Danaher Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 30, 2012; comparisons are with the three months ended April 1, 2011. Unaudited consolidated results. Danaher operates in five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies.
Financial performance
| Metric | Q1 2012 | Prior period | Change / context |
|---|---|---|---|
| Sales from continuing operations | $4.316 billion | $3.292 billion | Up 31.0%; acquisitions contributed 30.5%, existing businesses 1.5%, and currency reduced reported growth by 1.0%. |
| Gross profit / margin | $2.236 billion / 51.8% | $1.749 billion / 53.1% | Margin down 130 basis points, primarily due to the lower-margin Beckman Coulter acquisition. |
| Operating profit / margin | $734.9 million / 17.0% | $584.9 million / 17.8% | Margin down 80 basis points; acquisition dilution more than offset volume and productivity benefits. |
| Continuing-operations earnings | $520.1 million; diluted EPS $0.73 | $416.8 million; diluted EPS $0.61 | Effective tax rate was 25.3%, versus 25.1%. |
| Net earnings / diluted EPS | $612.9 million / $0.86 | $429.4 million / $0.63 | 2012 includes $92.9 million, or $0.13 per diluted share, from discontinued operations, primarily divestiture gains. |
| Operating cash flow | $645.2 million total; $651.4 million continuing operations | $436.5 million total; $434.3 million continuing operations | Continuing-operations cash flow rose about 50%. |
| Capital expenditures | $117.8 million | $46.3 million | Management expects approximately $550 million for full-year 2012. |
Segment performance: Life Sciences & Diagnostics sales rose to $1.546 billion from $626.6 million, primarily reflecting Beckman Coulter; operating margin was 13.3%, down from 14.4%. Test & Measurement sales increased 2.0% and margin rose to 22.6% from 20.7%. Environmental sales increased 4.0% and margin eased to 18.6% from 19.3%. Dental sales increased 0.5% and margin rose to 12.7% from 10.7%. Industrial Technologies sales increased 8.5%, largely from acquisitions; margin declined to 20.6% from 22.1%.
Balance sheet, debt and liquidity
- Cash and equivalents were $1.043 billion at March 30, 2012, versus $537.0 million at December 31, 2011. Of the quarter-end cash, $184 million was held in the U.S. and $859 million outside the U.S.
- Total debt was approximately $4.926 billion, including $653.6 million of U.S. commercial paper; long-term debt on the balance sheet was $4.863 billion. The company reported compliance with debt covenants.
- A $2.5 billion revolving credit facility, expiring July 2016, had no borrowings outstanding. Commercial paper outstanding carried a 0.2% weighted-average interest rate and approximately 17-day weighted-average maturity.
- Operating activities provided $645.2 million; investing activities provided $166.7 million, including $337.5 million of proceeds from discontinued-business sales; financing activities used $310.6 million, principally reflecting commercial-paper repayments.
- Current assets were $6.543 billion and current liabilities $3.913 billion. Management stated that cash, operating cash flow and other sources were sufficient for anticipated needs.
Material changes, outlook and management commentary
- Beckman Coulter, acquired in June 2011, was the main driver of reported sales growth. Existing-business demand also produced aggregate growth; North America and emerging markets led, while Europe declined slightly. Management expected Q2 2012 existing-business sales growth to exceed Q1, citing backlog and improving orders and shipments during Q1.
- Management forecast a full-year 2012 continuing-operations effective tax rate of approximately 24%, excluding discrete items. It expected 2012 capital spending of approximately $550 million.
- Segment outlook included expected improvement in Test & Measurement instrument growth during the rest of 2012; Industrial Technologies motion sales were expected to decline year over year in Q2 and return to growth in the second half.
- In January and February 2012, Danaher sold its Accu-Sort and Kollmorgen Electro-Optical businesses for approximately $132 million and $205 million, respectively. The sales generated a combined after-tax gain of $93.7 million, reported in discontinued operations. The businesses had combined 2011 revenue of $275 million.
- After quarter-end, Danaher agreed to acquire X-Rite for $5.55 per share, with an estimated aggregate purchase price of approximately $625 million, including assumed debt and net of acquired cash. Closing was anticipated in Q2 2012, subject to customary conditions; Danaher expected to use available cash.
- Three businesses were acquired during Q1 for $55.7 million net cash consideration; their combined prior-year annual sales were approximately $25 million. The company recorded approximately $17.3 million of preliminary goodwill for these acquisitions.
- Foreign exchange reduced Q1 reported sales by about 1.0%. Management estimated that rates prevailing at March 30, if sustained, would reduce 2012 revenue by about 1.0% year over year.
- Other notable items: a $14 million pretax gain from fair-value changes in an acquired currency swap; approximately $56 million of cash payments for 2011 restructuring actions; and expected 2012 non-U.S. pension contributions of approximately $50 million. The company reported no Q1 share repurchases.
Risks and contingencies
- Management cited risks from global economic and market instability, cyclicality and competition, execution and integration of acquisitions (including Beckman Coulter), and the possibility that restructuring actions could adversely affect the business.
- Other disclosed exposures include regulation of healthcare and other businesses, litigation and product liability, foreign currency and tax changes, goodwill or intangible-asset impairment, pension funding, indebtedness, supply and manufacturing constraints, and environmental, health and safety matters. The filing reported no material change to the risk factors previously disclosed in the 2011 Form 10-K.
- Goodwill was $14.573 billion at quarter-end. Management noted that impairment estimates depend on assumptions about future results and cash flows; no impairment was identified in the latest annual test.
- The filing refers readers to the 2011 Form 10-K for descriptions of litigation and other contingencies; the supplied filing text does not provide a clear quantified total exposure.
Important facts for investors to verify
- How much of future growth and margin performance is attributable to acquired businesses versus existing operations, particularly following Beckman Coulter integration.
- Whether the expected Q2 improvement and second-half Industrial Technologies recovery occurred, and how economic conditions and currency movements affected sales.
- The X-Rite acquisition’s final completion, financing, purchase accounting, and contribution to earnings and cash flow.
- Whether planned capital spending, pension contributions, restructuring payments, and debt repayments align with operating cash generation and available liquidity.
- How the $93.7 million discontinued-operation gain and $14 million currency-swap gain affect comparisons with recurring operating performance.