Danaher Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Danaher operates across five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Sales | $16.09 billion | $12.55 billion |
| Operating profit | $2.62 billion | $2.05 billion |
| Operating margin | 16.3% | 16.3% |
| Gross margin | 50.8% | 51.0% |
| Net earnings from continuing operations | $1.94 billion | $1.72 billion |
| Diluted EPS from continuing operations | $2.77 | $2.53 |
| Operating cash flow from continuing operations | $2.73 billion | $2.02 billion |
| Capital expenditures | $334 million | $191 million |
| Total debt at year-end | $5.31 billion | $2.82 billion |
| Cash and equivalents at year-end | $537 million | $1.63 billion |
Sales rose 28.0%; management attributed 7.0% growth to existing businesses, 2.5% to currency translation, and a net 18.5% to acquisitions and the comparison effect of the Apex joint venture. Continuing-operations net earnings increased about 13%. Net earnings, including discontinued operations, were $2.17 billion versus $1.79 billion; 2011 included a $202 million after-tax gain on the sale of Pacific Scientific Aerospace (PSA). Operating cash flow less capital expenditures was approximately $2.40 billion, compared with $1.83 billion in 2010.
Fourth-quarter 2011 sales were $4.72 billion, operating profit $779 million, continuing-operations net earnings $564 million, and diluted continuing-operations EPS $0.79. Fourth-quarter 2010 comparatives were $3.43 billion, $592 million, $452 million, and $0.66, respectively.
Material changes versus 2010
- Beckman Coulter, acquired in June 2011, substantially expanded Life Sciences & Diagnostics. That segment’s sales increased to $4.63 billion from $2.30 billion, predominantly due to acquisitions; its operating margin declined to 8.7% from 9.9%, reflecting integration and restructuring costs, acquisition accounting charges, and acquired-business mix.
- Test & Measurement sales increased 19.5% and operating margin rose to 22.2% from 20.2%. Environmental sales increased 7.5% and margin to 21.2% from 20.6%. Dental sales increased 10.0% and margin to 11.7% from 11.1%. Industrial Technologies sales increased 23.0% and margin to 21.0% from 20.2%.
- Debt rose by approximately $2.48 billion, principally to fund the Beckman Coulter acquisition. Danaher issued about $966 million of common stock and $1.8 billion of senior notes and used cash and commercial paper to finance the transaction.
- Cash declined by approximately $1.10 billion. Acquisition payments were $6.21 billion, partly offset by $680 million of PSA sale proceeds and $2.73 billion of continuing-operations operating cash flow.
Outlook, risks, and unusual items
- Management expected existing-business sales to grow year over year in 2012, but at a more moderate rate than in 2011, particularly in Industrial Technologies and, to a lesser extent, Test & Measurement. The outlook was conditional on no significant deterioration in economic conditions.
- Management forecast a 2012 effective tax rate of approximately 24%, capital expenditures of approximately $550 million, and a roughly 2% negative currency impact on reported sales if year-end 2011 exchange rates persisted.
- Management expected Life Sciences & Diagnostics to gain from Beckman Coulter integration and anticipated cost synergies. It also expected higher depreciation and amortization in that segment following the acquisition. Industrial Technologies motion sales were expected to decline in Q1 2012; Environmental ultraviolet-treatment sales were also expected to decline in Q1 against a strong prior-year comparison.
- Danaher recorded $179 million of 2011 restructuring and related charges, including $120 million in Q4; approximately $124 million remained accrued at year-end, with about $124 million of 2012 cash payments anticipated. The filing also records a $33 million pretax debt-extinguishment charge related to retiring acquired Beckman Coulter debt.
- ASI and Kollmorgen Electro-Optical were sold in January and February 2012, respectively. Danaher expected an aggregate after-tax gain of approximately $93 million in Q1 2012. These sales, together with the PSA sale, are presented as discontinued operations.
- Key risks include global economic and European-market uncertainty, acquisition integration and goodwill impairment, competition and pricing, foreign exchange, debt and commercial-paper-market access, healthcare and product regulation, and environmental and litigation liabilities. Beckman Coulter was addressing FDA findings involving compliance and quality systems and clearances for certain assays. Environmental reserves were $141 million; management did not believe reasonably possible amounts above reserves would materially affect the financial statements.
- Danaher reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of reported growth and future earnings reflects acquired businesses versus organic growth, particularly after Beckman Coulter integration?
- Whether expected Beckman Coulter synergies are achieved and whether its FDA compliance, quality-system, and assay-clearance matters are resolved.
- Cash generation, capital spending, and debt reduction following the acquisition; also review commercial paper reliance and upcoming debt maturities.
- Whether the 2012 tax-rate, currency, and segment outlook assumptions materialized, and the timing and realized proceeds or gains from the ASI and KEO disposals.
- The potential range and timing of environmental, pension, tax, and other contingent liabilities beyond recorded reserves.