Danaher Corporation DHR reported adjusted earnings of 85 cents per share in first-quarter 2017, beating the Zacks Consensus Estimate of 84 cents by 1.2%. Moreover, adjusted earnings rose 7.6% on a year-over-year basis.
The upside in the company’s bottom line can be attributed to its effective Danaher Business System (“DBS”), which provides a set of philosophies, processes and toolsets to drive improvement. Moreover, a decent top-line performance supplemented the earnings growth.
Revenues by Segment
Danaher reported total sales of $4,205.7 million, reflecting an increase of 7.2% year over year. In addition, the figure surpassed the Zacks Consensus Estimate of $4,170 million.
Improvement in first-quarter revenues was due to positive contributions from both non-core and core businesses. While acquired businesses contributed 6.0% to overall growth, core businesses contributed 2.5%, both on a year-over-year basis. The company’s recent large acquisitions, Pall and Cepheid, contributed significantly toward the top-line growth.
Life Sciences revenues rose 4.0% year over year to $1,308 million. Operating margin for the quarter expanded 210 basis points (bps) to 16.2%. The sales growth of this segment was driven by robust market traction of mass spectrometers, microscopy, flow cytometry and genomics products. In addition, improved industrial end-market supplemented sales growth. Impressive growth in the operating margin was driven by higher sales volumes and incremental year-over-year cost savings associated with the restructuring actions.
Revenues at the Diagnostics segment increased 17.0% year over year to $1,327 million. Impressive performance of clinical business in China and pathology diagnostics business in North America & Western Europe drove the top-line growth of this segment. However, operating margin at the segment contracted 430 bps year over year, to 11.6%. The fall is attributable to currency fluctuations, higher costs associated with new product development, sales, service and marketing growth investments.
Revenues at Dental came in at $656 million, relatively flat on a year-over-year basis. Operating margin shrunk 90 bps to 13.6%. While stellar demand for implant systems in China and other high-growth markets supplemented the top-line growth, this was fully offset by lower demand for dental consumable product lines in North America and Western Europe. Fall in operating margin is attributable to higher costs associated with new product development, sales & service and unfavorable product mix.
At the Environmental & Applied Solutions segment, revenues were up 4.5% year over year to $915 million. Solid performance across all the business lines, namely, water quality, chemical treatment solutions and ultraviolet water disinfection in end markets drove growth for this segment. Operating margin stood at 22.7%, flat on a year-over-year basis. While cost savings associated with restructuring actions benefitted operating margin, this was offset by costs associated with intersegment product line transfers.
On a year-over-year basis, operating profit margin contracted 80 basis points to 14.8%. Operating margin decline is attributable to unfavorable product mix, currency fluctuations and incremental year-over-year costs associated with various new product developments. However, gross margins were up 30 basis points to 55.5%. Gross margin improvement came on the back of higher sales volumes and impressive cost savings associated with the restructuring activities actions.
Danaher exited the first quarter of 2017 with free cash flow of $401 million, compared to the year-ago tally of $484 million.
Concurrent with the earnings release, Danaher provided its guidance for second-quarter 2017. The company projects adjusted earnings per share in the range of $0.95–$0.98.
Furthermore, Danaher reiterated its full-year 2017 adjusted earnings guidance. The company continues to expect non-GAAP adjusted earnings per share to be in the range of $3.85–$3.95.
As expected, Danaher’s first-quarter financials benefitted strongly from the DBS, which has driven impressive growth for the company ever since its inception. The company’s efficient management team, impressive customer base and wide geographic presence add to its strength. In addition, positive industry trends like new regulations from the Chinese Food and Drug Administration and strategic product launches bode well for long-term growth.
Post the spin-off from Fortive Corporation FTV, Danaher has retained businesses with a recurring revenue structure and major exposure in healthcare and environmental business verticals. This has also helped the Zacks Rank #2 (Buy) company to shift to less volatile end-markets and boost its consumables base. We believe that high market share in multi-billion markets, impressive secular growth, proprietary technology and healthy recurring revenue stream signal bright days in the future.
Other Stocks to Consider
Some other stocks worth considering in the industry are Leucadia National Corp. LUK and 3M Company MMM. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Leucadia National Corporation delivered an average positive earnings surprise of 60.9% in the last reported quarter. It currently sports a Zacks Rank #1.
3M Company currently carries the same Zacks Rank as Danaher. The company delivered an average positive earnings surprise of 1.9% for the trailing four quarters.
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