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Danaher's Q3 profit fueled by China, India growth even as currency bites

Danaher Corp., a "top pick" in the core laboratory tools business according to J.P. Morgan analysts, posted double-digit earnings growth for the sixth consecutive quarter, helped by revenue growth in India and China.

The Washington, D.C.-based company's food testing and water quality technology were in demand in the two countries, President and CEO Thomas Joyce Jr. said. In China, demand for Danaher's water quality platform increased due to the government's policy on surface water, with the country seeing a seventh consecutive quarter of double-digit growth, Danaher said.

Prior acquisitions such as Pall Biotech and Integrated DNA Technologies Inc., a genomics consumables company, also generated double-digit growth for Danaher. Production of large-molecule medicines — known as biologics because they are derived from living cells — drove the majority of Pall's revenue, which Joyce said will remain on a long-term growth track.

Overall, the maker of tools for the environmental, dental, life sciences and diagnostics markets boasted core revenue growth of 6.5% and revenues of $4.85 billion. Danaher raised its 2018 adjusted EPS guidance to a range of $4.49 to $4.52 from $4.43 to $4.50.

Currency, tariffs give pause

Although the majority of Danaher's platforms experienced a boost in core revenue, the dental unit was hurt by currency fluctuations. The effect of currency translation added to the lower sales volume at the unit. Core revenue fell 0.5%, compared to J.P. Morgan analysts' expectation of at least 1% growth.

Currency, particularly in terms of a strengthening U.S. dollar, was mentioned repeatedly as one of a few headwinds for Danaher's earnings numbers, echoing comments made on U.S. device maker Abbott Laboratories' Oct. 17 earnings call.

According to Joyce, currency translation crimped revenue by 1.5%. High growth market countries were especially impacted, Joyce said, even though China and India posted positive performances overall.

Currency fluctuations "are likely to continue as we see it today," Joyce said when questioned by analysts about the margin impact. CFO Daniel Comas posited that the effects, both translational and transactional, will continue over the next couple of quarters.

Tariffs had been a noted shadow over Danaher's second-quarter earnings, with management foreseeing continued challenges, especially in manufacturing. However, Joyce said on the Oct. 18 earnings call that "we don't see ourselves as being significantly in the crosshairs of the tariffs that have been put out." He added that, tariffs or no tariffs, there is always pressure to get price in the markets.

Regardless, there is reason to be cautious about the "second derivative impact on growth," Joyce said, adding, "We haven't seen much of that right now."

Looking ahead

Nevertheless, Danaher's overall performance "exceeded expectations," J.P. Morgan analysts wrote in a note to clients following Danaher's third-quarter earnings release. Joyce posited a fourth consecutive year of double-digit adjusted EPS growth come 2019.

The analysts added that other core tools companies would likely see positive results, specifically naming Thermo Fisher Scientific Inc. and Waters Corp. ahead of their earnings releases later in October.

Meanwhile, Danaher's M&A prospects appear rosy as the company looks to capitalize on its "multi-industry structure," Joyce said during the earnings call. The CEO added that Integrated DNA Technologies has been paid off with year-to-date free cash flow.

Comas, the CFO, also highlighted rising interest rates as a helpful factor for Danaher's M&A activity, as "we're much less interest-rate sensitive than lower credit companies and private equity."

Danaher is looking for new products in hematology, or the treatment of blood disorders, and dental, with Joyce acknowledging that "[hematology is] an area where we need to enhance our competitiveness." Among the product launches was an early indicator for sepsis, a serious infection often called blood poisoning.

The dental unit's recently U.S.-approved Spark, a clear aligner system, expanded the company's digital dentistry efforts and overall dental portfolio. Spark, initially launched in Australia in June, will likely enter U.S. markets "in the coming months," according to an Oct. 18 note by Stifel medical technology and supplies analysts. Nonetheless, Joyce said "there's a road to go ahead" before a measurable impact is made.

Joyce reiterated Danaher's plans to spin out the dental unit as an independent public company in the second half of 2019.

In diagnostics, automation was also a focal point, with advancements in reducing manual steps for a lab tech "from 32 to one," Joyce said. Continued investment in automation will be "critical" for long-term customer retention.

Immunoassay, a biochemical test that uses an antibody or antigen, also performed well in Danaher's product line, though Joyce noted during the question-and-answer session on the earnings call that Danaher is "more highly indexed to clinical chemistry … than some of our diagnostic competitors." Due to the clinical chemistry market's lower growth rate, "that is a little of a drag" on Danaher.