Danaher Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 28, 2014; comparative period ended March 29, 2013. Unaudited consolidated results cover five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. All amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Sales | $4,662.7 million | $4,444.7 million | Up 5.0% |
| Gross profit margin | 52.6% | 52.3% | Up 30 bps |
| Operating profit | $788.9 million | $730.9 million | Up 7.9% |
| Operating profit margin | 16.9% | 16.4% | Up 50 bps |
| Net earnings | $579.7 million | $691.9 million | Down 16.2% |
| Diluted EPS | $0.81 | $0.98 | Down 17.3% |
| Operating cash flow | $511.2 million | $636.5 million | Down 20% |
Sales growth comprised 3.5% from existing businesses, 2.0% from acquisitions, and a 0.5% currency headwind. Management attributed stronger operating margins primarily to higher volumes and savings from restructuring and productivity initiatives, partly offset by acquired businesses’ dilutive impact. SG&A was 29.0% of sales versus 29.2%; R&D was 6.7% in both periods. Interest expense declined to $32.5 million from $39.2 million.
Net earnings and EPS declined despite higher operating profit. The principal comparison item was the 2013 Apex Tool Group joint-venture sale, which generated a $229.8 million pretax gain and a $144 million after-tax gain ($0.20 per diluted share); there was no comparable gain in Q1 2014.
Segments
- Test & Measurement: Sales $871.0 million, up 2%; operating margin 22.1%, up 20 bps. Weakness in U.S. government and military markets and a near-term communications growth slowdown were noted.
- Environmental: Sales $768.7 million, up 6%; operating margin 18.9%, up 30 bps. Existing-business growth was 4%; acquisitions added 2.5% and currency reduced growth by 0.5%.
- Life Sciences & Diagnostics: Sales $1,659.6 million, up 6%; operating margin 13.2%, up 50 bps. Existing-business growth was 4%, with strength in life sciences and selected diagnostics markets.
- Dental: Sales $509.7 million, up 6%; operating margin 14.8%, up 170 bps. Growth came from consumables, implants, orthodontics, and equipment.
- Industrial Technologies: Sales $853.7 million, up 4.5%; operating margin 22.5%, up 160 bps. Product identification growth offset weaker motion-related demand.
Cash, debt, and liquidity
- Cash and equivalents were $3.35 billion at March 28, 2014, compared with $3.12 billion at year-end; $1.3 billion was held in the U.S. and $2.0 billion outside the U.S.
- Total borrowings were approximately $3.49 billion, including $450 million of commercial paper; long-term debt carrying value was $3.42 billion. Long-term debt fair value was $3.87 billion. The company reported compliance with debt covenants.
- A $2.5 billion revolving credit facility expiring in July 2016 had no borrowings outstanding. The company classified commercial paper and $400 million of notes due June 2014 as long-term based on its intent and ability to refinance.
- Investing activities used $284.7 million, including $162.8 million for acquisitions and $130.9 million of capital expenditures. Financing activities provided $14.7 million. Cash increased $231.3 million during the quarter.
- Operating cash flow fell year over year, largely reflecting working-capital movements and the absence of $66.6 million of Apex-related dividends received in Q1 2013. Receivables, inventory, and payables together used $170 million in Q1 2014 versus providing $27 million in Q1 2013.
Outlook, material developments, and risks
- Management expected existing-business sales to continue growing year over year for the rest of 2014 at a level in line with Q1, while cautioning about macroeconomic and geopolitical uncertainty. It expected overall market conditions to improve.
- For the balance of 2014, the company forecast an effective tax rate of approximately 24%, excluding discrete items, and capital spending of approximately $650 million for full-year 2014.
- Five businesses were acquired in Q1 for $162.8 million net of acquired cash; their latest pre-acquisition annual sales totaled approximately $65 million. Preliminary goodwill recorded was $96.6 million. Purchase-price allocations remained subject to refinement.
- Danaher declared a quarterly dividend of $0.10 per share, payable April 25, 2014, describing this as a 300% increase in the per-share amount. No shares were repurchased in the quarter; 20 million shares remained authorized for repurchase.
- Tax contingency: Denmark’s tax authority assessed approximately $200 million relating to withholding tax and interest for 2004–2009. If its claims succeed, management said additional amounts of approximately $150 million through March 2014, plus future interest, could be assessed. German tax discussions were ongoing and no final assessments had been issued. Management intended to contest the matters; resolution was uncertain and could materially affect results, including the tax rate.
- Expected 2014 pension contributions were approximately $50 million for U.S. plans and $55 million for non-U.S. plans. The company also reported $52 million of accrued restructuring charges related to 2013 initiatives, with substantially all remaining termination-benefit payments expected during 2014.
- Management cited risks including economic and market conditions, competition, acquisition integration and valuation, regulation, foreign exchange, taxes and litigation, supply and manufacturing disruptions, cybersecurity, and pension-market risks. It reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the Danish assessment and ongoing German tax matters result in additional liabilities beyond amounts accrued.
- Whether working-capital cash use normalizes as management expected and operating cash flow supports planned investment and distributions.
- Progress on integrating Q1 acquisitions and the effect of acquisition-related dilution on margins.
- Delivery against management’s existing-business growth outlook, approximately 24% tax-rate forecast, and $650 million capital-spending expectation.
- Refinancing or repayment of the $400 million notes due June 2014 and the company’s ongoing liquidity and debt-covenant position.