Danaher Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Unless indicated otherwise, financial amounts are U.S. dollars.
Business context and reporting period
Danaher designs and sells professional, medical, industrial and commercial products and services through four segments: Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. Its strategy emphasizes portfolio investment, the Danaher Business System (DBS), innovation and acquisitions. Continuing operations exclude businesses previously separated into Fortive and the former communications business. Approximately 63% of 2017 sales came from outside the United States.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Sales | $18.330 billion | $16.882 billion |
| Core sales growth, non-GAAP | 3.5% | 3.0% |
| Gross profit / margin | $10.193 billion / 55.6% | $9.335 billion / 55.3% |
| Operating profit / margin | $3.021 billion / 16.5% | $2.751 billion / 16.3% |
| Continuing-operations net earnings | $2.470 billion | $2.153 billion |
| Diluted continuing-operations EPS | $3.50 | $3.08 |
| Operating cash flow from continuing operations | $3.478 billion | $3.088 billion |
| Capital expenditures | $620 million | $590 million |
| Total debt at year-end | $10.522 billion | $12.269 billion |
| Cash and cash equivalents at year-end | $630 million | $964 million |
Operating cash flow rose about 13%. Investing activities used $843 million, including $386 million for ten acquisitions and $620 million of capital expenditures. Financing activities used $3.099 billion, largely reflecting repayment of short-term borrowings. Danaher had $2.431 billion of commercial paper outstanding; approximately $2.4 billion was classified as long-term based on the company’s intent and ability to refinance. The $4.0 billion revolving credit facility had no borrowings outstanding, and the company reported $1.6 billion of additional borrowing capacity under the facility and commercial-paper arrangements. Management said liquidity was sufficient for expected needs.
At year-end, current assets were $6.850 billion and current liabilities were $4.792 billion. The company declared dividends of $0.56 per share for 2017 and paid $378 million in dividends. No shares were repurchased under the ongoing program during 2017.
Material changes versus the prior comparable period
- Consolidated sales increased 8.5%; acquisitions contributed 4.5 percentage points and currency 0.5 percentage points, while core growth was 3.5%.
- Life Sciences sales rose 6.5% and operating margin increased to 17.6% from 15.3%. Diagnostics sales rose 16.0%, largely reflecting Cepheid, while margin declined to 14.9% from 15.6%. Dental sales increased 1.0%, with flat core growth, and margin fell to 14.3% from 15.1%. Environmental & Applied Solutions sales rose 7.5% and margin declined to 23.0% from 23.6%.
- Continuing-operations net earnings increased to $2.470 billion from $2.153 billion. Total net earnings fell to $2.492 billion from $2.554 billion, primarily because discontinued-operations earnings were only $22 million in 2017 versus $400 million in 2016. The 2015 comparison is also affected by the large gain on the communications-business disposition.
- Gross and operating margins improved modestly overall, supported by volume and productivity savings. Segment results were mixed, including margin pressure from acquired businesses and restructuring charges.
- Total debt declined by approximately $1.747 billion. The company issued about $1.8 billion of long-term debt during 2017, primarily to refinance commercial paper and maturing obligations.
Fourth quarter: Sales were $5.086 billion, operating profit $946 million, continuing-operations net earnings $857 million and diluted continuing-operations EPS $1.21. Fourth-quarter 2016 comparatives were $4.584 billion, $729 million, $747 million and $1.07, respectively.
Outlook, management commentary, risks and unusual items
- Outlook: Management expected 2018 capital expenditures of approximately $700 million and an effective tax rate of 20%–21%, subject to tax-law guidance and other factors. If exchange rates at December 31, 2017 persisted through 2018, currency was expected to add approximately 2% to sales versus 2017. The filing does not provide a consolidated 2018 revenue or earnings forecast.
- Tax legislation: The Tax Cuts and Jobs Act led to provisional 2017 tax accounting: approximately $1.2 billion of Transition Tax expense was substantially offset by an approximately $1.2 billion benefit from remeasuring U.S. deferred tax balances. The company had not completed its accounting and warned estimates could change as guidance and tax-return information became available.
- Restructuring and impairments: Danaher recorded $159 million of 2017 productivity-improvement and restructuring charges, including $76 million related to discontinuing a Diagnostics molecular-diagnostic product line. The latter included $49 million of noncash impairments and $27 million of cash restructuring costs. Substantially all actions on that product line were completed during 2017.
- Acquisition and asset exposure: Ten businesses were acquired for $386 million in 2017. Goodwill and other intangible assets totaled approximately $36.8 billion, making acquisition integration and impairment assumptions important to reported results.
- Tax contingency: Danish tax authorities assessed approximately $245 million, including interest, for withholding tax on intercompany interest for 2004–2009; Danaher anticipated a further assessment of about $144 million for 2010–2012. Management disputes the assessments. Resolution is uncertain, may take years and could materially affect results, including the tax rate.
- Other risks: The filing highlights global economic and currency exposure, competition and pricing pressure, reliance on innovation and successful acquisition integration, extensive healthcare and product regulation, cybersecurity and data privacy, supply-chain constraints, pension assumptions, and debt refinancing and interest-rate risks. Dental demand faced distributor realignment and channel inventory destocking, which management said could weigh on near-term revenue.
- Contingencies and controls: Environmental remediation reserves were $147 million. Danaher said excess litigation and environmental amounts were not reasonably expected to materially affect its financial statements. A reported EPA matter involving a subsidiary’s Illinois facility was expected to settle for approximately $175,000 plus injunctive relief. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile reported sales growth with 3.5% core growth, and assess how acquisition contributions—especially Cepheid—affect future organic growth and margins.
- Track the final TCJA accounting, Transition Tax payment schedule and the 2018 effective tax rate against management’s 20%–21% expectation.
- Review developments in the Danish tax dispute and related uncertain-tax-position reserves.
- Assess debt maturities, commercial-paper refinancing capacity and liquidity alongside the $630 million year-end cash balance.
- Monitor Dental channel inventories and distributor changes, Diagnostics product-line discontinuation effects, and integration and impairment risks related to acquired businesses.
- Compare actual 2018 capital spending with the approximately $700 million plan and evaluate whether cash generation supports acquisitions, debt service and dividends.