Danaher Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter ended June 30, 2017; comparisons are with the quarter ended July 1, 2016. Unless noted, amounts are in U.S. dollars and reflect continuing operations.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $4.510 billion | $4.242 billion | $8.716 billion | $8.166 billion |
| Gross margin | 55.0% | 56.1% | 55.3% | 55.7% |
| Operating profit | $684 million | $710 million | $1.308 billion | $1.323 billion |
| Net earnings from continuing operations | $557 million | $418 million | $1.041 billion | $1.004 billion |
| Diluted EPS from continuing operations | $0.79 | $0.60 | $1.48 | $1.44 |
| Operating cash flow | — | $1.571 billion | $1.589 billion |
Q2 GAAP sales grew 6.5%; sales from existing businesses (core sales, excluding acquisitions and currency) grew 2.0%. For the first half, GAAP sales also grew 6.5% and core sales grew 2.5%. Q2 net earnings from continuing operations increased despite lower operating profit, aided in part by a lower effective tax rate. Total net earnings were $557 million in Q2 versus $657 million in Q2 2016; the prior-year figure included earnings from Fortive, which was spun off in July 2016.
At June 30, cash and equivalents were $726 million, versus $964 million at year-end 2016. Total debt was $11.592 billion, compared with $12.269 billion at year-end; long-term debt was $11.423 billion and current debt $170 million. The company reported approximately $1.3 billion of additional borrowing capacity under its credit and commercial paper facilities and compliance with debt covenants. First-half capital expenditures were $307 million.
Material changes and segment trends
- Diagnostics sales rose 14.5% in Q2, largely reflecting acquisitions, while segment operating margin fell to 10.9% from 18.5%. Results included charges related to discontinuing a molecular diagnostics product line.
- Life Sciences sales grew 4.0% in Q2 and operating margin improved to 16.0% from 14.5%.
- Environmental & Applied Solutions sales grew 4.5% and operating margin improved to 23.9% from 23.2%.
- Dental sales declined 1.5%; management cited softer demand and distributor inventory destocking in North America and Western Europe.
- Currency reduced reported sales growth by approximately 1.5 percentage points in both the quarter and first half. Acquisitions and other factors contributed 6.0 points to Q2 growth and 5.5 points to first-half growth.
Outlook, commentary, risks, and unusual items
- Management expected overall sales growth to continue through the rest of 2017 and core growth rates to improve, while cautioning about macroeconomic and geopolitical uncertainty. No specific full-year sales or earnings guidance was provided in the filing.
- Management expected a 20.5% effective tax rate for continuing operations for the remainder of 2017 and approximately $700 million of full-year capital spending.
- The Diagnostics product-line exit resulted in $76 million of pretax charges ($51 million after tax, or $0.07 per diluted share), including $49 million of noncash impairments and $27 million of cash restructuring costs. Management expected approximately $40 million of annual savings in 2018; substantially all related restructuring was completed in Q2.
- Three businesses were acquired in the first half for $94 million net cash consideration; their combined prior-year annual sales were approximately $65 million. The company also acquired a remaining noncontrolling interest for $64 million.
- A significant Danish tax dispute remains unresolved. Existing assessments were approximately $222 million, and management anticipated an additional assessment of approximately $131 million for later years. Danaher said it was vigorously contesting the matter; resolution could take years and could materially adversely affect results.
- Other risks include acquisition integration and execution, foreign exchange, regulation, competition, indebtedness, and litigation. The company reported no material change in its previously disclosed risk factors and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether core-sales growth accelerates as management expected, and how much reported growth continues to depend on acquisitions.
- Whether Diagnostics margins recover after the product-line exit and whether the projected $40 million of 2018 savings is realized.
- Progress integrating Cepheid and other acquired businesses, including their impact on margins and cash generation.
- Cash conversion, capital spending, and the company’s ability to manage commercial paper and other debt maturities while maintaining liquidity.
- Developments in the Danish tax assessments and their potential financial-statement impact.
- That Q2 tax benefits and the comparison with 2016 discontinued operations affect reported earnings comparisons; first-half operating cash flow was slightly below the prior-year period.