Danaher Corporation DHR reported adjusted earnings of $1.05 a share for third-quarter 2015, surpassing the Zacks Consensus Estimate by a penny. Adjusted earnings increased 6.1% on a year-over-year basis.
Improvement in the company’s bottom line is mainly attributable to its effective Danaher Business System (“DBS”) that focuses on three critical areas of quality, delivery, and cost & innovation. Solid top-line performance also aided earnings growth in the quarter.
Inside the Headlines
Danaher reported total sales of $5,127.1 million, an increase of 6.7% year over year. Also, revenues topped the Zacks Consensus Estimate of $5,075 million.
Improvement in top line came on the back of positive contributions from both acquired businesses (which accounted for 10.5% of the growth) and existing businesses (3%). However, currency fluctuations acted as a significant headwind, leading to 7% decline in the sales.
Higher sales in China and India were offset, to some extent, by weak sales in Russia, the Middle East and Brazil. Moreover, existing businesses in developed markets recorded low-single digit growth. The U.S. and Western Europe recorded impressive growth, partially offset by lackluster performance in other markets.
Revenues in the Test & Measurement segment declined 2.2% year over year to $842.4 million. Operating margin for the segment increased 80 basis points (bps) to 22.7%. The overall decline in revenues was triggered by foreign currency fluctuations during the quarter. Higher sales volume and cost savings generated from restructuring actions contributed to the improvement in operating margins.
Revenues in the Environmental segment inched up 0.9% to $922.4 million. The segment recorded an operating margin of 22.0%, up 160 bps year over year. Improvement in both water quality and retail petroleum equipment businesses contributed to the overall growth. Higher sales volume and restructuring actions undertaken by the company were attributable to improvement in operating margins
Life Sciences and Diagnostics revenues rose 14.7% year over year to $1,997.6 million. Operating margin for the quarter decreased 490 bps to 10.8%. Higher demand in the clinical business, robust global consumable sales and impressive sales in clinical and pharmaceutical markets across North America and Western Europe aided the strong sales growth. Moreover, increased demand for advanced staining consumables in North America, Western Europe and China supplemented the sales growth. The fall in operating margin was brought about by high transaction costs related to the acquisition of Pall.
Revenues from the Dental segment grew 23.4% year over year to $652.2 million. However, the operating margin decreased 240 bps to 14.8%. Surge in demand for dental consumables, including orthodontic and implant products in the North American market, and increase in prices for existing products supported the improvement. However, charges related to acquisition of Nobel Biocare added to the decline of operating margin.
In the Industrial Technologies segment, revenues slipped 6.7% to $807.7 million, while the operating margin rose 10 bps to 24.4%, both on a year-over-year basis. Poor sales in sensors and controls businesses due to unimpressive demand in North America and Western Europe more than offset the improvement in automation and product identification businesses. However, improvement in productivity and restructuring initiatives benefited operating margins.
On the other hand, Danaher’s operating margin increased 250 basis points (bps) year over year to 15.9%. This improvement was driven by increased sales volumes and cost-saving initiatives associated with restructuring actions.
Danaher Completes Pall Acquisition
On Aug 31, 2015, Danaher completed the takeover of Pall Corp. for approximately $13.8 billion or $127.20 per share. The transaction has been funded through cash balance and proceeds drawn from debt issuances or new credit facilities. Both the companies’ board of directors have approved the merger. Following this transaction, the company has successfully merged Pentagon Merger Sub, Inc., an indirect wholly owned subsidiary of Danaher, into Pall Corp. Now Pall has become an indirect wholly owned subsidiary of Danaher.
Liquidity
Danaher exited the quarter with cash and equivalents of $1,833.5 million versus $3,342.0 million as on Jul 3, 2015. The company had long-term debt of $11,522.7 million on Oct 2, 2015 compared with $3,052.7 million as on Jul 03, 2015.
Our Take
Danaher’s business model has proven its resiliency over the past few quarters and is emerging as the company’s biggest strength. This apart, the company’s impressive performance in developing markets, its ardent eye for strategic acquisitions and commitment toward introducing innovative products are likely to act as key drivers for growth, going forward.
We believe the company’s decision to acquire Pall will strengthen its foothold in the already thriving biopharmaceutical market. Driven by increased funding in biotechnological research, rising demand for single-use and disposable products and an increasing number of approved drugs and vaccines, this market is expected to grow significantly in the long run. This, in turn, indicates lucrative commercial prospects for Danaher.
Danaher currently has a Zacks Rank #2 (Buy). Other well-ranked stocks in the industry include NN Inc. NNBR, Worthington Industries, Inc. WOR and Compass Diversified Holdings CODI. All three stocks carry the same Zacks Rank as Danaher.
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