Danaher Corporation — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; the filing also reports fourth-quarter results. All figures are U.S. dollars unless noted. Danaher operated across Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. Its growth strategy emphasizes the Danaher Business System, product development, productivity improvements, and acquisitions.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $20.56 billion | $19.15 billion |
| Operating profit | $3.47 billion | $3.35 billion |
| Operating margin | 16.9% | 17.5% |
| Gross margin | 52.3% | 51.6% |
| Continuing-operations net earnings | $2.60 billion | $2.54 billion |
| Diluted EPS, continuing operations | $3.67 | $3.56 |
| Total net earnings | $3.36 billion | $2.60 billion |
| Operating cash flow, continuing operations | $3.83 billion | $3.62 billion |
| Capital expenditures | $633 million | $581 million |
| Total debt at year-end | $12.87 billion | $3.47 billion |
| Cash and equivalents at year-end | $791 million | $3.01 billion |
Reported sales rose 7.5%: existing businesses contributed 3.0% growth, acquisitions 10.5%, and currency translation reduced growth by 6.0%. Operating margin fell 60 basis points, reflecting acquisition-related charges and dilution, including Pall, and separation costs; productivity savings and sales growth partly offset these pressures. The effective tax rate on continuing operations was 21.8%, versus 25.2%.
Cash used in investing activities was $14.95 billion, principally reflecting $14.31 billion of acquisition payments, including Pall. Financing activities provided $9.05 billion, largely through borrowings used to fund the acquisition. The company reported $6.0 billion of credit facilities, with no facility borrowings outstanding at year-end, and approximately $2.0 billion of additional borrowing capacity under the disclosed arrangements. Management stated available liquidity and operating cash flow were sufficient for expected needs. Annual dividends declared were $0.54 per share, up from $0.40.
Segments and material changes
- Test & Measurement: Sales $2.65 billion, down 2.0%; operating margin rose to 23.1% from 21.2%. Existing-business growth was offset by currency effects.
- Environmental: Sales $3.64 billion, up 2.5%; operating margin rose to 21.5% from 19.9%. Existing-business growth and productivity gains supported results.
- Life Sciences & Diagnostics: Sales $8.21 billion, up 14.5%, including 17.5% acquisition contribution; operating margin declined to 13.3% from 15.4%, affected by Pall acquisition costs and dilution.
- Dental: Sales $2.74 billion, up 25.0%, primarily due to acquisitions; existing-business sales were flat and operating margin declined to 13.5% from 13.9%.
- Industrial Technologies: Sales $3.32 billion, down 5.5%, mainly due to currency and divestiture effects; operating margin rose to 24.1% from 22.7%.
The $13.6 billion Pall acquisition closed August 31, 2015 and expanded Life Sciences & Diagnostics into filtration, separation, and purification. Management expects approximately $300 million in annual Pall cost savings as integration progresses. Nobel Biocare, acquired in late 2014, contributed to Dental’s acquisition-led growth. In July 2015, Danaher completed the split-off and merger of most of its communications business with NetScout. The transaction produced a $767 million after-tax gain, included in discontinued operations; accordingly, total net earnings and reported EPS include a significant nonrecurring gain. Continuing-operations earnings provide a better view of ongoing results.
Outlook, risks, and unusual items
- Management expected 2016 sales from existing businesses to grow year over year at a level in line with 2015, while cautioning about macroeconomic and geopolitical uncertainty. The 2016 expected tax rate was approximately 23%–24%; capital spending was estimated at approximately $750 million, including anticipated Fortive businesses.
- Danaher targeted a third-quarter 2016 tax-free separation into New Danaher and Fortive, subject to board approval and customary conditions. Delays, higher costs, management distraction, or failure to realize intended benefits were identified risks.
- Currency translation reduced 2015 reported sales by 6.0%. At year-end exchange rates, management estimated a 1.5% adverse effect on 2016 sales relative to 2015 if those rates persisted.
- Total debt increased substantially to finance Pall. Debt service, refinancing access, interest-rate exposure, and credit ratings are relevant liquidity risks. Approximately $23.5 billion of foreign earnings were planned for indefinite reinvestment; repatriation may carry U.S. tax costs.
- Tax authorities in Denmark assessed approximately DKK 1.2 billion (about $180 million) for withholding tax and interest, with a possible additional DKK 700 million (about $102 million) for later years if the claims succeed. Danaher disputed the assessments; resolution could take years and materially affect results.
- Environmental remediation reserves were $126 million. Management did not believe reasonably possible additional environmental or litigation amounts beyond reserves would materially affect the financial statements, but outcomes remain uncertain.
- Goodwill and other intangible assets totaled approximately $36.3 billion. No goodwill impairment was recorded; impairment depends on estimates of future performance and valuation assumptions.
- Management and the auditor reported effective internal controls for the assessment performed, but Pall—about 33% of year-end assets and 4% of annual revenue—was excluded because its controls had not yet been fully incorporated.
Most important facts for investors to verify
- Whether ongoing growth and margins, excluding acquisition, currency, separation, and disposition effects, support management’s 2016 outlook.
- Pall integration progress against the approximately $300 million annual cost-savings target, and the pace of debt reduction following the acquisition.
- Completion timing, costs, tax treatment, and standalone financial effects of the planned Fortive separation.
- Resolution and potential financial exposure from the Danish tax assessments, and developments in other tax audits.
- Whether foreign-exchange movements, goodwill and intangible valuations, pension obligations, and environmental or legal contingencies change materially.
- Integration of Pall’s internal controls and the comparability of results given acquisition and discontinued-operation accounting.