Danaher (DHR) Q3 Earnings Top Estimates, Revenues Up Y/Y

Danaher Corporation (NYSE:DHR) reported adjusted earnings of 87 cents a share in third-quarter 2016, beating the Zacks Consensus Estimate of 83 cents by 4.8%. Notably, adjusted earnings increased 22.5% 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 led to high-teens adjusted earnings growth during the quarter.

Revenues by Segment

Danaher reported total sales of $4,132.1 million, reflecting an increase of 17.7% year over year. However, the sales figure fell short of the Zacks Consensus Estimate of $4,149 million.

Improvement in third-quarter revenues mainly came on the back of positive contributions from acquired businesses (which accounted for 14.5% of growth). Also, core businesses grew 3% year over year. The company’s diversified portfolio was conducive to top-line growth.

This is Danaher’s first earnings release since it completed the spin-off of Fortive Corp. (NYSE:FTV) on Jul 2. The spin-off was announced in second-quarter 2015. Post spin-off, Danaher has reorganized its business into four segments, namely Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions.

Life Sciences revenues rose 64.6% year over year to $1,325 million. Operating margin for the quarter increased 900 basis points (bps) to 15.4%. Robust sales of mass spectrometers particularly in China, India and Western Europe led to the sales growth. Also, strong demand for flow cytometry and particle counting products added to the strength of this segment. It also benefited from increased government investment in China. Impressive growth in operating margin came on the back of higher sales volumes and incremental year-over-year cost savings associated with restructuring actions and improved productivity.

Revenues at the Diagnostics segment increased 3.1% year over year to $1,213 million. Also, operating margin at the segment increased 250 bps, year over year to 16.0%. Higher sales of consumables in China, Europe, India and North America fueled growth in the acute care diagnostic business, and drove this segment’s growth. Also, increased demand for advanced staining instruments and consumables mainly in North America and China favored the top-line. Operating margin growth was driven by higher sales volumes, improved productivity and cost savings associated with restructuring actions.

Revenues at Dental were up 3.7% year over year to $676 million. Also, operating margin increased 20 bps to 15.0%.Sales growth for this segment was driven by strong demand for implant systems, particularly in high-growth markets. Also, higher sales of orthodontic products, primarily in Western Europe, China and Russia as well as dental equipment in high-growth markets beefed up the top-line. Growth in operating margin was mainly led by cost savings associated with restructuring actions and other productivity improvement initiatives.

At the Environmental & Applied Solutions segment, revenues were up4.3% year over year to $918 million. However, operating margin declined 20 bps to 25.3% on a year-over-year basis. Impressive performance by the water quality business, product identification businesses, marking & coding equipment, packaging and color solutions and lab chemicals drove sales.

Also, on a year-over-year basis, operating profit margin improved 320 basis points to 16.9%.

Notable Activity during the Quarter

During the quarter, Danaher Corp. inked a definitive agreement to buy molecular diagnostics company Cepheid (NASDAQ:CPHD) for $53.00 per share. Under the deal, Cepheid will become part of Danaher’s diagnostics unit. The deal makes strategic sense as Danaher has a huge diagnostics business, but does not enjoy a strong foothold in molecular diagnostics, in which Cepheid is a market leader.

Cepheid’s comprehensive installed base, test menu and pioneering product portfolio will fortify Danaher’s presence in this high-growth segment. Per Danaher, Cepheid’s addition will boost operational efficiencies and expand margins in its $5 billion-worth diagnostics unit. Cepheid is likely to generate $618–$635 million in revenues this year, which will add to Danaher's $5 billion revenue base.

This apart, the company has also announced the acquisition of Phenomenex that will bolster its Life Sciences segment. Both of these acquisitions are expected to close in the fourth quarter of 2016.

Liquidity

Danaher exited the quarter on Sep 30, 2016, with free cash flow of $701 million, a significant increase from $518 million recorded as of Oct 2, 2015.

Guidance

Concurrent with the earnings release, Danaher provided its guidance for fourth-quarter 2016. The company projects adjusted earnings per share in the range of $1.01 to $1.05.

Also, Danaher raised its full-year 2016 adjusted earnings guidance to $3.57 to $3.61 from the previous range of $3.53 to $3.60.

Our Take

Danaher’s DBS model has helped it to deliver yet another impressive quarter. Danaher is gradually evolving as a healthcare company. It has widened its presence in the healthcare and dental markets, which are expected to benefit from the rise in the aging population and increased spending on healthcare and fitness. Also, the company’s strategic acquisitions have acted as a fundamental catalyst, propelling the top-line significantly. Going forward, we believe Cepheid and Phenomenex buyouts will help the company unlock multiple growth opportunities in its Diagnostics and Life Sciences segments.

Danaher currently carries a Zacks Rank #2 (Buy). Another equally ranked stock in the sector is Leucadia National Corporation (NYSE:LUK) . You can see the complete list of today’s Zacks #1 Rank stocks here.

Leucadia National is a diversified financial services holding company engaged in personal and commercial lines of property and casualty insurance, life insurance, banking and lending and manufacturing. This company has been witnessing upward revisions in its 2016 earnings estimates over the past four weeks from 11 cents to 20 cents.

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