Danaher Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended April 3, 2015; compared with the three months ended March 28, 2014. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2015 | Prior period | Change |
|---|---|---|---|
| Sales | $4.873 billion | $4.663 billion | +4.5% |
| Gross profit / margin | $2.600 billion / 53.4% | $2.453 billion / 52.6% | Margin +0.8 percentage points |
| Operating profit / margin | $774 million / 15.9% | $789 million / 16.9% | Profit down $15 million; margin down 1.0 point |
| Net earnings | $570 million | $580 million | Down 1.7% |
| Diluted EPS | $0.79 | $0.81 | Down $0.02 |
| Operating cash flow | $524 million | $511 million | Up $12 million |
| Capital expenditures | $119 million | $131 million | Down $12 million |
Sales from existing businesses grew 5.0%; acquisitions added 6.0%, while currency translation reduced reported sales by 6.5%. Gross margin improved on volume, acquired-business mix and productivity savings, partly offset by acquired-inventory fair-value charges. Operating margin was pressured by acquired businesses, Nobel Biocare inventory charges, and growth investments. SG&A was 30.5% of sales versus 29.0%; R&D was 7.0% versus 6.7%.
Segment sales and operating profit were: Test & Measurement, $858 million and $171 million; Environmental, $823 million and $161 million; Life Sciences & Diagnostics, $1.696 billion and $216 million; Dental, $662 million and $60 million; Industrial Technologies, $835 million and $205 million. Dental sales rose 30%, mainly from acquisitions, while operating margin fell to 9.1% from 14.8%, including a 300-basis-point impact from Nobel Biocare inventory fair-value charges. Environmental and Industrial Technologies operating margins improved; Test & Measurement, Life Sciences & Diagnostics and Dental margins declined.
Liquidity, debt and balance sheet
- Cash and equivalents were $2.511 billion at April 3, down from $3.006 billion at year-end. Current assets were $8.774 billion and current liabilities $4.953 billion.
- Total debt was approximately $3.178 billion, including $124 million current; long-term debt carrying value was $3.054 billion. Cash exceeded total debt by approximately $667 million. Danaher reported compliance with debt covenants.
- Operating cash flow less capital expenditures was approximately $404 million. Investing activities used $691 million, including $488 million for three acquisitions; financing activities used $261 million, mainly from net commercial-paper repayments. Cash also fell by $67 million from exchange-rate effects.
- A $2.5 billion revolving credit facility had no borrowings outstanding. Cash included $844 million held in the U.S. and approximately $1.7 billion outside the U.S.
Material changes, outlook and risks
- Management reported mid-single-digit sales growth in both developed and high-growth markets, with stronger growth in China and India partly offset by weakness in Russia and Latin America and declines in Japan. Extra fiscal-quarter days also benefited growth. Management expected overall sales growth to continue but cited macroeconomic and geopolitical uncertainty.
- At Q1 exchange rates, management estimated currency would reduce full-year 2015 sales by approximately 6% year over year. Full-year capital spending was forecast at $650–$700 million; the expected effective tax rate for the remainder of 2015 was approximately 23.5%, excluding discrete items.
- Danaher acquired three businesses for $488 million cash, with aggregate prior-year sales of approximately $245 million. Acquisition-related goodwill was preliminarily recorded at $183 million.
- The planned combination of most of the Test & Measurement communications business with NetScout was expected to close in mid-2015. The DOJ closed its investigation on April 22, after quarter-end; shareholder approval, tax-related conditions and other closing conditions remained. Danaher expected its shareholders to receive approximately 60% of the combined NetScout shares.
- Foreign-currency translation produced a $680 million loss in other comprehensive income, driving total comprehensive loss of $104 million despite positive net earnings. Goodwill declined by $253 million, largely due to currency translation.
- Denmark’s tax authority assessed approximately $174 million, including interest, for withholding tax relating to 2004–2009; potential additional assessments for 2010–2012 were approximately $96 million. Danaher disputes the claims and is appealing; management said resolution could take years and could materially affect results.
- Other stated risks include currency volatility, acquisition integration and execution, competitive and market conditions, regulatory and litigation exposure, and the possibility the NetScout transaction may be delayed or not completed.
Important facts for investors to verify
- Whether underlying sales growth and margin trends persist after the benefit of extra quarter days and amid continuing currency headwinds.
- The pace of Nobel Biocare integration, realization of expected synergies, and effects of acquired inventory charges and acquisition dilution.
- Final terms, timing, tax treatment and completion of the NetScout transaction.
- Developments in the Danish tax dispute and any change in potential exposure or reserves.
- Cash deployment, acquisition spending, debt levels, and the availability and geographic location of cash.