Danaher Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of 2009, ended October 2, 2009; comparisons are with the corresponding 2008 periods. Danaher operates through Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components.
Financial performance
Amounts are in millions of dollars except per-share data and percentages. Financial results are unaudited.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Sales | $2,750.7 | $3,208.2 | $8,052.0 | $9,521.0 |
| Operating profit | $464.6 | $522.1 | $1,148.8 | $1,445.8 |
| Operating margin | 16.9% | 16.3% | 14.3% | 15.2% |
| Net earnings | $351.4 | $372.0 | $884.8 | $1,011.9 |
| Diluted EPS | $1.05 | $1.11 | $2.66 | $3.03 |
| Operating cash flow | — | — | $1,305.5 | $1,349.7 |
- Sales fell 14.5% in Q3 and 15.5% year to date. Existing-business sales declined 14% and 13%, respectively; currency reduced reported sales by about 2.0% and 4.5%, partly offset by acquisitions.
- Gross margin was 48.0% in Q3 and 47.7% year to date, compared with 47.1% in each 2008 period. Cost savings, lower commodity costs, and restructuring benefits helped, while lower volumes reduced fixed-cost leverage.
- Reported Q3 operating margin includes a significant one-time litigation-settlement gain. The filing attributes a 310-basis-point year-over-year benefit to the settlement; therefore, the reported margin increase does not represent underlying operating performance alone.
Balance sheet, liquidity, and capital
- At October 2, 2009, cash and equivalents were $1,636.2 million, total debt was approximately $2,950 million, and long-term debt was $2,899.5 million. At December 31, 2008, cash was $392.9 million and total debt approximately $2,619 million.
- Current assets were $5,198.8 million and current liabilities $2,678.4 million. Management said liquidity remained strong and expected cash from operations, available cash, commercial paper, and committed credit facilities to meet requirements.
- Nine-month investing cash use was $444.2 million, including $281.4 million for acquisitions and $115.4 million of capital spending. Financing provided $348.5 million, including approximately $744.6 million net proceeds from the 2019 notes offering.
- Operating cash flow declined 3% year over year. Working-capital improvements generated $112 million, versus a $132 million use in the prior-year period. Restructuring activities used approximately $136 million in cash during the first nine months.
Material changes and segment trends
- All four segments reported lower Q3 sales: Professional Instrumentation $1,060.1 million (down 12.5%); Medical Technologies $766.3 million (down 8.0%); Industrial Technologies $654.9 million (down 20.0%); and Tools & Components $269.4 million (down 20.5%).
- Industrial Technologies and Tools & Components faced particularly steep demand declines. Professional Instrumentation weakness was concentrated in test and measurement. Medical Technologies sales also declined, though acute-care diagnostics grew.
- Medical Technologies operating profit was $168.1 million versus $102.9 million in Q3 2008, substantially reflecting the litigation settlement described below. Professional Instrumentation, Industrial Technologies, and Tools & Components reported lower Q3 operating profit.
Outlook, unusual items, and risks
- Management expected Q4 2009 revenue to remain below 2008 levels, but decline at a more moderate rate than Q3. Demand had improved sequentially in North America and some industrial businesses; Europe and certain emerging markets remained soft.
- Management expected approximately $250 million of 2009 restructuring and related charges, with some actions potentially extending into the first half of 2010. Approximately $101.4 million had been incurred by October 2; expected annualized savings were $220 million. The filing estimated 2009 capital spending of about $190 million.
- Management projected an approximately 25% effective tax rate for the remainder of 2009, excluding discrete items. Favorable resolutions of tax positions and statute expirations reduced tax expense by $37 million in Q3 and $97 million year to date, or $0.11 and $0.29 per diluted share, respectively.
- Q3 litigation settlement with Align Technology provided $13 million cash and 7.6 million Align shares, worth about 10% of Align at issuance. Danaher recorded an $85 million pretax gain, or $53 million after tax ($0.16 per share). The shares were classified as available-for-sale securities; their fair value was $187 million at quarter-end.
- Danaher signed agreements to acquire MDS Analytical Technologies assets, including AB SCIEX and Molecular Devices, and the remaining 50% of AB SCIEX from Life Technologies. Combined consideration was $1.1 billion, including assumed debt and net of cash acquired; closing was expected in Q4, subject to approvals and customary conditions. The businesses were expected to add about $650 million in annual revenue.
- Principal risks cited include further economic or market weakness, competition, acquisition integration and returns, debt and liquidity exposure, goodwill impairment, foreign-exchange movements, litigation, environmental and regulatory matters, pension risks, and tax uncertainty. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Separate the $85 million Align settlement gain and $97 million year-to-date tax benefit from recurring earnings when assessing profitability.
- Track whether demand stabilizes and whether the projected more moderate Q4 sales decline materializes, particularly in industrial markets and test and measurement.
- Verify completion, funding, integration costs, and realized returns for the planned $1.1 billion acquisition.
- Monitor restructuring charges, cash expenditures, timing, and delivery of the projected $220 million annualized savings.
- Assess the effects of higher total debt, commercial-paper access, and the use of cash on liquidity and capital-allocation flexibility.