My name is Kathy, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to the Danaher Corporation's third quarter 2019 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key on your telephone keypad. I will now turn the call over to Matthew Gugino, Vice President of Investor Relations. Mr. Gugino, please go ahead.
Thanks, Kathy. Good morning, everyone, and thanks for joining us on the call. With us today are Tom Joyce, our President and Chief Executive Officer, and Matt McGrew, 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, 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 investor section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the investor section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will also be available until October 31st, 2019. 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 third quarter of 2019, and all references to period increases or decreases in financial metrics are year-over-year. All references to individual operating company operating margins exclude the impact of intangible amortization. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we'll 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.
Thank you, Matt, and good morning, everyone. We're pleased with our strong performance in the third quarter as we delivered 5% core revenue growth and solid core margin expansion. We believe our ongoing investments in innovation and commercial initiatives help to continue building sustainable competitive advantages across a number of our businesses. We also made meaningful progress on our two most recent portfolio moves, the acquisition of GE Biopharma and the initial public offering of our dental business. During the quarter, we achieved several important milestones related to the GE Biopharma business. Earlier this week, we announced that we signed an agreement to sell certain businesses to Sartorius for a purchase price of $750 million. The revenue to be divested is approximately $140 million and consists of our label-free biomolecular characterization, chromatography, hardware and resins, microcarriers, and particle validation standards businesses.
All of these businesses are part of our life science platform. While the sale to Sartorius remains subject to certain regulatory approval, it represents a significant step in the GE Biopharma regulatory process. Timing around meeting certain closing conditions such as regulatory approvals can of course be uncertain. We remain very encouraged by the progress we're making and expect to close the GE Biopharma transaction in the first quarter of 2020. We recently announced that the business will be called Cytiva when it officially becomes part of Danaher. The name is derived from Greek and Latin roots meaning cell and doing, as everything Biopharma customers do relates to the use, growth, or analysis of cells. The name may be new, the Cytiva logo or the drop, is actually a reference to the iconic Pharmacia brand of the business going back to the 1960s.
Pharmacia was a pioneer in the development of process chromatography and was one of the first businesses to become part of GE Biopharma. We've received terrific feedback on the reintroduction of the drop logo as we look to build on its legacy under the new Cytiva brand. Lastly, we continue to make progress on the financing of the GE transaction. In September, we raised approximately EUR 6.8 billion in euro-denominated debt. We raised this debt at a combined interest rate of less than 1% with an average maturity of approximately 14 years. We anticipate raising the remaining debt required to finance the transaction prior to year-end. On September 18th, our dental platform, now called Envista, started trading as a public company on the New York Stock Exchange under the ticker NVST. I want to thank Amir Aghdaei and all of the Envista associates for their contributions.
We wish them the very best as they embark on this exciting new endeavor. Envista released their third quarter earnings earlier this morning and will be holding a conference call at 11:00 A.M. Eastern Time to discuss those results. We ask that you direct any questions on Envista's business performance to the Envista team. Turning to our third quarter results. Sales grew 4% to $5 billion with core revenue growth of 5% on a consolidated basis and 6% core revenue growth when excluding the results of our dental segment. Acquisitions increased revenues by half a percent, while the impact of foreign currency translation decreased revenues by 1.5%. Geographically, high growth markets increased high single digits, with China growing at that rate while Russia and Eastern Europe both grew double digits. Developed markets increased mid-single digits with North America leading the way.
Gross margin for the third quarter was 55.8%, up 40 basis points year-over-year. Operating profit margin was 16.6%, with core operating margins increasing 70 basis points led by our Life Sciences and Diagnostics segments. Now for the third quarter results across the portfolio. In Life Sciences, reported revenue increased 6%, with 6.5% core revenue growth. Operating profit margin increased by 60 basis points, with core operating margins expanding 100 basis points. At Beckman Life Sciences, we believe we continue to grow above the market as core revenue increased double digits. We saw strength across most major geographies and product lines as new product introductions continued to contribute meaningfully to core revenue growth. In particular, we believe flow cytometry with the CytoFLEX platform and dry reagents as these innovative product lines are simplifying customer workflows.
Additionally, Labcyte, the automated liquid handling business we acquired earlier this year, is growing double digits and has exceeded our initial expectations. Core revenue at SCIEX declined slightly, in part due to a tough year-over-year comparison as the business grew nearly 10% in the third quarter last year. We saw strength in high growth markets that was offset by softness in North America and Western Europe. At Pall, the team achieved high single-digit core revenue growth as we saw good performance in both the developed and the high-growth markets. The biotech and aerospace businesses saw the largest increases offset by continued softness in microelectronics. August marked the fourth anniversary of our acquisition of Pall.
Over the last four years with the application of the Danaher Business System, Pall has accelerated core revenue growth, expanded gross margins by greater than 500 basis points to approximately 55%, and increased operating margins nearly 1,000 basis points to above 25%. Implementing DBS tools has not only enhanced the financial performance, but also improved operational efficiency, expanded commercial capabilities, and increased the cadence of innovation across the business. Turning to IDT. IDT delivered another quarter of double-digit core revenue growth with solid results across all major geographies. By product line, the business saw particular strength in next generation sequencing and synthetic biology. In August, IDT continued to expand its product portfolio in these high growth areas with the launch of a new product, oPools, the longest strands of ready-to-use DNA on the market.
IDT's proprietary manufacturing process allows them to create DNA at the highest quality levels, enabling scientists focused on developing advanced diagnostic tests and treatments to generate more consistent and reliable results in their research. Now moving to diagnostics. Reported revenue increased 6.5% with core revenue growth of 8%. Reported and core operating profit margins increased by 100 basis points. DBS-led commercial and operational execution drove performance across the diagnostics platform. Beckman Diagnostics had its fourth consecutive quarter of mid-single digit core revenue growth, driven by strength in high growth markets and increases in North America. A key driver of Beckman's improved growth performance has been its increased cadence of new product introductions. At the American Association for Clinical Chemistry trade show in August, Beckman highlighted a number of these recent innovations, including the DxH 900 high volume hematology analyzer, as well as the DxA 5000 laboratory automation systems.
The DxH 900, with its early sepsis indicator, has been a key contributor in the improved performance in Beckman's hematology business. In automation, the DxA 5000, which was launched in Europe earlier this year, recently received 510(k) clearance from the FDA. The system's key benefits of detecting pre-analytical sample quality, increasing turnaround time, and reducing the number of manual processing steps from 32 to four, are driving early adoption and great customer feedback. Turning to Radiometer, core revenue growth increased double digits, led by strong results in China and Japan, as we believe the team drove market share gains in our blood gas and immunoassay product lines. Leica Biosystems also delivered double-digit core revenue growth led by North America and Japan. Success at Leica is being driven by new product introductions combined with the implementation of growth rooms, one of our most impactful DBS commercial tools.
Growth rooms enable cross-functional teams to collaborate and align actions around the business' most critical short and long-term commercial initiatives. With this focused approach, Leica's core histology and advanced staining product lines delivered mid-single-digit core growth or better in each of the last eight quarters. Finally, at Cepheid, core revenues increased double digits across all major geographies and product lines. Next month will mark Cepheid's third anniversary with Danaher, and we could not be more pleased with what the team has accomplished. Since the acquisition, the business has grown double digits annually to nearly $1 billion in revenue. Gross margins have expanded by 1,000 basis points to approximately 60%. R&D investments have increased by over $50 million annually, while operating profit margins have increased from breakeven to approximately 20%.
Cepheid highlights another powerful example of how running the Danaher playbook by applying DBS to drive growth and expand margins, allows for investment back into the business that helps drive compounding returns. Moving to our Environmental and Applied Solutions segment, reported revenues increased 0.5%, with core revenue growth increasing at 2%. Operating profit margin remained constant, with core operating margins expanding 10 basis points. In Product Identification, core revenue declined slightly, driven in part by tough prior year comparisons at Videojet, partially offset by growth in our packaging businesses. At VJ, core revenue declined low single digits on a nearly 10% comparison to the third quarter last year. Despite the results of the quarter, we're encouraged by a positive order growth and expect improved performance in the fourth quarter. Last month at the annual Pack Expo Trade Show, Videojet showcased some of its recent instrument and digital innovations.
On the instrument side, Videojet highlighted the VJ 7340 laser printer, featuring the smallest marking head available on the market today and allowing for easy integration into existing packaging lines. Videojet also released Rapid Recover, a digital solution that automatically troubleshoots and diagnoses printer service issues. This functionality builds on Videojet's market-leading service capabilities and improves customer uptime by increasing first-time fix rates and avoiding costly investigation time. In our packaging businesses, which include Esko and X-Rite, core revenue increased at low double-digit rates, continuing the improving trends that we referenced in these businesses last quarter. Developed markets led the way, offsetting some softness in high-growth markets. Finally, at Water Quality, solid execution across the platform drove mid-single-digit core revenue growth on top of a double-digit prior year comparison. Looking at performance by operating company, Trojan core revenue increased double digits led by North America.
The team saw strong performance in the municipal market in both its UV and filtration product lines, driven by high win rates and service expansion initiatives. At Hach, core revenue increased low single digits. Strong performance in Europe and North America was offset by declines in China due to a difficult comparison versus 2018 related to China's surface water initiative, Policy 61. At ChemTreat, core revenue increased mid-single digits, driven by strength in the oil and gas, as well as the food and beverage end markets. In September, many of you attended our Water Quality Platform Investor Day at Hach in Loveland, Colorado. In that day, we highlighted the key strategic initiatives of the platform. You also saw details on the sustainable business model that's common across Danaher, including strong underlying secular growth drivers, exceptional margin profiles, and high recurring revenues.
The team provided examples throughout the day of customer-focused workflow solutions, innovation, and go-to-market execution that we believe have led to share gains across water quality. Finally, the day showcased a variety of tools within the Danaher Business System to accelerate the cadence of innovation and drive sustainable long-term results across the platform. The presentation and webcast are available in the investor section of our website, and I encourage those who weren't able to attend the event to take a look. To wrap up, we're very pleased by our third quarter performance and the hard work the team has put in throughout the year. It's also worth highlighting the steps we've taken over the last several years to transform the portfolio. Through acquisitions, we've brought in fundamentally higher growth businesses with significant consumables and aftermarket positions.
Today, we consider 70% of our revenue to be recurring, with much of it being captive to our installed base and mission-critical to our customers' daily operations. Combined with our significant organic investments in innovation, an outstanding team, and the Danaher Business System, we're excited about the opportunities through the end of 2019 and beyond. We're initiating fourth quarter adjusted diluted net EPS guidance of $1.32-$1.35. We anticipate core revenue growth to be approximately 4.5%, which excludes our dental segment. We now expect full year 2019 adjusted diluted net EPS to be in the range of $4.74-$4.77. Both our fourth quarter and full year EPS guidance include the dilution from non-controlling interest related to the 19.4% of Envista we no longer own.
Thanks, Tom. That concludes our formal comments. Kathy, we're now ready for questions.
In order to ask a question, please press star one on your telephone keypad. Please limit questions to one question and one follow-up question. Your first question comes from the line of Tycho Peterson with J.P. Morgan.
Good morning, Tycho.
Good morning. I'd like to start with the diagnostic strength. You guys continue to put up great numbers there. Can you talk a little bit about how much of this is driven by the new hematology and automation launches? Can you comment on China? We've heard about some hospital issues there for diagnostics, and then here in the U.S., we did hear Quest the other day talk about vendor consolidation. Just curious how you think you're positioned as we go through that process with the DxA 5000. Thanks.
Sure. Thanks, Tycho. A lot to cover there. Starting with hematology. We've talked over the last several months, couple quarters certainly, and most recently in my prepared remarks about the impact of our new hematology product line. This has been something, as I think you probably know, Tycho, has been in the works really since we acquired Beckman. That particular product line was a product line where we had some real challenges. These new products, the DxH product line, particularly the 900 with the early sepsis indicator, is making a significant difference.
We have literally turned that business around from a business where we were not happy with our retention and our win rates, to the point where now we're very happy with our retention and our win rates, and we're seeing growth in that business now that is having a material impact on the improved performance that you're now seeing from Beckman overall. Relative to the overall growth of Beckman, however, it's not purely a hematology story. Improvements in our menu across the board, across each of the analytical modalities, improvements in our automation systems. I noted the DxA 5000, which is also having impact, particularly in labs that are really challenged in terms of throughput and skilled labor, where we're reducing the need for skilled labor.
It's really all of those things combined that are having an impact on seeing that consistent mid-single-digit growth rate that Beckman is now improving towards. I think it's a combination of things. You asked specifically about China. We're seeing continued good performance in China. Beckman has always had a strong position in China. It's always been a key growth driver for us, and it continues to be so. It's a highly competitive market, but we are extremely well-positioned there and continuing to see good growth, very high retention rates, and very solid win rates as well. You asked about vendor consolidation, and if I caught your question accurately, I think the question was related to North America. Assuming I heard that accurately, clearly there's always an effort across hospitals today to drive cost reductions. Vendor consolidation is certainly a part of that.
Again, as we look at our win rates and our retention rates across our North American business, which is obviously an important part of the overall profile of Beckman Dx, we continue to see both improved performance there and sustained improved performance. Again, that's underpinning that greater consistency of improvement effects across the board. Hopefully, I covered the waterfront. If I didn't, Tycho, happy to take a follow-up.
Yeah, Tycho-
Yeah.
Sorry, it's Matt. Tom mentioned Beckman in China, just to give you some context on diagnostics overall in China, because I think that might have been part of the question as well. From a diagnostics perspective in China, we were double-digit core here in the quarter, just to give you some sense of the overall market over there.
Okay, just one follow-up on Life Sciences, 6.5% core against a 9.5% comp. That certainly stands out. Just curious how you think about the sustainability of that. A lot of that, I guess, was Pall up high single digit as well.
Sure. Tycho, we feel very good about the sustainability of our performance across Life Sciences. If we step back and we think about both more the Pall side of the house versus Life Sciences tools. Life Sciences tools continue to be mid-single-digit across the platform. Our underlying businesses like Molecular Devices, like Microsystems, both mid-single-digit performance. Beckman LS, as I mentioned in the prepared remarks, double-digit performance. On the tool side, really good performance. Obviously, a little bit more weakness in SCIEX, we're very encouraged by the order trends that we see there. Probably only one spot there that was maybe a little bit weaker, overall, I'd say the tool side, very solid. Across the Pall business and what we would see is really the biopharma side of Pall. Again, very good performance there.
A solid market that we see continuing to perform well. Our biopharma exposure is now north of $1.5 billion. Most of that, obviously, coming from Pall Biotech. Pall Biotech saw a double-digit core growth in the quarter. That's six quarters in a row of double-digit core growth, the order trends look very good. We're also seeing good sustained performance across single-use technologies, and gene and cell therapy, which are showing double-digit core growth. Admittedly, some of those are smaller portions of the overall portfolio, really good performance, and we think those are sustainable positions over time, and building.
Okay. Lastly, could you give us the Pall Industrial number?
Pall Industrial on the quarter was mid
Low single digits, Tycho.
Okay. Thank you.
Your next question comes from the line of Derik De Bruin, Bank of America.
Morning, Derik.
Morning.
Hey. Morning. Hey, did I catch you correctly in the fourth quarter guidance is 4.5% core growth ex dental?
That is correct.
All right. Can you sort of walk through just sort of the market dynamics as we get there? I think that's a little bit lower than what we would've thought on it. I'm just sort of curious what you're sort of assuming in terms of year-end spending and whatnot. Just sort of unpack that.
Sure.
What's driving to those numbers?
Sure. Of course. We've, as you know, I think, just stepping back a second, we've had 8 quarters in a row of mid-single digit core growth, and we think the fourth quarter is a mid-single digit growth rate quarter as well. However, there are a couple of timing dynamics relative to our third quarter versus the fourth quarter. Particularly in diagnostics, where we saw Leica Biosystems and Radiometer at double-digit core growth rates in Q3, little help from the VAT impact in Japan. Those businesses will moderate a little bit off of that double-digit core growth in Q3. Also a couple of timing issues relative to the life science side, where we had a big Q3, particularly for Pall, where there were some larger equipment orders across biotech and at the industrial side that moved from Q4 into Q3.
Really we're talking about a little bit of timing impact there between Q3 and Q4, but we feel very good about our execution, very good about the underlying market dynamics, across both life sciences and diagnostics, as well as across water quality and PID. When you look at our fourth quarter guidance in light of the full year, we're still talking about a full year of 2019 at 5.5%-6%, and that's very consistent with what we talked about for the last couple of quarters. In general, we would characterize that fourth quarter relative to the third as largely more to do with timing, but still feel very good about where we're bringing the full year.
Okay. That's helpful. Just say out of curiosity, can you talk a little bit about Western Europe and what's going on there? Specifically, just wondering if some of the bioprocess strength you've seen or some of the stuff you've seen is potentially related to pull forwards because people are worried about Brexit and stuff. We've heard that from some other companies recently, that there may be some funny spending patterns that we've seen this year. Can you talk about anything you're seeing in the European trends and sort of how that market's shaping up end to be close?
Sure. We're not seeing any sort of unusual procurement behavior in that regard in Western Europe. Europe overall across Q3 performed at a low single-digit rate. That's down a little bit, clearly from the first half. We've seen a bit of softness in certain pockets, like at Videojet, a bit at SCIEX, and a bit at Leica Microsystems. As we look at where those pockets of softness are, I think they really speak to some of the overall macro softness in Europe because when we unpack where some of the differences are between the first half and the second half, it largely looks to be around instrumentation and equipment. Some of the larger capital spends, some of the OEM customers, for example, in the packaging world. Those are the areas where we see some of that softness.
I would attribute that low single digit performance in Europe a little bit more to the macro softness in Europe than I would any unusual procurement behavior going on one way or the other.
That's stuff that's not sort of been going into the research labs. It's more the industrial end?
That's right. Those are the areas that would speak a little bit more to the industrial side of the house. Admittedly, with our low percentage of the portfolio there, literally industrially exposed. We're not a terrific proxy, but.
Yes
we can certainly see a few of those pockets, whether it's in North America or in developed Europe, where some of that macro slowdown exists. Again, those are pretty small pockets.
Great. Thank you.
Thank you.
Your next question comes from the line of Vijay Kumar with Evercore ISI.
Good morning, Vijay.
Thanks for taking the question, guys.
Yes.
Conducting a nice sprint here. Tom, maybe one big picture question for you to start off with. On a pro forma basis, when you look at the assets, some of the comments you made on DBS and how underlying growth for acquired businesses have improved. If I just look at the numbers, the core Danaher is call it a mid-singles core, ex dental, that helps your core. Now GE comes in with DBS. This seems to be a solid mid-singles. Even if macro were to soften going forward, it seems like that mid-single-digit, stable, strong mid-single-digit thesis should be pretty much intact. I'm just curious on the pro forma growth outlook on how you guys are looking at it.
Well, Vijay, first of all, I think your summary of the portfolio today is an accurate one. We've made tremendous progress in the evolution of the portfolio towards establishing that mid-single digit growth performance. I think we've done that with businesses that have demonstrated over time and over cycles, their stability in driving that consistent kind of growth performance. Now, some of that comes from being in terrific markets with leading positions in those markets.
It also comes from the nature of the balance of sale, whereby, as I mentioned earlier, with 70% of our revenue roughly being recurring revenue, largely in the form of consumables that are captive to the instrumentation, and with the addition of service and other associated aftermarkets, the combination of being in great markets with leading businesses and that strong aftermarket consumables position is what gives us confidence that we've built a portfolio that is designed to be sustainable over macro cycles. That doesn't mean that we are completely immune, as I just mentioned, about a couple of soft spots here and there that could be geographic or could be where we have a little bit of exposure to a more industrially-oriented market. In general, we've built a portfolio to that effect.
Yes, the addition of the GE Biopharma business is but one more significant step in reinforcing that kind of market position. We feel very good about that looking forward into 2020 and beyond.
That's helpful, Tom. Matt, one quick one for you on this fourth quarter guidance. It looks like the guide implies a solid margin expansion in Q4. One, am I right in my math on that solid margin expansion? Maybe comment on where this is coming from, OpEx versus IGM.
It's probably going to be a little bit of both on the gross margin side and the OpEx side. I think you're right, Vijay. I think the way that we kind of think about the Q4 guide, especially with some of the noise in there with the NCI and the FX, we're kind of talking about 4.5% core growth, kind of a normal solid 35% fall through. Really, that NCI headwind of, call it, $0.02, is really the only change here that we've sort of made to the guide, if you will. I think you're right. We anticipate having pretty good fall through like we normally would expect here in the fourth quarter, and I suspect it'll be a little bit on the gross margin side and probably with that comes the operating leverage as well.
Thanks, guys.
Thanks, Vijay.
Your next question comes from the line of Scott Davis with Barclays Research.
Hey, Scott. How you doing?
I'm great. It's easy covering your company. Every quarter you put up decent numbers, and I'm not exactly sure what you make and what you sell, but it's working.
Scott, you know we love to make life easy for all of the visitors on this call. It's one of our goals, among many.
I don't know. I might be the last industrial guy left, but you're not going to get rid of me that easily.
That's okay. Welcome back. What's up today?
I got two questions for you, Tom, but the first is just the asset sales.
Yeah
around was this a compromise with the regulators? Was this something the regulators requested? Was it U.S. regulators or was it more globally geared? Just a little bit more color on that.
Sure, Scott. Well, when we initially announced this deal, we did it with the clear understanding that regulators were going to do what obviously they would do in a deal of this magnitude, and that would be done across a span of regulatory bodies from the U.S. to Europe, other countries, and certainly to China. Eyes wide open that those reviews would take place and that there was always the prospect that there could be a small portion of the GE portfolio or the Danaher Life Sciences portfolio that the regulators may have questions about. The sale of the businesses that we announced earlier this week to Sartorius was really a function of what we believe were very constructive discussions with regulatory bodies across the world. With a clear understanding of what the rationales were from their perspective as well as ours.
This was simply something that regulatory bodies, along with us, came to the point where both parties thought that this made sense. It really was a series of globally oriented conversations and made sense to take that step.
Okay. Good color. Just since it's the four-year anniversary of the Pall deal, I'm just curious to see kind of some of the deltas in the model. Where have things come out versus kind of revenues, where things come out versus margins? It doesn't have to be exact numbers, where they've been the pluses and minuses and kind of at the end of the day, are you going to make the double-digit return promise, assuming things continue in 2020? Once you hit that year five, approaching year six, are you on target to hit the original targets that you laid out?
Yes, Scott, it's Matt. I think if you look back at maybe the two core metrics, if you will, that we sort of talk about with deals. If you think about core growth at Pall. When we kind of bought Pall, I would say it was more of a low single-digit core growth business. In that, over the course of let's say, the last, I guess, like you said, four years here, team's done a really good job at kind of taking DBS, in particular, DBS on the growth side, and the innovation side, and really changing that fundamentally, to be more of a mid-single-digit plus type growth rate. I think you've seen significant progress on the top line. As far as kind of OP goes, I think, when that business came in, it was kind of a high teens type of OP.
Today, we sort of own that business at, call it 1,000 basis points better than that. We've made really good progress on kind of the team coming in there and taking out some of the costs that we knew were there. I think if you remember, we talked about kind of a cost target at the initial that was kind of $300 million, and I think we took that up even to $350 ultimately. From an ROIC perspective, I think that so far as we stand here, I would say that that exceeds where we thought we would be.
Okay. Well, congratulations on that. Thank you, guys.
Thanks, Scott.
Your next question comes from the line of Doug Schenkel with Cowen.
Hey, Dan. Hey, Doug.
Hey, good morning, guys. I guess a question on interest rates. The interest rate on the Eurobond was under 1%, recognizing you still need to issue the rest of the debt and probably a good chance it's going to come in at a rate that is at least slightly higher than the Eurobond. It still seems like you're going to have some upside relative to the deal model you shared with the investment community originally. By our math, every 50 basis points of lower interest rate translates into about $0.10 of earnings upside. Does that seem reasonable, and should we expect you to let this flow through, or is there likely to be some reinvestment?
Yeah, I mean, I think the numbers that you're quoting on the Eurobond are accurate, obviously. We do still need to do the U.S. deal here. Like you said, I suspect that will probably be at a higher rate. We will get to that in the fourth quarter. I think as far as kind of trying to think through the deal model, I think I would say at this point we are not trying to update, if you will, kind of the GE accretion. We're obviously going to have some moving pieces here. You're going to have a little bit of a headwind, though modest, from the divestitures that we just announced on Monday. Obviously, you just talked about likely some favorable financing costs so far on the Eurobond deal.
Also likely have a business in the GE Biopharma business that it's had a pretty good year here in 2019. I think the way to think about it is we will kind of holistically pull all of that together for you when we do update the guide so that we can kind of incorporate all of that at one time.
Okay. Thank you for that. Very quick follow-up related to the deal as well, and following up on the last question on divestitures. Based on where you are in the regulatory process and the fact that you did announce those divestitures earlier this week, how would you characterize the probability that additional divestitures could be required from here on out?
Well, Doug, as you saw in the announcement, first of all, those divestitures are pretty modest.
Yep
on a relative basis at $140 million, so less than 5% of the revenues that we are going to acquire. Of course, the regulatory process is a fluid one. While we believe this was a significant, a major step towards approval, at this point, we can't comment on this any further. It was an important milestone, but as we commented, we don't expect either this deal to close, nor the actual formality of those approvals to be completed until the first quarter, and therefore closing immediately following that. We can't comment any further about any prospects for any further actions.
Okay. Totally understood. Maybe just a couple on the quarter.
Sure.
First on diagnostics, core margin expanded 100 basis points and was ahead of our forecast. Could you talk through some detail on that performance? Specifically, I'd be curious how Cepheid margins are progressing and how growth improvement at Beckman is really contributing to this performance. Then, just on Pall. It seems like the bioprocessing market is growing broadly at a very strong 15%-plus rate based on what some of your peers have reported over the last few days. I think you noted that Pall Biotech grew double digits. Is it reasonable to believe that you're growing Pall Biotech at least at that 15%-plus level that we're hearing from others? Thank you.
Doug, I'll take the biopharma piece first, then Matt will jump back in on the Dx margins. Yes. The simple answer is, what you are hearing from other sources around the growth of the bioprocessing market overall as being a double-digit growth rate market and a very attractive one, and one, by the way, that we and obviously others believe is sustainable in terms of its growth prospects. We at Pall are clearly both benefiting from that and taking advantage of that opportunity to drive that kind of growth.
We did put up double-digit growth within that business, and that's across, obviously, our filtration business, which is fundamental to biologic drug production, but also includes growth in the really innovative ends of the spectrum around biopharma, which is really around single-use technologies, which are becoming increasingly important as biological drugs are being produced in smaller and smaller batch sizes for unique patient populations, as well as in the growth areas around cell and gene therapy, which, while being somewhat nascent today, are going to be significant growth drivers in the future. We are participating in that growth today with outstanding products and I think a series of new products that'll be coming over time that we're very excited about.
Yeah, Doug, as far as the DX margins go, in particular in the quarter, I think we had a pretty good performance generally speaking out of all of the businesses. I would call out both Leica Biosystems and Radiometer. Those are some of our higher margin businesses, obviously both of those growing in the double-digit core growth certainly helps the margin performance. Overall, I think it was pretty good with a little bit of a boost here from those businesses that have been sort of high single digits year-to-date, turning in a kind of a low double-digit performance in the quarter. I think that's a big ramp of it. As far as Cepheid's margins go, again, it's sort of similar to the Pall story.
I think the team there has done a fantastic job of really balancing growth while also focusing on the margin side of it. They've done a really nice job of kind of embracing DBS and leading from the front. Today, I think when we bought it was sort of maybe a break-even type business from an OP perspective. Today, those margins are, call it 20% or so from an EBITDA perspective.
Thanks, Doug.
Your next question comes from the line of Steve Beuchaw with Wolfe Research.
Morning, Steve.
Hi, good morning, and thanks.
Morning.
I had just a couple for Tom and then one for Matt. Tom, I wonder if you wouldn't mind unpacking the number at SCIEX a little bit. I'd say, prospectively, you mentioned that you saw some really good trends around orders. Would be helpful to know a little bit more about what you're seeing. For the quarter, SCIEX is a little bit unique relative to some tools businesses in that you have a clinical exposure. Would be nice to hear how you saw the relative trends in that business between clinical, some of the core applied markets where you have a good presence. To the extent you have any comment on what you're seeing on pharma on the R&D, that would be really helpful. Second question is just more of a global question on municipal and broader government project demand.
You're uniquely well-positioned to have a view on how that's tracking. I'll go ahead and, Matt, ask you just one, and more of a prospective big picture question. You have a lot of moving parts in the model given that we're divesting dental, and we have GE coming into the fray looking for the majority of 2020. Can you just talk prospectively about the impact on earnings and cash to the extent you can associated with those transitions? If you can give us any update on the thinking so we know how, and maybe some of it's below the line to think about those items going forward. Really appreciate the help here.
Sure, Steve. Thanks. Let's start with SCIEX. You heard my comment accurately that while SCIEX was down slightly in the quarter, we are in fact encouraged by the order trends that we're seeing, and we do in fact expect some improved performance in the fourth quarter. When we look at the quarter itself, the third quarter, we clearly were up against a tough comp. SCIEX, as I think I mentioned, was up nearly 10% in the third quarter of last year. Certainly a bit of a challenge from a comp standpoint. We did see, outside of that, some softness in North America. A little bit of that was timing of some larger deals in the second half between Q3 and Q4.
Also, and this does get a little bit into some of the market segments that you asked about, we are seeing the consolidation of some small and mid-sized reference labs, and that has created a bit of a headwind there. You asked about specifically the clinical market, and SCIEX has certainly had a position in clinical over time. Over the last couple of years, we've seen a number of challenges in that market that are not unique to SCIEX, just broadly defined challenges around changes in reimbursement and guidelines around pain management, for one example, and certainly the impact, both across small and mid-size labs, are related to those challenges in clinical. SCIEX was really built on the back of tremendous strength and depth of technologies and capabilities around pharma, small molecules, certainly originally, and more recently around large molecule positions.
Those positions continue to be reasonably good, particularly biopharma, which obviously is a growth segment. Core small molecule pharma was much more modest in its growth globally. Academic actually remained pretty good, really across North America and China. I think overall, we think SCIEX is going to continue to be a leader in that market, a real innovator, and one where, over time, we'll see a pickup off the third quarter. You asked about the municipal market, our exposure to the municipal market or the government market is, for the most part, associated with our water quality platform. In that case, the term municipal is probably more appropriate to our position, really, than any broader governmental construct, at least in the U.S.
What we've seen most recently in the U.S. and in Europe would be that municipal spending has generally been pretty consistent, and that's what's driven the mid-single-digit growth rates that we put up at water quality across the U.S. and Western Europe. That applies certainly to Hach, it applies to Trojan, and a bit to ChemTreat, although ChemTreat tends to be more associated with applied markets. In China, where we continue to see good performance for our water quality platform, albeit against a very tough comp associated with what's called Policy 61, which we noted in the prepared remarks, that market has continued to be an outstanding market. Yes, it is largely associated with government or in particular, environmental ministry-oriented regulations such as Policy 61, which drove an increased level of monitoring in surface waters across China last year.
That will continue to be a positive dynamic across water quality. Right now, we see pretty consistent and steady performance around both municipal spending in the developed markets, as well as a little bit more governmental-oriented attention to environmental issues in the high-growth markets.
Steve, as far as your question on the moving pieces with GE and dental, I think maybe the way I think about it is that from an EPS perspective, obviously Q4, there's no GE impact. We talked a little bit here earlier about all the moving pieces that are there, and obviously, as we get a little closer to close, we will update all of that for 2020. As far as Q4, obviously nothing to think about. As far as Q4 goes for EPS for Envista, the NCI, I'd put a placeholder of maybe $0.02 in there for the NCI for the fourth quarter. As far as cash flow goes, I think that was your next question.
If you think about, we sort of talked about GE coming in at maybe roughly $1 billion worth of cash flow. Envista will be out there, I think, talking to you guys about their own 2020 cash flow projections when they get a little closer. I don't want to speak for them. I think you can pencil in that GE of, call it $1 billion, and we'll let Envista talk about 2020 cash flow when they talk to you guys later today.
Okay, great details. Really appreciate the time here.
Thanks, Steve.
Your next question comes from the line of Dan Brennan with UBS.
Thank you. Great. Maybe a question just on Q3, Q4. Tom, I think you mentioned a few times, maybe a little bit of timing benefit or timing pushout, obviously with the size of Danaher, I'm sure there's always lots of small shifts. Just wanted to understand, was there more pronounced timing benefit this quarter? Maybe could you just help us then think about, put it in your fourth quarter guide, how do we think about Life Sciences, Diagnostics, and EAS?
Sure, Dan. Yeah, I think perhaps a little bit of the timing issue between Q3 and Q4 here, on the margin, would've been a little bit more pronounced than what we've seen. I think if you look at the fundamentals underneath each one of the platforms, Life Sciences, Diagnostics, and EAS, each one of them continued to perform quite well. Again, our exposure to the macro environment is somewhat limited in the sense of being a good proxy for an industrial slowdown. We don't have a lot of industrial exposure left. We generally feel very good about how the overall platform will perform going through the fourth quarter and how we're set up for 2020.
Okay, great. You kind of touched upon my second part of the question. Maybe could you help us think about maybe between your 70% recurring business and the instrument side of the house, where there, you mentioned earlier in the call that there's a bit of pressure there from what you're seeing globally. It's a question we get a lot, differentiating between Danaher and other players in the broader tool spaces, the global economy is getting softer. How do we think about your instrument growth rate as we look out here with PMIs being a bit weak and the global economy slowing? Thanks, Tom.
Sure. Here's one way to think about it, Dan, using some specific numbers. If you look at the third quarter, our consumables business was up, call it 6%, versus the equipment side of the house, which was up more like 4%. If you think back to the last couple of quarters, those have been closer to even, about equal equipment versus consumables. Here you see the consumables number continuing to be quite strong and the equipment number being a little bit softer.
I think that's probably the best way to look at what is underneath some of the softness that I talked about that may be impacted by the macro environment across a business like Videojet, for example, or SCIEX, or possibly Leica Microsystems, probably to name three examples of businesses where the equipment side of the house is a higher percentage of the balance of sale than on average across the portfolio.
Great. Thank you.
You bet.
We have reached the allotted time for questions. I will now turn the call back over to Matt Gugino for closing remarks.
Thanks, Kathy, and thanks everyone for joining us. We're around all day for questions.
This concludes today's Danaher Corporation's third quarter 2019 earnings results conference call. You may now disconnect.