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Danaher (DHR) Beats on Q2 Earnings and Sales, Ups Guidance

Zacks Equity Research

Danaher Corporation DHR reported better-than-expected results in the second quarter of 2019. While earnings beat the Zacks Consensus Estimate by 3.5%, sales surpassed the same by 1.4%.

The company’s adjusted earnings were $1.19 per share in the reported quarter, which outpaced the Zacks Consensus Estimate of $1.15. The reported figure also increased 3.5% over the year-ago quarter’s figure of $1.15 on the back of impressive sales performance and gain from Danaher Business System (“DBS”) initiatives.

Organic Growth & Acquired Assets Drive Sales

In the quarter under review, the company’s net sales were $5,156.6 million, which increased 3.5% from the year-ago quarter’s figure. Organic sales in the quarter grew 5.5% and acquired assets had a positive 1% impact. However, foreign currency translations had a negative impact of 3%.

The top line surpassed the Zacks Consensus Estimate of $5,085 million.

The company reports net sales under four segments — Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. The segmental information is briefly discussed below:

Revenues in the Life Sciences segment totaled $1,712.6 million, increasing 6.5% year over year. Results were driven by a 2% gain from acquired assets and 7.5% growth in core sales, partially offset by a 3% adverse impact of foreign currency translations.

Revenues in the Diagnostics segment grossed $1,618.3 million, increasing 4.5% year over year. The improvement came on the back of a 7.5% increase in core sales, which was partially offset by a 3% negative impact of foreign currency translations.

Revenues in the Dental segment amounted to $712.1 million, reflecting 3% decline year over year. Core sales declined 0.5% and unfavorable movements in foreign currencies had 2.5% adverse impact.

Notably, in June 2019, Danaher announced that its spun-off Dental segment will be known as Envista Holdings Corporation. The separation of the dental business will be complete in the second half of 2019.

Revenues in the Environmental & Applied Solutions segment totaled $1,113.6 million, increasing 2% year over year. The uptick can be attributed to a 4% increase in core sales and 0.5% positive impact of acquired assets. However, foreign currency translations had an adverse impact of 2.5%.

Margins Fall Year Over Year

In the quarter under review, Danaher’s cost of sales increased 5.3% year over year to $2,279.2 million. It represented 44.2% of net sales compared with 43.4% in the year-ago quarter. Gross margin declined 80 basis points (bps) year over year to 55.8%.

Selling, general and administrative expenses of $1,671.8 million reflect a year-over-year increase of 2.1%. As a percentage of net sales, it represented 32.4% versus 32.9% in the year-ago quarter. Research and development expenses were $321.8 million, which increased 3.2% year over year. It represented 6.2% of net sales.

Operating income in the quarter under review increased 1.9% year over year to $883.8 million. Operating margin, however, contracted 30 bps to 17.1% in the quarter. This downturn was due to a 5-bps adverse impact of acquisitions and 40-bps impact of miscellaneous sources, partially offsetting contribution of 15 bps from the core business.

Balance Sheet and Cash Flow

Exiting the second quarter, Danaher had cash and cash equivalents of $5,433.6 million, significantly above $3,910 million at the end of the last reported quarter. Long-term debt balance increased 7.3% sequentially to $10,144.4 million.

In the second quarter, the company generated net cash of $1,171.5 million from operating activities, increasing 13.1% from the year-ago period’s level. Capital used for purchasing property, plant and equipment totaled $180.8 million versus $153.8 million in the year-ago quarter. Free cash flow increased 13.5% year over year to $1,002 million.

In the first half of 2019, the company paid dividends worth $233.9 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 GE BioPharma business in the fourth quarter of 2019. This buyout will strengthen Danaher's biologics workflow solutions business, considered under its Life Sciences segment.

For the third quarter, Danaher anticipates adjusted earnings of $1.12-$1.15 per share.

For 2019, the company raised its adjusted earnings per share projection to $4.75-$4.80 from $4.72-$4.80 mentioned earlier.

Danaher Corporation Price, Consensus and EPS Surprise

Danaher Corporation Price, Consensus and EPS Surprise

Danaher Corporation price-consensus-eps-surprise-chart | Danaher Corporation Quote

Zacks Rank & Other Stocks to Consider

With a market capitalization of approximately $100.1 billion, the company currently sports a Zacks Rank #1 (Strong Buy).

Two other top-ranked stocks in the industry are United Technologies Corporation UTX and Honeywell International Inc. HON. While United Technologies sports a Zacks Rank #1, Honeywell carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for both the stock remained stable for the current year. Further, average positive earnings surprise for the last four quarters was 12.85% for United Technologies and 3.50% for Honeywell.

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