Danaher Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 28, 2012; comparisons are with the quarter ended September 30, 2011. The nine-month figures compare the periods ended September 28, 2012 and September 30, 2011. Amounts are U.S. dollars.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $4.416 billion | $4.446 billion | $13.285 billion | $11.374 billion |
| Gross margin | 51.6% | 49.1% | 51.7% | 51.4% |
| Operating profit | $756 million | $643 million | $2.302 billion | $1.838 billion |
| Operating margin | 17.1% | 14.5% | 17.3% | 16.2% |
| Continuing-operations net earnings | $549 million | $515 million | $1.669 billion | $1.372 billion |
| Diluted EPS from continuing operations | $0.77 | $0.73 | $2.34 | $1.97 |
- Cash flow: Nine-month operating cash flow from continuing operations was $2.671 billion, up 39%. Capital expenditures were $333 million; free cash flow, calculated as operating cash flow less capital expenditures, was approximately $2.338 billion.
- Liquidity and debt: Cash and equivalents were $1.541 billion at September 28, versus $537 million at December 31, 2011. Reported debt totaled approximately $4.714 billion, including $537.5 million of U.S. commercial paper; cash less reported debt implies net debt of approximately $3.173 billion. The company had no borrowings outstanding under its $2.5 billion revolving credit facility and reported compliance with debt covenants.
- Balance sheet: Total assets were $31.585 billion and stockholders’ equity was $18.953 billion. Inventory was $1.882 billion. Current assets of $6.908 billion exceeded current liabilities of $3.935 billion.
Material changes versus the prior comparable period
- Q3 reported sales decreased 0.5%; management attributed the change to 1.0% growth from existing businesses and 1.5% contribution from acquisitions, offset by a 3.0% currency headwind. Nine-month sales increased 17.0%, largely reflecting acquisitions: existing-business growth was 2.0%, acquisition contribution 17.5%, and currency reduced sales 2.5%.
- Q3 operating margin improved 260 basis points. The comparison benefited from 2011 Beckman Coulter acquisition-related charges not recurring, productivity and restructuring savings, and was partly offset by acquisition dilution and growth investments. For the first nine months, margin improved 110 basis points, with similar drivers and a 10-basis-point benefit from resolution of prior-disposition contingencies.
- Q3 continuing-operations diluted EPS rose to $0.77 from $0.73. The nine-month increase to $2.34 from $1.97 included a larger acquisition contribution, principally from Beckman Coulter, acquired in June 2011.
- Segment trends were mixed: Q3 sales fell 5.0% in Test & Measurement and 3.0% in Life Sciences & Diagnostics, while Environmental grew 2.5% and Industrial Technologies grew 5.5%. Dental sales declined 1.0%. Life Sciences & Diagnostics’ margin improved substantially from the prior-year acquisition-charge comparison; Test & Measurement margin weakened with lower instrument demand.
- Nine-month net earnings included $92.9 million from discontinued operations, primarily the $93.7 million after-tax gain on the ASI and KEO sales. Q3 discontinued operations contributed no earnings.
Outlook, management commentary, and risks
- Management said underlying Q3 growth was led by emerging markets, especially China, Latin America, and the Middle East; U.S. sales were slightly lower and Western Europe contracted at a mid-single-digit rate. A stronger dollar reduced Q3 and nine-month reported sales by approximately 3.0% and 2.5%, respectively. At then-current exchange rates, management estimated a roughly 2.0% reduction to full-year 2012 revenue year over year.
- A July 2012 cost-reduction plan was expected to be substantially completed by December 31, 2012, with approximately $120 million of pretax charges, most in Q4; the charges were expected to be cash expenditures.
- Management forecast a Q4 2012 continuing-operations effective tax rate of approximately 24%, excluding discrete items. It expected 2012 capital expenditures of approximately $500 million and approximately $50 million of non-U.S. pension contributions; U.S. pension contributions were not expected to be significant.
- In October 2012, Danaher and Cooper agreed to sell their 50%-owned Apex Tool Group for approximately $1.6 billion. Danaher expected after-tax net proceeds of approximately $650 million; closing, subject to customary conditions including regulatory approvals, was expected in the first half of 2013.
- Key risks cited include macroeconomic weakness and market cyclicality, competition, foreign-exchange movements, acquisition integration and goodwill impairment, regulatory and product-liability exposure, litigation and tax contingencies, pension-market risks, and reliance on access to commercial-paper and capital markets. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth and segment demand trends—particularly weak instrumentation demand and softness in Western Europe—persist beyond Q3.
- How much of the margin improvement reflects sustainable productivity savings versus nonrecurring 2011 acquisition charges and other comparison effects.
- Whether the planned cost reductions are completed on schedule and within the estimated $120 million charge, and what savings follow.
- Whether the Apex sale receives approvals, closes on the expected timetable, and delivers the anticipated proceeds.
- Debt classification, upcoming 2013 maturities, commercial-paper refinancing access, and the extent to which overseas cash is available for U.S. needs.
- Acquisition integration, purchase-price allocation and goodwill assumptions; tax-rate variability; and potential effects of contingencies or changes in currency rates.