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Danaher (DHR) Beats on Q1 Earnings & Sales, Raises View

Danaher Corporation DHR reported adjusted earnings of $1.08 a share in first-quarter 2016, beating the Zacks Consensus Estimate of $1.03 by 4.8%. Notably, adjusted earnings increased 18.5% 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. The DBS system also helped the company achieve robust operating margin expansion and free cash flow. Moreover, a decent top-line performance boosted the bottom line in the quarter.

Revenues by Segment

Danaher reported total sales of $5,387.2 million, reflecting an increase of 14.8% year over year. Also, the sales figure managed to beat the Zacks Consensus Estimate of $5,361 million.

Improvement in first-quarter revenues mainly came on the back of positive contributions from acquired businesses (which accounted for 16.5% of growth); whereas core businesses remained relatively flat. However, currency fluctuations acted as a headwind, leading to a 2% decline in sales.

Revenues at the Test & Measurement segment declined 5.7% year over year to $640.3 million. Also, operating margin at the segment declined 140 basis points (bps) to 20.9%. The overall decline in revenues was triggered by a slowdown in all major geographies and product lines.

Overall slowdown of the global economy added to the woes. A decline in operating margin came on the back of lower sales and strengthening of the U.S. dollar.

Revenues at the Environmental segment increased 3.4% to $855.8 million. Also, operating margin at the segment was down 260 bps year over year to 17.3%. Price increases of products at this segment proved conducive to sales growth. Also, increased demand for the company’s ultraviolet water disinfection and retail/commercial petroleum equipment product lines compounded sales growth. A fall in operating margin was attributable to incremental investments in new product development initiatives and currency fluctuations.

Life Sciences and Diagnostics revenues rose 42.2% year over year to $2,411.9 million. Operating margin for the quarter increased 220 bps to 14.9%. Higher demand in the clinical business (led by growth in the microbiology and immunoassay product lines), robust global consumable sales and impressive performance in key clinical & pharmaceutical markets aided sales growth.

Increasing sales of mass spectrometers primarily driven by compound microscopy products contributed to Danaher’s results. Impressive growth in operating margins came on the back of higher sales volumes and incremental year-over-year cost savings associated with the restructuring actions.

Revenues at the Dental segment inched down 1% year over year to $655.9 million. However, the operating margin increased 540 bps to 14.5%. While increased demand for general dental consumable products and implant systems in North America drove sales growth, this was largely offset by weak demand for dental equipment and imaging products on account of weaker market conditions in Europe and the Middle East. 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 slipped 1.3% to $823.3 million while the operating margin declined 30 bps to 24.3%; both on a year-over-year basis. Weaker demand in business' packaging and color solutions in geographies like North America and China proved to be a major drag. Also weak demand in agricultural and construction-related end-markets acted as headwinds.

Liquidity

Danaher exited the quarter with cash and equivalents of $664.3 million versus $790.8 million as on Dec 31, 2015. The company had long-term debt of $12,194.7 million compared with $12,025.2 million as on Dec 31, 2015.

Guidance

Concurrent with the earnings release, Danaher provided its guidance for second-quarter 2016. The company projects adjusted earnings per share in the range of $1.19–$1.23 for second-quarter 2016. Also, encouraged by the present market scenario and inherent business strength, Danaher raised its full-year 2016 guidance from $4.80–$4.95 to $4.85--$4.98.

Our Take

Broad diversification across business and end markets has proved to be Danaher’s key strength, helping the company mitigate external challenges and bolster growth over the past few quarters. In addition, the company’s diligently devised business model DBS has proved to be a major success.

Also, leading brands, dominant share in multi-billion markets, spot-on acquisition strategy and solid customer base adds to its strength. We also believe prudent streamlining of businesses and divestiture of slow-growth operations will likely accelerate growth. This apart, the company’s low exposure to oil and gas markets and relatively less cyclical nature of the Life Sciences and Dental business reaffirm our confidence on the stock.

Danaher presently carries a Zacks Rank #2 (Buy). Some other favorably ranked stocks in the industry worth a look include 3M Company MMM, Carlisle Companies Inc. CSL and CLARCOR Inc. CLC. All three companies carry the same Zacks Rank as Danaher.

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