Danaher Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended April 1, 2011, compared with the three months ended April 2, 2010. The interim statements are unaudited. Pacific Scientific Aerospace is presented as a discontinued operation, with prior-period results reclassified.
Financial results and liquidity
Unless otherwise noted, amounts are in millions of dollars. Continuing-operations results exclude Pacific Scientific Aerospace.
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Sales from continuing operations | $3,345.7 | $3,007.8 | Up 11.0%; existing-business growth 10.0%, currency 1.5%, and Apex-related sales reduction 0.5% net of acquisition growth |
| Gross profit / margin | $1,763.4 / 52.7% | $1,468.7 / 48.8% | Margin up 390 basis points |
| Operating profit / margin | $590.6 / 17.7% | $421.5 / 14.0% | Margin up 370 basis points |
| Continuing-operations earnings | $420.2 | $292.7 | Up about 44% |
| Net earnings, including discontinued operations | $429.4 | $300.2 | Up about 43% |
| Diluted EPS from continuing operations | $0.61 | $0.43 | Up $0.18 |
| Operating cash flow from continuing operations | $433.9 | $395.5 | Up about 10% |
| Capital expenditures | $48.4 | $37.3 | Q1 spending |
| Cash and equivalents at period end | $1,593.6 | $806.4 | Prior-period figure is April 2, 2010 |
Operating cash flow was supported by higher earnings; increased tax payments of about $100 million year over year partly offset that benefit. Cash used in investing activities from continuing operations was $563.4 million, including $517.4 million for acquisitions. The company reported $1.6 billion in cash and equivalents at April 1, including approximately $1.3 billion held outside the United States.
Total debt carrying value was approximately $2.727 billion, including $58.9 million classified as current and $2.668 billion as long-term. Cash exceeded debt by approximately $1.133 billion. The $180 million of U.S. commercial paper outstanding carried a 0.2% weighted-average interest rate and approximately 17-day weighted-average maturity; no borrowings were outstanding under the revolving credit facilities. Danaher stated that it complied with its debt covenants. The current ratio was approximately 1.84, based on reported current assets of $6.132 billion and current liabilities of $3.324 billion.
Danaher’s effective tax rate on continuing operations was 25.2%, versus 25.5%. Management expected an approximately 25% rate for 2011, excluding discrete items. No material broad-based inflation impact was reported.
Material changes and segment performance
- All five reportable segments recorded year-over-year sales and operating-profit growth. Sales growth was strongest in Test & Measurement (27.5%, including acquisitions) and Life Sciences & Diagnostics (21.5%, including acquisitions and currency).
- Segment operating margins improved: Test & Measurement 20.7% versus 19.0%; Environmental 19.3% versus 17.0%; Life Sciences & Diagnostics 14.4% versus 7.1%; Dental 10.7% versus 8.5%; and Industrial Technologies 21.3% versus 19.2%.
- Company-wide operating-margin improvement reflected higher volume and productivity, but also benefited from acquisition-related charges in Q1 2010 that did not recur to the same extent in 2011. Management attributed 125 basis points of the overall comparison benefit to lower acquisition-related charges. Segment comparisons, particularly Life Sciences & Diagnostics, also reflected substantial nonrecurring prior-year acquisition costs and fair-value adjustments.
- Q1 2011 included acquisitions of two businesses for $517 million cash, net of cash acquired; their combined pre-acquisition annual sales were $252 million. Purchase-price allocations were preliminary and included $248.5 million of goodwill.
- LYONs conversions resulted in issuance of approximately 5.7 million Danaher shares. Long-term debt declined from $2.784 billion at December 31, 2010 to $2.668 billion at April 1, 2011.
Outlook, transactions, risks and unusual items
- Management expected sales to continue growing during the remainder of 2011, but at a moderating rate versus Q1, partly because year-over-year comparisons would become more difficult. It expected motion-business growth to moderate slightly and noted difficult comparison effects for retail petroleum, especially in Q2.
- Danaher agreed to acquire Beckman Coulter for $83.50 per share, at an aggregate purchase price of approximately $6.8 billion including assumed debt and net of cash acquired. The offer remained subject to customary conditions; the HSR waiting period had been terminated, and management anticipated completion in Q2 2011. Planned financing included available cash, commercial paper and securities, potentially supplemented by new or expanded credit facilities or bridge financing.
- Danaher agreed to sell Pacific Scientific Aerospace for $685 million cash; closing was expected in Q2, subject to customary conditions. Management expected an after-tax gain of approximately $210 million, or $0.30 per diluted share, upon completion. The business reported Q1 sales of $97.6 million and after-tax earnings of $9.1 million.
- Management expected 2011 capital spending of approximately $275 million; U.S. and non-U.S. pension contributions and unfunded benefit payments of approximately $50 million and $27 million, respectively; and a roughly 25% continuing-operations tax rate, subject to stated qualifications.
- Reported sales benefited from a weaker U.S. dollar: currency translation added approximately 1.5% to Q1 sales. If April 1 exchange rates persisted, management estimated a 2.5% lift to 2011 revenue growth; exchange-rate movements could instead reduce reported sales.
- Risks identified include economic and market weakness, competition, acquisition integration and financing, goodwill or intangible impairment, currency movements, litigation and regulatory exposure, taxes, debt and refinancing, pension funding, commodity costs, supply constraints, and the company’s non-controlling position in the Apex joint venture. Management reported no material changes to previously disclosed risk factors or market-risk disclosures.
- The company adopted updated revenue-recognition standards prospectively on January 1, 2011; Q1 sales were not significantly different as a result, but future effects could vary. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Beckman Coulter offer closed on the expected timetable, its final financing mix and resulting debt, interest expense and dilution.
- Completion and proceeds from the Pacific Scientific Aerospace sale, including whether the expected gain was realized.
- Whether sales growth and margin performance moderated as management anticipated, and how much growth came from existing businesses, acquisitions and currency.
- Final purchase-price allocations and integration performance for recent acquisitions, alongside goodwill and intangible-asset impairment indicators.
- Cash conversion and working-capital trends, particularly accrued liabilities and tax payments, and the adequacy of liquidity and credit facilities after major transactions.