Danaher Corporation — Q3 2013 Form 10-Q
Business context and period: Unaudited quarterly report for the three and nine months ended September 27, 2013, compared with the corresponding 2012 periods. Danaher operates in five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales | $4.669 billion | $4.416 billion | $13.851 billion | $13.285 billion |
| Gross margin | 51.9% | 51.6% | 52.3% | 51.7% |
| Operating profit | $812 million | $756 million | $2.387 billion | $2.302 billion |
| Operating margin | 17.4% | 17.1% | 17.2% | 17.3% |
| Continuing-operations net earnings | $597 million | $549 million | $1.906 billion | $1.669 billion |
| Diluted continuing-operations EPS | $0.84 | $0.77 | $2.69 | $2.34 |
- Growth: Management reported Q3 sales growth of 5.5%: 3.0% from existing businesses, 3.0% from acquisitions, and a 0.5% reduction from currency. Nine-month sales growth was 4.0%: 2.0% from existing businesses, 2.5% from acquisitions, and a 0.5% currency headwind.
- Cash flow: Nine-month operating cash flow from continuing operations was $2.507 billion, down 6% from $2.671 billion. Capital expenditures were $392 million. Cash and equivalents were $1.996 billion at quarter-end, versus $1.679 billion at year-end 2012.
- Liquidity and debt: Debt totaled approximately $3.502 billion, including $3.446 billion of long-term debt and $56.5 million current debt. Danaher had a $2.5 billion revolving credit facility with no borrowings outstanding and reported compliance with debt covenants. Cash includes $1.4 billion held outside the U.S.
- Other balance-sheet items: Total assets were $33.721 billion; stockholders’ equity was $21.371 billion. Goodwill was $16.024 billion and other intangible assets were $6.345 billion.
Changes versus prior comparable periods
- Q3 sales, operating profit, and continuing-operations diluted EPS increased year over year. Q3 operating margin rose 30 basis points; nine-month operating margin declined 10 basis points.
- Margin comparisons benefited from volume, productivity, and savings from 2012 restructuring, partly offset by growth investments, acquisitions, and the loss of Apex joint-venture earnings following its sale.
- Life Sciences & Diagnostics was a significant growth contributor: Q3 sales increased to $1.675 billion from $1.518 billion and operating margin rose to 14.7% from 12.2%. Industrial Technologies’ existing-business sales declined 1% in Q3; its motion businesses had a high-single-digit decline.
- Nine-month 2013 continuing earnings include a $229.8 million pre-tax ($143.6 million after-tax) gain from selling Danaher’s Apex joint-venture interest. 2012 results included $92.9 million of discontinued-operations earnings, principally the after-tax gain on the sale of ASI and KEO.
- Danaher acquired 11 businesses for $869 million net cash during the first nine months; those businesses had aggregate prior-year annual sales of $294 million. Acquisitions contributed $554 million of preliminary goodwill.
Outlook, commentary, and risks
- Management expected Q4 2013 existing-business sales growth to continue at a level consistent with the first nine months, while warning that macroeconomic conditions remained challenging. High-growth markets represented approximately 26% of Q3 sales and grew at a mid-single-digit rate.
- Management forecast Q4 2013 continuing-operations effective tax rate of approximately 23%, excluding discrete items. It expected 2013 capital spending of approximately $550 million and approximately $52 million of contributions to non-U.S. pension plans.
- The motion businesses were expected to remain in year-over-year decline in Q4; Test & Measurement management expected existing-business growth, partly on strengthening network-management demand.
- Tax authorities in Denmark and Germany raised significant issues concerning interest deductibility and taxation at certain subsidiaries. The disputes were unresolved; management said an adverse resolution could materially affect financial position, results, cash flows, or future tax rates.
- Other disclosed risks include macroeconomic and U.S. government uncertainty, foreign exchange, acquisition integration and goodwill impairment, regulation, product and manufacturing issues, litigation, pension-market exposure, and cybersecurity. The filing reported no material change to the prior annual report’s risk factors.
- Danaher had a new authorization to repurchase up to 20 million shares, but made no repurchases during the quarter or nine-month period. The filing also reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth reflects ongoing operations versus the Apex disposal gain, and how reported growth compares with existing-business growth.
- Whether operating cash generation recovers, given the 6% year-over-year decline and working-capital and tax-payment effects.
- Acquisition performance and integration, including the returns on $869 million of acquisition spending and the carrying value of goodwill and intangibles.
- Developments in the Denmark and Germany tax matters and their potential cash or earnings impact.
- Debt refinancing and liquidity plans, particularly the $400 million notes due in June 2014 and the portion of cash held overseas.
- Ongoing weakness in Industrial Technologies motion businesses and whether Q4 existing-business growth meets management’s stated expectation.