Danaher Corporation (NYSE:DHR) recently delivered a solid set of second-quarter earnings that belied some of the disappointing reports we have seen from other companies in the industrial sector in this current earnings season. The company is known for its business model of acquiring companies and then applying its Danaher Business System, or DBS, in order to increase their productivity.
Let's take a closer look at the earnings report and see if the business model is still working.
Danaher's second-quarter earnings
First, the headline numbers:
- Second-quarter core revenue growth of 3.5% versus management's full-year target of 3%-4% core revenue growth.
- Second-quarter non-GAAP adjusted EPS of $1.08 versus guidance of $1.01-$1.05 and analyst estimates of $1.04.
I've used core revenue growth (occurring from ongoing businesses) as a headline because it's a better gauge for two reasons. First, Danaher is an acquisitive company, with acquisitions contributing 6.5% to the overall revenue growth in the quarter. Second, foreign currency effects (a stronger U.S. dollar) are hurting reported revenue, with the impact of currency translation taking off 6.5% of overall revenue growth. In the end, they balanced each other out, and total revenue growth came in at 3.5%.
As for guidance:
- Third-quarter core revenue growth comparable to the second quarter at around 3.5%.
- Third-quarter adjusted diluted non-GAAP EPS guidance of $1.00-$1.04.
- Full-year adjusted diluted non-GAAP EPS guidance raised slightly to $4.25-$4.33 from $4.23-$4.33.
The slight increase in the low end of full-year EPS guidance isn't really anything to get excited about, but at least it stemmed the tide of guidance reductions due to negative currency effects. For example, full-year guidance was reduced at the time of the first-quarter results to $4.23-$4.33 from $4.30-$4.40 in January, and from $4.35-$4.45 in November, mainly because of currency effects.
What to look for in the results
Readers unfamiliar with Danaher's business model can read up on what makes the company tick here. In order to better demonstrate the underlying trends in the business, the following slideshow details each segment's core operating margin increases, with some commentary on market conditions and core revenue growth.
Comparing year-over-year core margin and revenue growth is a better way to look at underlying performance because it strips out the effects of acquisitions made in the last year. If Danaher is doing a good job of integrating acquisitions, then you should see its core margin increasing continually, but reported margins will be more variable since the acquisitions could suppress margins as the new companies are integrated.
For ease of reference in the slideshow, here is a look at each segment's contribution to profit last year: