Danaher (DHR) Beats Q3 Earnings Estimates, Lowers '19 View

Danaher Corporation (NYSE:DHR) kept its earnings beat streak alive in the third quarter of 2019, with earnings surpassing estimates by 0.9%. However, sales lagged estimates by roughly 0.1%.

The company’s adjusted earnings were $1.16 per share in the reported quarter, which outpaced the Zacks Consensus Estimate of $1.15. The same also grew 5.5% from the year-ago quarter’s figure of $1.10 on impressive sales performance and gain from Danaher Business System (“DBS”).

Sales Rise on Organic Growth & Buyouts

In the quarter under review, the company’s net sales were $5,037.3 million, which grew 3.8% from the year-ago quarter. Organic sales in the quarter grew 5% and acquired assets had a positive 0.5% impact. However, foreign-currency translations had a negative impact of 1.5%.

Adjusted core sales growth, excluding the impact of Envista Holdings Corporation (NYSE:NVST) , was 6% in the quarter.

However, the top line lagged the Zacks Consensus Estimate of $5,040 million.

It is worth noting here that Danaher completed the divestment of its dental assets and transferred those to its subsidiary, Envista, in September 2019. Effective the third quarter of 2019, the company started reporting net sales under three segments — Life Sciences, Diagnostics, and Environmental & Applied Solutions. The segmental information is briefly discussed below:

Revenues for the Life Sciences segment totaled $1,695.6 million, rising 6.2% year over year. Results were driven by 1% gain from acquired assets and 6.5% growth in core sales, partially offset by a 1.5% adverse impact of foreign-currency translations.

Revenues in the Diagnostics segment grossed $1,601.9 million, increasing 6.5% year over year. The improvement came on the back of 8% rise in core sales, which was partially offset by a 1.5% negative impact of foreign-currency translations.

Revenues in the Environmental & Applied Solutions segment totaled $1,080.5 million, rising 0.5% year over year. The uptick can be attributed to 2% growth in core sales. However, foreign-currency translations had an adverse impact of 1.5%.

Gross Margin Up Y/Y, Operating Margin Falls

In the quarter under review, Danaher’s cost of sales rose 3.1% year over year to $2,228.9 million. It represented 44.3% of net sales compared with 44.6% in the year-ago quarter. Gross margin increased 40 basis points (bps) year over year to 55.8%.

Selling, general and administrative expenses of $1,654.7 million reflect a year-over-year increase of 6.2%. As a percentage of net sales, it represented 32.9%. Research and development expenses were $318.9 million, which rose 5.9% year over year. It represented 6.3% of net sales.

Operating income in the quarter under review grew 0.5% year over year to $834.8 million. Operating margin, however, contracted 50 bps to 16.6% in the quarter. The downturn was due to a 10-bps adverse impact of acquisitions and 110-bps impact of miscellaneous sources, partially offsetting contribution of 70 bps from the core business.

Balance Sheet and Cash Flow

Exiting the third quarter, Danaher had cash and cash equivalents of $14,252.1 million, significantly above $5,433.6 million at the end of the last reported quarter. Long-term debt balance rose 63% sequentially to $16,536.2 million.

In the first three quarters of 2019, the company generated net cash of $2,840.4 million from operating activities, increasing 2% from the year-ago period level. Capital used for purchasing property, plant and equipment totaled $518.4 million versus $441.3 million in the year-ago period.

In the first nine months of 2019, the company paid out dividends worth $385 million to its shareholders.

Outlook

In the quarters ahead, Danaher expects to consistently benefit from DBS initiatives. These efforts enabled the company to focus more on product innovation, superior product quality, building an efficient workforce and enhancing shareholder value.

Also, Danaher anticipates completing the acquisition of General Electric Company's (NYSE:GE) BioPharma business in the fourth quarter of 2019. The buyout will likely strengthen Danaher's biologics workflow solutions business, considered under its Life Sciences segment. To comply with the regulatory process, the company recently decided to divest some of its business to Sartorius AG.

For the fourth quarter of 2019, Danaher anticipates adjusted earnings of $1.32-$1.35.

For 2019, the company lowered its adjusted earnings per share projection to $4.74-$4.77 from the previously mentioned $4.75-$4.80. The revision reflects dilution caused by the Envista transaction.

Danaher Corporation Price, Consensus and EPS Surprise