The market greeted industrial conglomerate Danaher's (DHR 0.62%) latest quarterly results with a nice pop on the day of the earnings release. This was the first set of company earnings presided over by new CEO Tom Joyce. Naturally, investors were keen to find out just what kind of message the new chief executive was looking to give out. His predecessor,Larry Culp, was closely associated with the company's success over the years, and Joyce has large boots to fill. So, in that context, we'll look at five key takeaways from the company's quarterly conference call. Is Joyce taking the company in the right direction?
Business as usual at Danaher?
In a previous article, Fools looked at the earnings in more detail. The company is known for acquiring businesses and then applying its Danaher Business System, or DBS, to them. Simply put, it's a management strategy that emphasizes lean manufacturing processes that can be applied across all segments of the company. While the current results will still be a product of Culp's management, the question is does Joyce plan to change its business strategy?
DBS Explained Source: Danaher Website
First, Danaher continues to be a prodigious converter of net income into free cash flow, with Joyce outlining the conversion rate in the quarter." Our cash flow performance is also very good, resulting in free cash flow to net income conversion ratio of a 128%."
A quick look at its historical numbers confirms that the figure is in line with its long-term trends, indicating that the company's lean management processes continue to work in maximizing cash flow for investors.
Source: Morningstar.
Core margin improvement
Second, Joyce disclosed that Danaher would be "increasing spending on productivity initiatives to approximately $125 million in the second half of 2014." Again, this signals the company's commitment to increasing margins from the businesses it owns, along with those of its acquisitions--same old Danaher.
As the following chart demonstrates, Danaher returned to form after a weak second-quarter where two of its segments saw negative core margin growth. In the third-quarter the company increased operating margins in four of its core (excluding acquisitions) businesses.
Source: Danaher Presentations.
Danaher's acquisitions
Third, Joyce made it clear that Danaher's acquisitive nature wasn't going to change anytime soon: "We are encouraged by our increased M&A activity of late, as we've announced $3.3 billion of deals across our portfolio in the first nine months of the year." The $3.3 billion figure includes the $2.2 billion for the acquisition of Nobel Biocare (dental implants). Danaher has been subject to some criticism over its lack of major acquisitions in the last couple years, but Joyce was keen to dispel any notion that the company wasn't focused on making deals--again, no change to its traditional strategy.
The fourth point relates to the company's acquisition strategy itself. When pushed on the issue of whether management favors balancing the overall business in terms of certain percentages for the industrial, health care, or environmental segments, Joyce replied, "We are not stuck on percentages and we absolutely moved to where we can add the greatest value for our shareholders by making those portfolio moves that come our way and that we can make happen over time."
In other words, if the greatest value deals are all in health care, then that's where management would aim to do deals. It's an admirable strategy, but it has the potential to focus the business on one area -- something for investors to think about if they favor picking stocks based on a company's industry exposure.
Geographic commentary
The final takeaway is some interesting geographical commentary from Joyce. In an analysis of fellow industrial stalwart 3M (MMM 0.41%), Fools saw a chart of how the International Monetary Fund recently downgraded expectations for global growth in emerging markets, but only made a slight decrease in expectations for the developed world.
Danaher's management appeared to confirm the trends. Indeed, Joyce spoke of "reason for some caution" on Germany and confirmed "recent softness" in Brazil, while saying there has been a change in "the trajectory of" the Russian market.
Moreover, Joyce spoke of "continued very good growth in China"; the IMF also slightly increased its 2014 forecast for growth in emerging market-Asia. Joyce concluded that "high-growth markets" (a euphemism for emerging markets) would "be the leaders" in terms of margin, with developed markets "hanging in there" on margin generation. However, the IMF forecast suggests the U.S. economy might be doing better than implied in Danaher's guidance.
All told, management wants you to know that it remains committed to applying DBS to generate future productivity improvements on acquisitions. Moreover, the company's excellent cash flow conversion is still apparent. The geographical commentary confirms what the IMF said, but it's somewhat disappointing that management was not more upbeat on conditions in North America. Otherwise, it's business as usual, and investors should not doubt that Danaher's core business strategy will remain the same, even with a new CEO in place.
