Danaher Corporation (NYSE:DHR)
Q3 2014 Earnings Conference Call
October 16, 2014 08:00 AM ET
Matt Gugino – VP, IR
Tom Joyce – President and CEO
Dan Comas – EVP and CFO
Scott Davis – Barclays
Nigel Coe – Morgan Stanley
Steven Winoker – Bernstein Research
Steve Tusa – JPMorgan
Jeff Sprague – Vertical Research Partners
Julian Mitchell – Credit Suisse
Richard Eastman – Robert W. Baird
Isaac Ro – Goldman Sachs
My name is Debby, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Danaher Corporation Third Quarter 2014 Earnings Results Conference Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).
I will now turn the conference over to Mr. Matt Gugino, Vice President of Investor Relations. Mr. Gugino, please begin your conference.
Matt Gugino – VP, IR
Thanks Debby. Good morning, everyone, and thanks for joining us. On the call today are Tom Joyce, our President and Chief Executive Officer and Dan Comas, our Executive Vice President and Chief Financial Officer.
I’d like to point out that our earnings release, a slide presentation supplementing today’s call, our third quarter Form 10-Q and the reconciling and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available in the Investor section of our website, www.danaher.com under the heading Financial Information-Quarterly Earnings and will remain available following the call.
The audio portion of this call will be archived on the Investor section of our website later today under the heading Investor Events and will remain archived until our next quarterly call. A replay of this call will also be available until October 23, 2014. The replay number is (888) 203-1112 in the U.S. and (719) 457-0820 internationally and the confirmation code is 9389793.
During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Please refer to the supplemental materials and our third quarter Form 10-Q for additional factors that impacted year-over-year performance.
Unless otherwise noted, all references in these remarks and accompanying presentation to earnings, revenues and other company-specific financial metrics relate to the third quarter of 2014 and relate only to the continuing operation of Danaher’s businesses, and all references to period-to-period increases or decreases in the financial metrics are year-over-year.
I would also like to note that we are making some statements during the call that are forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings.
It is possible that actual results might differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements whether as a result of new information, future events and developments or otherwise.
With that I’d like to turn the call over to Tom.
Tom Joyce – President and CEO
Thanks Matt and good morning everyone. We are pleased with the quarterly results we announced this morning. Earnings came in above our expectations, thanks to the Danaher teams’ very strong execution.
Danaher Business System continues to drive superior margin expansion, increase cash flow and healthy top line performance in a modest growth environment. The investments we’ve made in innovation and expansion in high growth markets drove share gains in many of our operating companies. Fluke, Hach, Veeder-Root, Radiometer, AB Sciex, Implant Direct and Esko are among the businesses that we believe outperformed relative to their markets during the quarter.
These share gains and the teams’ execution also helped drive more than 85 basis points of core operating margin improvement in four of our five segments. Our cash flow performance is also very good, resulting in free cash flow to net income conversion ratio of a 128%.
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. These acquisition will strengthen our dental, life science and diagnostics, environmental and Test & Measurement segments.
Cultivation funnels across our portfolio remained full, giving us confidence in our ability to deploy our substantial M&A capacity in a strategic and disciplined way. So with that as a backdrop, let’s get in to the details of the quarter.
This morning we reported diluted net earnings per share of $0.95, up 13% and representing another record third quarter for Danaher. Revenues grew 4.5% to 4.9 billion, with core revenues up 3%. The positive impact of acquisitions increased revenues by 2%, while currency translation reduced revenues by 50 basis points.
Geographically, high growth markets led the way increasing high single digits. Despite the headlines in China, our businesses grew double digit, led by our T&M Instruments, Gilbarco Veeder-Root, Diagnostics and Dental platforms. Developed markets remained relatively stable and the US and Western Europe both grew low single digits.
Our gross margin expanded 80 basis points or approximately a $140 million to 52.7%. This increase in gross profit enabled us to increase our sales and marketing and R&D by nearly 60 million in the quarter and deliver 70 basis points of core operating margin expansion.
Turning to our five operating segments, Test and measurement revenues increased 1.5%, while core revenues decreased 1%, primarily due to a decline in our communications platform. Reported operating margin declined a 170 basis points, while core operating margins decreased a 115 basis points.
On Monday, you saw that we announced an agreement to combine our communications business with NetScout Systems to create a premier global provider of network management solutions for both carrier and enterprise customers.
We are excited about this transaction which is the culmination of a multi-year discussion with NetScout about working together. This is a powerful opportunity to combine highly complementary businesses in a transaction that we believe will benefit all Danaher and NetScout stakeholders, associates, shareholders and customers alike.
Danaher’s premier troubleshooting, cyber security, and engineering solutions combined with NetScout’s high performance monitoring technologies will give customers access to the most expansive suites of best-in-class product in the industry.
The combined company will offer even greater breadth and depth across both carrier and enterprise networks, expanding opportunity through innovation and growth and improving our customers overall experience.