Danaher Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with the three months ended April 1, 2016. Unless stated otherwise, amounts are in U.S. dollars and millions. Results primarily reflect continuing operations; Fortive is reported as discontinued operations.
Financial performance
| Metric | Q1 2017 | Prior-year period |
|---|---|---|
| Sales | $4,205.7 | $3,924.1 |
| Gross profit / margin | $2,334.3 / 55.5% | $2,167.3 / 55.2% |
| Operating profit / margin | $623.9 / 14.8% | $613.1 / 15.6% |
| Continuing-operations earnings | $483.8; diluted EPS $0.69 | $585.8; diluted EPS $0.84 |
| Net earnings, including discontinued operations | $506.1; diluted EPS $0.72 | $758.4; diluted EPS $1.09 |
| Operating cash flow, continuing operations | $560.2 | $607.1 |
| Capital expenditures | $158.6 | $122.6 |
Sales increased 7.0% overall: 2.5% from existing businesses, 6.0% from acquisitions and other, offset by a 1.5% currency headwind. Gross margin improved 30 basis points, while operating margin declined 80 basis points, reflecting acquired-business dilution, investments in growth, product mix and currency effects.
By segment, sales and operating margin were: Life Sciences $1,308.1 and 16.2% (up from 14.1%); Diagnostics $1,327.3 and 11.6% (down from 15.9%); Dental $655.5 and 13.6% (down from 14.5%); and Environmental & Applied Solutions $914.8 and 22.7% (unchanged). Diagnostics’ growth was primarily acquisition-driven, including Cepheid.
Liquidity, debt and balance sheet
At March 31, 2017, cash and equivalents were $803.9, total debt was $11,950.3 (including $2,221.0 current and $9,729.3 long-term), and total stockholders’ equity was $23,791.1. Current assets were $6,318.9 and current liabilities $6,003.1. Cash declined from $963.7 at year-end. The company generated $560.2 in operating cash flow, used $163.7 in investing activities and $590.7 in financing activities, including $434.9 of net repayments of short-term borrowings and a $64.4 payment to acquire a noncontrolling interest.
Danaher reported compliance with debt covenants, no outstanding borrowings under its credit facilities, and approximately $1.6 billion of additional borrowing capacity. Approximately $4.0 billion of commercial paper was classified as long-term based on the company’s intent and ability to refinance it. Management said liquidity was sufficient for anticipated needs.
Material changes, outlook and risks
- Continuing-operations earnings fell year over year, but the comparison was affected by a $223.4 pretax gain on sale of investments in Q1 2016 (about $0.20 per diluted share after tax), which did not recur. Q1 2017 also included a $22.3 discontinued-operations tax benefit from release of reserves related to Fortive jointly filed returns.
- The effective tax rate on continuing operations was 17.3%, versus 25.2%. Management expected an approximately 20.5% rate for the remainder of 2017, subject to earnings mix and discrete tax items.
- Management expected overall sales growth to continue, while cautioning about macroeconomic and geopolitical uncertainty. At March 31 exchange rates, currency was expected to reduce full-year 2017 sales by approximately 1.5% year over year. Expected 2017 capital spending was approximately $750.
- Management cited Cepheid integration and anticipated synergies, while noting that acquired businesses diluted Q1 operating margin. The company also reported continued investment in product development, sales and marketing.
- Denmark tax authorities assessed approximately $203 for 2004–2009 withholding taxes; Danaher anticipated an additional assessment of approximately $120 for 2010–2012. Management disputed the positions and intends to defend them. Resolution is uncertain and could materially affect results and the effective tax rate.
- Other stated risks include economic and market conditions, competition, acquisition and integration execution, regulation, foreign exchange, indebtedness, litigation and tax matters, cybersecurity, supply-chain disruption and pension-plan exposure. The filing reported no material changes to previously disclosed risk factors and no goodwill impairment trigger in the quarter.
Investor verification priorities
- Separate underlying growth from acquisition contribution, especially in Diagnostics, and assess Cepheid’s integration, margin impact and expected synergies.
- Reconcile the earnings comparison for the nonrecurring 2016 investment gain and the 2017 tax benefits; evaluate the sustainability of the reported tax rate and 20.5% outlook.
- Review commercial-paper refinancing, near-term maturities, available facility capacity and the company’s liquidity under less favorable credit-market conditions.
- Track the Denmark tax dispute, potential additional assessment and other tax contingencies.
- Assess whether operating cash flow, capital spending and working-capital trends support management’s outlook and investment plans.