Danaher Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Danaher operated across Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Sales | $19.893B | $18.330B | +8.5%; core sales growth +6.0% |
| Gross profit / margin | $11.107B / 55.8% | $10.193B / 55.6% | Margin +0.2 percentage points |
| Operating profit / margin | $3.404B / 17.1% | $2.990B / 16.3% | Profit +13.8%; margin +0.8 points |
| Net earnings from continuing operations | $2.651B | $2.470B | +7.3% |
| Diluted EPS from continuing operations | $3.74 | $3.50 | +6.9% |
| Operating cash flow | $4.022B | $3.478B | +16% |
| Capital expenditures | $656M | $620M | Up $36M |
| Cash flow less capital expenditures | $3.366B | — | Derived from reported cash flow and capex |
| Total debt at year-end | $9.740B | $10.522B | Down $782M |
| Cash and equivalents at year-end | $788M | $630M | Up $158M |
| Effective tax rate | 19.5% | 16.0% | Higher; 2017 included substantial TCJA-related net tax benefits |
Fourth-quarter results
Q4 2018 sales were $5.364B versus $5.086B in Q4 2017; operating profit was $963M versus $938M. Continuing-operations net earnings were $747M versus $857M, and diluted continuing-operations EPS was $1.05 versus $1.21. The filing provides these quarterly figures but does not give a clear standalone explanation for the year-over-year Q4 earnings decline.
Segments
| Segment | FY2018 sales | FY2018 operating margin | Change in core sales |
|---|---|---|---|
| Life Sciences | $6.471B | 19.0% | +7.5% |
| Diagnostics | $6.258B | 17.2% | +6.5% |
| Dental | $2.845B | 12.2% | +0.5% |
| Environmental & Applied Solutions | $4.320B | 22.9% | +6.0% |
Material changes and business developments
- Reported sales rose 8.5%; acquisitions contributed 2.0 percentage points and foreign currency 0.5 points, while core growth accelerated to 6.0% from 3.5% in 2017.
- Life Sciences acquired Integrated DNA Technologies (IDT) in April 2018 for approximately $2.1B net of cash acquired. Two 2018 acquisitions represented approximately $2.2B in cash consideration overall.
- Operating margin expanded from 16.3% to 17.1%, principally reflecting higher existing-business volumes and productivity savings. Dental margin contracted to 12.2% from 14.3%, with weaker traditional equipment and consumables, lower pricing, and growth investment among the cited pressures.
- Danaher announced a planned tax-free spin-off of Dental, targeting the second half of 2019, subject to board, financing, tax, IRS and regulatory conditions. Dental generated approximately $2.8B of 2018 sales.
- 2018 net earnings included a $73M after-tax gain on the 2017 sale of marketable equity securities? The filing reports that gain in 2017, not 2018; no comparable securities-sale gain was reported for 2018. 2018 also included $70M of productivity and restructuring charges.
- The 2017 comparison included a $22M discontinued-operations tax benefit and significant TCJA effects. Continuing operations are the relevant basis for the year-over-year performance comparison.
Liquidity, debt and capital allocation
- Year-end current assets were $7.094B and current liabilities $4.842B. Danaher reported $788M of cash, including $750M held outside the United States.
- The company had a $4.0B revolving credit facility, no borrowings under it at year-end, and approximately $1.5B of additional borrowing capacity after commercial-paper backstops. It reported compliance with debt covenants.
- 2018 investing cash outflows included $2.173B for acquisitions and $656M for capital expenditures. Dividends paid were $433M; no shares were repurchased in 2018, and 20M shares remained authorized for repurchase.
- FY2019 capital spending was estimated at approximately $750M. Expected 2019 defined-benefit contributions were about $10M for U.S. plans and $50M for non-U.S. plans.
Outlook, risks and contingencies
- Management expected a 2019 effective tax rate of approximately 19.5%. It estimated that year-end exchange rates, if sustained, would reduce 2019 sales by approximately 1.5% versus 2018. Tariffs were expected to have a modest impact on 2019 cost of goods sold.
- In January 2019, Danaher entered into approximately $1.9B of cross-currency swaps; management expected them to reduce 2019 interest expense by about $35M relative to stated interest rates, based on then-current rates and exchange rates.
- The most significant disclosed tax uncertainty is the IRS examination of 2012–2015 self-insurance tax positions. Proposed adjustments would increase taxable income by approximately $960M, with a further approximately $1.7B of potential adjustments under consideration. Danaher disputes the positions and intends to defend them; resolution could take years and could materially affect cash flows, earnings and the effective tax rate.
- Denmark tax authorities assessed approximately $247M, including interest, for withholding tax on intercompany interest for 2004–2009; Danaher anticipated a further assessment of approximately $146M for 2010–2012. The company is contesting the matter, whose outcome is uncertain.
- Environmental reserves were $147M. Management stated it did not believe probable payments above reserves would materially affect the financial statements; legal proceedings above reserves likewise were not believed reasonably likely to have a material effect.
- Other principal risks include acquisition integration and impairment risk, the proposed Dental separation and its tax treatment, competition and pricing, regulatory approval and compliance, foreign exchange, tariffs and trade policy, cybersecurity, supply constraints, Brexit uncertainty, and pension funding exposure.
Important facts for investors to verify
- Track resolution of the IRS and Danish tax disputes, including potential cash payments, interest, and changes to deferred tax liabilities.
- Monitor Dental separation approvals, financing, tax opinions and rulings, timing, costs, and any changes to the planned terms.
- Assess whether core growth and margin gains persist, especially Dental’s weak growth and margin decline and the contribution from acquisitions.
- Review debt maturities, commercial-paper refinancing capacity, liquidity, and the realization of expected benefits from the cross-currency swaps.
- Confirm the extent of acquisition integration, goodwill and intangible-asset valuation, restructuring execution, and IDT’s incorporation into financial controls; IDT was excluded from management’s 2018 internal-control assessment.