I'll kick off.

We're tracking pretty well as we go into next year with an expectation of about $40 million of costs coming out of the Beckman P&L because of what we've done here with VERIS.

We are taking a portion of it, probably close to half of that number, and investing that in Cepheid.

As you know, we're going to -- they're going to take over kind of our broader molecular effort here, and we think that investment will help them accelerate some of their activities.

Thanks, Dan.

Steve, associated with your question on M&A, first, in terms of the environment, I'd say we've seen some modest improvement in activity around deal opportunities.

So that gives us some encouragement that there's opportunities perhaps breaking free, but we'll see, always hard to predict.

Relative to our viewpoint on acquisitions, we have always valued the balance between small and midsized bolt-on acquisitions that are really accretive both strategically and financially to our platforms, balanced with larger acquisitions that sometimes add a new leg or an adjacency to a platform or, occasionally in our history, that have added a new platform.

As I've said, in the past, our focus really is on the 5 platforms we have today and looking at adjacencies that might materially improve those platforms as they exist.

From a priority standpoint, we always prioritize markets first, and we look for attractive global markets with good growth dynamics.

And then we look at companies secondarily, and we look for companies with good growth dynamics and margin opportunities.

We certainly value the consumables and the aftermarket side of companies.

You've seen us build a portfolio now into the 60 -- mid-60 -- 65% of the portfolio is in consumables, and that obviously is a key source of underlying growth and stability, a lack of cyclicality and inherently good gross margins.

And so we remain very consistent, I think, in those views of what markets and companies are attractive.

And then finally, we look at valuation.

And we've always valued a disciplined approach to returns.

We've consistently said that small and mid-sized bolt-on acquisitions, we look for those double-digit returns to be in a -- roughly a 3-year time frame.

And then if we're talking about a larger acquisition or an adjacency, those double-digit returns still remain vitally important, but the time frame associated with those may be a bit longer.

Historically, we've targeted inside of a 5-year time frame.

Occasionally, those get a hair longer than that when the strategic value and the long-term opportunity really warrants it.

So I would say our views in terms of the characteristics we look for and the approach we've taken remain very consistent with our history.

And we'll take our next question from Steven Winoker with UBS.

So listen, just moving back to a couple of topics you already hit on, but I'd like to go a little further.

I remember when you guys first purchased Beckman.

We were really talking about mid-single-digit growth over a long time frame.

So you've seen mid to high, and you've seen obviously improvement, right, from flat to low.

I'm sure Florida took a little bit of a chunk out.

But if you had to kind of point to -- has your expectation there changed, shifted?

Is there something fundamental?

Or is this all been just a temporary issue that you're kind of working through and you really believe the growth is there?

Steve, your recollection is a good one, and we do -- did and do have a view that Beckman Coulter, the acquisition that we did those years ago, has the potential to become a mid-single-digit growth business, and we would obviously seek to drive that beyond that but particularly as we've broadened the exposure to certain end markets, like the molecular market, which Beckman obviously did not have exposure to in the past and where Cepheid now plays such an important role.

And it has been a journey.

One thing I would maybe remind everybody is that the Beckman Coulter that we acquired was then initially split into 2 different businesses, and our Diagnostic business became a separate business from our Life Science business.

Beckman Coulter Life Science, we often described in those days as an $800 million start-up that we had to kind of take from a flat to declining business and drive to growth.

We've done that very successfully.

Beckman Coulter Life Science has become an innovator in its market and has now driven consistent mid-single-digit growth and great operating margin improvements.

And so we're really pleased with that.

On the Dx side, it's been a longer journey.

There was a pretty significant inheritance tax that we had to pay and have continued to have to pay associated with a lack of innovation, some quality and regulatory-related matters and, frankly, long sales cycles and, frankly, long customer memories.

And those have been a challenge for us.

We're really pleased with the progress that we've made, taking that flat Dx business, probably -- actually probably on its way to declining slightly and improving it and improving the operating margins and driving working capital improvements, improving retention rates and win rates.

But it's been a long journey, and there's still a journey to go.

And so we still believe that the opportunities there are significant, and we'll see continuous improvement.

But it's been slow going, but we're confident in the improvement potential ahead.

And Steve, to add to the point, if you put the 2 Beckman together, for example, in the third quarter, they were, combined, mid-single-digit growers with a lot of margin expansion.

Okay, that's helpful.

Second, on Environmental & Applied Solutions, you talked about it a little bit, but I would have thought in the constructive environment that's out there today and given some of the secular tailwinds behind some of the newer parts of that business, that -- relatively newer, that you would have seen better than 3% growth, core.

So again, maybe just talk a little bit about what's going on in terms of the ability to accelerate that even a little and also kind of adjacencies as you sort of look at that business and think about kind of adjacent paths that might also supplement forward organic growth after the acquisition's anniversary.

Sure.

Thanks, Steve.

So important to separate EAS into Product ID and Water Quality.

So Product ID remained very solid mid-single-digit growth in the period, continued outstanding performance from Videojet and good performance from both Esko and X-Rite.

I'll come back to those relative to your adjacency question in just a minute.

But on the Water Quality side, in the third quarter, we were a little lighter on the core growth side, low single-digit growth.

Hach showed improvement relative to the second quarter, and -- but we still saw some softness in the Environmental business.

But again, we firmly believe, and we understand that, that's more project timing, the muni and industrial side of Hach continues to perform very well.

The other dynamic in the quarter relative to Water Quality was again really around project timing at Trojan.

Trojan has seen terrific growth -- order growth rates this year and good top line performance in the quarter.

We just simply saw some project delays, and -- but we saw double-digit orders, and we think there's actually pretty good potential that Trojan might show double-digit core growth in the fourth quarter.

And again, a little bit of a shortfall at ChemTreat related to the hurricane impact, but ChemTreat has been a very consistent performer.

So I think you step back from all that at the Environmental & Applied Solutions segment, and we would say we feel very good about the performance there.

The underlying order rates are good, and we'll see improved performance in the fourth quarter.

Relative to your question about adjacencies, I think those 2 platforms underneath that segment are actually great examples of how we have extended a platform through acquisitions into adjacencies and broadened the number of solutions we bring to customers.

If you think about how we broadened Water Quality originally with the extension into treatment at Trojan and into ChemTreat and ChemTreat, how it was accretive to our growth rates, I think great example.

I think the Product ID, as we extended Videojet back into the packaging workflow, all the way back to the brand owner, designing that packaging with Esko and X-Rite and Pantone, I mean those are just textbook examples of how we think about expanding a platform and improving growth rates and our strategic heft, if you will.

And so those are good models.

We would attempt to continue to extend those models.

Again, it's all a question of cultivating the right targets and eventually breaking them free, but we have active pipelines in each one of the businesses that -- each one of the platforms to do just that.

And we'll take our next question from Jeff Sprague with Vertical Research.

Just a couple of quick follow-ons, one back to water.

Tom, your confidence on that Q4 timing -- I asked that kind of in the spirit that we are hearing about some delays in other pockets of muni work.

I'm wondering if these projects that didn't start in Q3 have already started in Q4.

I mean it sounds like the orders and backlog are there, but I guess just address the risk of potential further pushout.

And then secondly, just as we think about your comments back on Dental on maybe equipment now stepping down, I would assume that's going to create some absorption issues in the plants and maybe some other ripple effects.

Just what are the ramifications for Dental margins in Q4 when you look at that swirl of kind of specialized consumables a little better and maybe equipment taking a step down?

Okay.

Thanks, Jeff.

So relative to water in the fourth quarter, we do feel good about water in the fourth quarter associated with the order rates that we've mentioned.

Your question specifically about project delays, I mean, to some extent, there's -- that's always a dynamic that can exist in the muni market.

But when we're in as close as we are right now, usually, we have a pretty good sense, for example, at Trojan in terms of what's going to shift when relative to construction schedules and those kinds of things.

Some of what has gone on in our -- what we call our Environmental business, which is more associated with government funding and releasing tenders associated with more natural resources like rivers, lakes and streams and monitoring of deep ocean, that's where things can be a little bit more uncertain.

So balancing all that, I think we have pretty good line of sight to the fourth quarter.

Sure, there can always be one thing or another that gets pushed out, but in general -- or on balance across ChemTreat, Trojan, Hach and the broader portfolio, again, we feel pretty good about where we are.

Relative to your question about Dental equipment, this is an uncertain environment in terms of some of the manufacturer-distributor realignment that I mentioned and the potential impact on equipment.

So I mean, I think we're -- we've dialed in our outlook reasonably conservatively, and we manage the cost structures in the factory associated with the volumes that we see coming so...

And Jeff, maybe to add to that.

So the equipment side, look, we will have a couple of tough quarters here because of what is likely to be a destock on the equipment side, and that will hurt the equipment margin.

I do think we get an offset because we've gone through this destock period on the traditional consumables and we feel like we're kind of getting towards the end of that.

And if anything, consumables are more profitable than equipment.

So as Tom said, I think we're properly aligned.

Equipment is going to get tougher on the margin side, but consumables -- traditional consumables will start to see some recovery here in Q4.

And we'll go next to Dan Arias with Citi.

Maybe just on Diagnostics, on the topic of the selling environment.

If I think back to the beginning of last year, it kind of sounded like you weren't really sure whether ACA and everything associated with that were material factors.

So I guess as we push through the year, I'm curious what your thoughts are there.

Do you feel like health reform issues are affecting demand?

Or is it more of just sort of a fringe element that's not really impactful on results?

Dan, it is hard to pin down.

There's no doubt that the backing and forthing in Washington associated with ACA creates uncertainty in the minds of our customers.

And uncertainty is never good, as we all know, and it creates a little bit of hesitancy, not in all customers but in some customers.

But it's hard to pin down the materiality of that.

I mean there are a couple of things -- one in particular that is a little bit easier to pin down, and that's the med device tax.

If ACA is repealed as it's been proposed a number of times, the med device tax typically would -- has been -- would go out the window permanently.

It's been in suspense so far all this year.

That had a really very, very modest impact on us both when it came into being then when it went into suspense.

So I mean -- but that's a more practical and specific example, but again, the materiality of the uncertainty, very hard to pin.

Okay, helpful.

And maybe just to finish off that last point, the Dental forecast, unless I've missed it.

Did the puts and the takes there net out at Dental core growth staying up modestly to finish the year?

Or is that not necessarily something we should count on?

I think the planning assumption we had going into the second half of being Dental relatively flat, granted we were up kind of 1% here in the third quarter, is a good planning assumption for the fourth quarter.

But as we've talked about more broadly, we expect to accelerate core growth in the fourth quarter.

We talked about Pall.

We talked about the inclusion of Cepheid.

We expect water to get better.

So versus the 3% we posted here in the third quarter, we think we'd be looking more at a 3.5% to 4% range for core growth in Q4.

That does conclude today's question-and-answer session.

At this time, I'd like to turn the call back to Matt Gugino for any closing or additional remarks.

Thanks, Tracy, and thanks, everyone, for joining us.

We're around all day for questions.

This does conclude today's conference.

We thank you for your participation.

You may now disconnect.