Business context and reporting period
Danaher Corporation’s unaudited Form 10-Q covers the three months ended April 1, 2016, compared with the three months ended April 3, 2015. Danaher reported five continuing segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. The 2015 comparison reflects the communications business as discontinued operations.
Financial performance and key metrics
- Sales: $5.387 billion, up 15.0% year over year. Acquisitions contributed 16.5%, existing businesses 0.5%, and currency translation reduced sales 2.0%. Pall was a major contributor to acquisition-driven growth.
- Profit and margins: Gross profit was $2.863 billion, with gross margin of 53.1% versus 52.6%. Operating profit was $882 million, up from $755 million; operating margin was 16.4% versus 16.1%.
- Net earnings and EPS: Continuing-operations net earnings were $758 million versus $558 million; diluted continuing-operations EPS was $1.09 versus $0.78. Results included a $223 million pretax ($140 million after-tax, or $0.20 per diluted share) gain on sale of marketable equity securities. The filing does not provide an adjusted earnings figure excluding this gain.
- Cash flow: Operating cash flow from continuing operations was $773 million versus $530 million. Capital expenditures were $151 million; operating cash flow less capital expenditures was approximately $622 million, a simple derived measure and not a company-reported free-cash-flow measure. Investing activities provided $8 million, including $265 million in securities-sale proceeds; financing activities used $891 million, including approximately $1.1 billion of net short-term borrowing repayments.
- Liquidity and debt: Cash and equivalents were $664 million at quarter-end, down from $791 million at December 31, 2015. Total debt was approximately $12.392 billion, versus $12.870 billion at year-end; net debt was approximately $11.727 billion. Current liabilities were $5.321 billion. Danaher reported approximately $1.9 billion of additional borrowing capacity under its credit facilities and commercial-paper support, and compliance with debt covenants. Certain commercial-paper and 2016 note borrowings were classified as long-term based on management’s intent and ability to refinance.
- Other: The effective tax rate was 27.3%, up from 23.4%. The company declared a $0.16-per-share quarterly dividend. No shares were repurchased during the quarter.
Material changes versus the prior comparable period
- Sales and earnings increased substantially, but reported sales growth was primarily acquisition-driven; sales from existing businesses grew only 0.5%.
- Life Sciences & Diagnostics sales rose 42.0%, including 41.5% acquisition contribution, and operating margin improved to 14.9% from 12.7%. Pall’s integration contributed to higher depreciation and amortization.
- Dental operating margin increased to 14.5% from 9.1%, partly reflecting the absence of 2015 Nobel Biocare acquired-inventory fair-value charges. Sales declined 1.0%.
- Test & Measurement sales fell 5.5% and operating margin declined to 20.9% from 22.3%; Environmental sales rose 4.0% while margin declined to 17.3% from 19.5%; Industrial Technologies sales fell 1.5% and margin eased to 24.3% from 24.6%.
- Interest expense increased to $62 million from $29 million, primarily reflecting debt associated with the Pall acquisition. Cash from operations rose 46%, while the prior-year period included substantially higher acquisition spending.
- Comprehensive income was $833 million versus a loss of $104 million, principally reflecting higher net earnings and a foreign-currency translation gain of $201 million versus a $680 million loss in 2015.
Outlook, management commentary, risks and unusual items
- Management expected overall sales growth to continue, while cautioning about macroeconomic and geopolitical uncertainty. High-growth-market sales were about 25% of total sales; those markets grew at a low-single-digit rate, led by China and India, with weakness in Latin America and Russia.
- Danaher targeted completion of its tax-free Fortive spin-off in the third quarter of 2016, subject to board approval and customary conditions. Danaher anticipated a roughly $3.0 billion cash dividend from Fortive, expected to be debt-financed by Fortive, and intended to use the proceeds to repay Danaher debt. Separation costs were $9 million in the quarter, with approximately $6 million of related discrete tax expense.
- Management expected approximately $300 million in annual Pall cost savings as integration proceeds. Full-year 2016 capital spending was expected to be approximately $750 million. The forecast effective tax rate for the remainder of 2016 was approximately 24%, excluding discrete items.
- The quarter’s securities-sale gain was a material nonrecurring contributor to earnings. The reported tax rate also reflected a higher tax rate on that gain and separation-related tax expense.
- Danaher faced Danish tax assessments of approximately $196 million, including interest, for 2004–2009. If the claims succeed, management said additional assessments of approximately $116 million for 2010–2012 were likely. Danaher disputed the claims and intended to appeal; the outcome was uncertain and could materially affect results.
- Other identified risks included separation timing and execution, acquisition integration, indebtedness and refinancing, foreign exchange, market weakness, regulatory matters, and litigation. Management reported no material change to the risk factors disclosed in its 2015 Form 10-K.
Important facts investors should verify
- Whether underlying sales growth improves beyond the quarter’s 0.5% existing-business growth, and how currency movements affect reported results.
- Whether the Fortive separation occurs on schedule, the amount and financing of the anticipated dividend, and the use of proceeds to reduce debt.
- Progress integrating Pall and delivery of the projected annual cost savings, alongside segment-level demand and margin trends.
- The resolution and potential financial impact of the Danish tax dispute and other tax contingencies.
- How earnings and cash generation compare after excluding the $223 million pretax securities-sale gain, and how debt, liquidity, and refinancing capacity evolve.