Danaher Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 29, 2012; comparable periods ended July 1, 2011. Unaudited results. Danaher reported five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Sales | $4.553 billion | $3.636 billion | $8.870 billion | $6.928 billion |
| Operating profit | $811 million | $610 million | $1.546 billion | $1.195 billion |
| Operating margin | 17.8% | 16.8% | 17.4% | 17.2% |
| Gross margin | 51.7% | 52.7% | 51.8% | 52.9% |
| Continuing-operations net earnings | $600 million | $440 million | $1.120 billion | $856 million |
| Diluted continuing-operations EPS | $0.84 | $0.64 | $1.57 | $1.24 |
- Reported sales rose 25.0% in Q2 and 28.0% in the first half. Acquisitions contributed 25.0 and 27.5 percentage points, respectively; existing businesses contributed 3.5 and 2.5 points, while currency reduced growth by 3.5 and 2.0 points.
- Q2 net earnings were $600 million versus $649 million in the prior year, and first-half net earnings were $1.213 billion versus $1.078 billion. The prior-year periods included larger discontinued-operation gains; continuing-operations earnings provide a more comparable view.
- Operating-margin comparisons benefited from higher volumes, productivity savings, lower Beckman Coulter acquisition-related charges than in 2011, and a gain from resolving a prior asset-disposition contingency. Acquisition dilution partly offset these benefits. Gross margin declined mainly because Beckman Coulter had lower gross margins than Danaher’s pre-existing businesses.
- Segment sales in Q2 were $1.583 billion for Life Sciences & Diagnostics, $856 million for Test & Measurement, $764 million for Environmental, $499 million for Dental, and $851 million for Industrial Technologies. Life Sciences & Diagnostics’ large increase principally reflected the Beckman Coulter acquisition.
Cash flow, balance sheet and liquidity
- First-half operating cash flow from continuing operations was $1.696 billion, up about 38% from $1.228 billion. Net cash provided by operations, including discontinued operations, was $1.654 billion.
- Capital expenditures were $229 million; management expected full-year 2012 capital spending of approximately $550 million. Cash acquisitions were $945 million. Proceeds from the ASI and KEO divestitures were approximately $337 million.
- Cash and equivalents were $1.118 billion at June 29, 2012, versus $537 million at year-end 2011. Total debt carrying value was approximately $4.903 billion, including $4.848 billion classified as long-term and $55 million current. Commercial paper and certain notes were classified as long-term based on refinancing intent and available credit support.
- The company had no borrowings under its $2.5 billion revolving credit facility, which expires in July 2016, and reported compliance with debt covenants. U.S. commercial paper outstanding had a weighted-average interest rate of 0.2% and maturity of about 13 days.
- Of cash on hand, $975 million was held outside the United States and $143 million domestically. Management stated that cash, operating cash flow and other liquidity sources were sufficient for anticipated needs.
Outlook, commentary and notable items
- On July 18, 2012, the board committed to a cost-reduction plan expected to be substantially complete by year-end. Danaher forecast approximately $100 million of pretax, cash charges, mostly in the second half of 2012.
- Management forecast a second-half 2012 effective tax rate of approximately 24%, excluding discrete items. Q2 included a $7 million discrete tax benefit.
- Management estimated that currency rates prevailing at quarter-end, if sustained, would reduce 2012 revenue by approximately 2.5% year over year; the dollar continued to strengthen after quarter-end. It noted macroeconomic uncertainty, particularly in Europe.
- Segment commentary was mixed: communications demand supported Test & Measurement, while instrument demand was weak; Environmental reported growth in water quality and retail petroleum; Dental consumables grew but equipment demand was uneven; Industrial Technologies’ motion businesses faced soft end markets. Management expected communications growth to moderate and instrument declines to continue at a similar rate in Q3.
- Eight businesses were acquired in the first half, including X-Rite, for $945 million net cash consideration; their combined prior-year annual sales were $376 million. Danaher also sold ASI and KEO, recording an aggregate $94 million after-tax gain. Goodwill was $14.927 billion; management identified recent acquisitions as generally higher impairment-risk reporting units.
- Other notable items include a $6 million Q2 pretax charge from fair-value changes in an inherited currency swap, and a $20 million remaining accrual for 2011 restructuring actions. Management cited risks including economic conditions, foreign exchange, competition, acquisition integration, regulation, litigation, product quality, and potential goodwill or intangible-asset impairment.
Investor verification points
- Assess underlying organic growth and segment trends separately from Beckman Coulter and other acquisition contributions and currency effects.
- Verify whether the announced cost reductions are completed on schedule and whether charges and expected savings develop as described.
- Monitor cash conversion, the planned $550 million capital expenditure level, acquisition spending, and the use and location of cash balances.
- Review debt maturities, commercial-paper refinancing capacity, covenant compliance, and the effect of foreign-exchange movements.
- Track integration synergies and margin performance, particularly in Life Sciences & Diagnostics, and assess goodwill and acquired-intangible valuation risks.
- Review the full annual filing and subsequent disclosures for details of litigation, tax contingencies, and other commitments; this quarterly filing text refers to prior-period disclosures but does not provide a clear current quantified value for those exposures.