Danaher Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results below are unaudited. Danaher designs and sells products and services across Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. It reorganized its reportable segments in Q4 and recast comparative information. The company generated 55% of sales outside the U.S.
Financial results and liquidity
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Sales | $13.203 billion | $11.185 billion |
| Operating profit | $2.166 billion | $1.542 billion |
| Operating margin | 16.4% | 13.8% |
| Net earnings | $1.793 billion | $1.152 billion |
| Diluted EPS | $2.64 | $1.73 |
| Operating cash flow | $2.084 billion | $1.801 billion |
| Capital expenditures | $217 million | $189 million |
| Cash and equivalents at year-end | $1.633 billion | $1.722 billion |
| Total debt at year-end | $2.825 billion | $2.933 billion |
- Sales increased 18.0%; sales from existing businesses grew 11.5%, acquisitions contributed about 7.0%, and currency translation reduced reported growth by 0.5%.
- Gross margin rose to 50.2% from 47.2%. Management attributed the improvement mainly to higher volume, restructuring savings, and the contribution of lower-margin hand-tool businesses to Apex.
- Operating cash flow increased 16%. Cash used in investing was $2.289 billion, including $2.130 billion for acquisitions. Operating cash flow less capital expenditures was approximately $1.867 billion.
- Year-end cash exceeded current debt by approximately $1.592 billion; total debt less cash was approximately $1.192 billion. Current assets were $5.730 billion and current liabilities $3.305 billion.
- Quarter four sales were $3.609 billion versus $3.133 billion in Q4 2009; operating profit was $626.5 million versus $393.8 million, and net earnings were $473.9 million versus $266.9 million. Diluted EPS was $0.69 versus $0.40.
Material changes and unusual items
- In July 2010, Danaher formed the 50/50 Apex Tool Group joint venture with Cooper Industries and deconsolidated the contributed tool businesses. Danaher recorded a $291 million pretax gain, or $232 million after tax ($0.34 per diluted share), and recognized $22.8 million of equity-method earnings from Apex in 2010.
- The Apex gain was a significant contributor to the increase in reported earnings; it is not recurring operating revenue. The 2010 effective tax rate was 23.5%, compared with 19.2% in 2009; 2009 benefited from approximately $97 million of discrete tax benefits.
- Danaher acquired 19 businesses in 2010 for approximately $2.130 billion net of cash acquired. The January acquisition of AB Sciex and Molecular Devices contributed substantially to Life Sciences & Diagnostics growth; that segment’s sales rose 55%, largely due to acquisitions, while its operating margin fell to 9.9% from 12.1% amid acquisition-related charges and dilution.
- Segment sales and operating margins: Test & Measurement, $2.833 billion and 20.2%; Environmental, $2.738 billion and 20.6%; Life Sciences & Diagnostics, $2.298 billion and 9.9%; Dental, $1.825 billion and 11.1%; Industrial Technologies, $3.193 billion and 19.7%.
- Restructuring charges were substantial in 2009 ($238.5 million); Danaher reported no such segment charges in 2010 and paid approximately $110 million against restructuring accruals during the year. Comparisons also reflect the 2009 Align litigation settlement gain, which benefited Dental results.
Outlook, risks, and contingencies
- Management expected year-over-year sales growth to continue in 2011, but at a moderating rate versus 2010, assuming no significant deterioration in economic conditions. It expected a 2011 effective tax rate of approximately 25.5% and capital spending of approximately $250 million.
- In February 2011, Danaher agreed to acquire Beckman Coulter for approximately $6.8 billion, including debt assumed and net of cash acquired, subject to customary conditions; it expected completion in the first half of 2011. Planned financing included cash, commercial paper, securities, and potentially additional facilities or bridge financing. This prospective transaction was not reflected in 2010 year-end debt.
- Other announced 2011 transactions included a planned $685 million cash sale of Pacific Scientific Aerospace and an approximately $470 million acquisition of EskoArtwork, both subject to closing conditions. Management expected a gain on the aerospace sale.
- Key risks include uncertain global recovery and cyclical customer capital spending; competition and pricing; acquisition integration, financing and goodwill impairment; foreign exchange; raw-material costs and supply availability; product, medical-device and environmental regulation; litigation and remediation exposure; pension funding; and commercial-paper market access.
- At year-end, goodwill and indefinite-lived intangibles totaled approximately $12.2 billion. The company reported no goodwill impairment in its 2010 annual test. It also disclosed approximately $518 million of gross unrecognized tax benefits and $6.5 billion of foreign earnings planned to be indefinitely reinvested, for which deferred U.S. taxes had not been provided.
- Management and the auditor concluded internal control over financial reporting was effective, but AB Sciex was excluded from the assessment because its controls had not yet been fully incorporated. AB Sciex represented $1.1 billion of total assets and $482 million of 2010 revenue. The financial statement audit opinion was unqualified.
- The filing describes environmental remediation and ordinary-course litigation contingencies, but management did not expect them to have a material adverse effect. A California hazardous-waste matter was settled for $135,000 plus administrative costs, a supplemental environmental project, and injunctive relief; it was not material.
Investor verification points
- Separate the $232 million after-tax Apex gain and other tax effects from recurring earnings when assessing 2010 profitability.
- Confirm underlying organic growth and margin trends by segment, particularly the acquisition-driven Life Sciences & Diagnostics expansion and its lower margin.
- Track the Beckman Coulter transaction’s closing, financing, resulting leverage, and integration performance, as well as the announced EskoArtwork acquisition and Pacific Scientific Aerospace divestiture.
- Review cash conversion and working-capital needs: receivables and inventory increased, and working capital items used $204 million of cash in 2010.
- Monitor tax exposures, pension funding assumptions, goodwill valuation, and environmental and litigation reserves; these depend on estimates and may change.
- Assess the implications of the AB Sciex controls exclusion and its planned integration into Danaher’s control environment.