Danaher (DHR) Beats On Q2 Earnings, Guidance Lowered

Danaher Corporation (NYSE:DHR) reported adjusted earnings of $1.25 a share in second-quarter 2016, beating the Zacks Consensus Estimate of $1.09 by 14.7%. Notably, adjusted earnings increased 16.8% on a year-over-year basis.

The upside in the company’s bottom line can be attributed to its effective Danaher Business System (“DBS”) that focuses on three critical areas -- quality, delivery, and cost & innovation. Moreover, a decent top-line performance boosted high-teens adjusted earnings growth during the quarter.

Revenues by Segment

Danaher reported total sales of $5,785 million, reflecting an increase of 16.6% year over year. However, the sales figure fell short of the Zacks Consensus Estimate of $5,798 million.

Improvement in second-quarter revenues mainly came on the back of positive contributions from acquired businesses (which accounted for 15% of growth). Also, core businesses grew 2% year over year while currency fluctuations had an adverse impact of 0.5% on sales.

Revenues at the Test & Measurement segment declined 3.5% year over year to $650 million. Also, operating margin at the segment declined 210 basis points (bps) to 22.2%. The overall decline in revenues was triggered by a slowdown across all major geographies and product lines.

The decline in operating margin was a result of poor sales at existing businesses, strengthening of the U.S. dollar and rise in operating expenses on account of product development, sales and marketing growth investments.

Revenues at the Environmental segment increased 7.5% to $958 million. Also, operating margin at the segment was down 140 bps year over year to 21.1%. Price increases of products at this segment proved conducive to sales. Higher sales of instruments and related consumables and services in Western Europe, China and Latin America fuelled growth at the analytical instrumentation product line. Also, strong performance of chemical treatment solutions and ultraviolet water disinfection product lines boosted the top line.

Higher costs associated with product development, sales and marketing growth investments and foreign currency headwinds proved to be a drag on the operating margin performance.

Life Sciences and Diagnostics revenues rose 41.5% year over year to $2,603 million. Operating margin for the quarter increased 90 bps to 16.4%. Growth of the installed base of instruments in Asia and consumables sales in Europe and China fuelled growth at the Diagnostics business in the quarter. Higher sales of the company’s broad range of mass spectrometers and microscopy products proved conducive to sales.

Impressive growth in the operating margin came on the back of higher sales volumes and incremental year-over-year cost savings associated with the restructuring actions and improved productivity.

Revenues at the Dental segment were up 4% year over year to $715 million. Also, the operating margin increased 110 bps to 15.3%. Growth in dental sales came on the back of increased demand for implant systems, particularly in Western Europe and orthodontic products in all major markets. Also, strong sales of dental equipment in North America added to the strength of this segment. Growth in operating margin was mainly led by cost savings associated with restructuring actions and other productivity improvement initiatives.

At the Industrial Technologies segment, revenues inched down 0.5% to $859 million while the operating margin declined 30 bps to 25.3%, both on a year-over-year basis. Weaker demand in business' packaging and color solutions in geographies like North America and other high-growth markets proved to be a major drag. Also, weak demand in agricultural and construction and certain medical-related end-markets proved to be a drag on automation sales.

Liquidity

Danaher exited the quarter on Jul 1, 2016, with cash and equivalents of $4,097.6 million, a massive increase from $664.3 million recorded as on Apr 1, 2016. The company’s long-term debt declined to $12,007.7 million compared with $12,194.7 million as on Apr 1, 2016.

Guidance

Concurrent with the earnings release, Danaher provided its guidance for third-quarter 2016. The company projects adjusted earnings per share in the range of 80 cents to 84 cents for the quarter.

However, on account of the recent Fortive Corporation (NYSE:FTV) spin-off and other adjustments, Danaher has revised full-year adjusted earnings guidance down to $3.53 to $3.60 from the previous range of $4.85--$4.98.

Going Forward

Danaher posted yet another quarter of impressive financial results with both decent year-over-year growth in the top and bottom line amid macroeconomic headwinds. Going forward, we are particularly upbeat about the company’s prospects post the Fortive spin-off. Danaher will now have about $16.5 billion in sales and will be in a better position to focus on its life sciences, filtration, water quality and product identification businesses. The new company called Fortive will be headquartered in Everett, WA. This split will expand the opportunities for capital deployment for both the companies. Also, the thriving biopharma markets, company’s leading brands, dominant share in multi-billion markets and solid customer base add to its strength.

Despite this long-term growth potential, we believe that the company’s downward revision of full-year earnings estimates mirrors the escalating adjustment costs related to the split that will likely put margins under pressure. Also, softness in certain product lines in major geographies coupled with currency fluctuations will likely weigh down on this Zacks Rank #5 (Strong Sell) company’s financials in the short run.

Better-ranked stocks in the sector include Honeywell International Inc. (NYSE:HON) and Leucadia National Corporation (NYSE:LUK) , both of which carry a Zacks Rank #2 (Buy).