Danaher Corporation — Q1 2010 Form 10-Q
Business context and period: The filing covers the three months ended April 2, 2010, compared with the three months ended April 3, 2009. Danaher reported four segments: Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change / context |
|---|---|---|---|
| Sales | $3.092 billion | $2.628 billion | 17.5% growth, per MD&A |
| Operating profit | $433.4 million | $340.2 million | Operating margin 14.0%, up from 12.9% |
| Net earnings | $300.2 million | $237.7 million | Up approximately 26% |
| Diluted EPS | $0.89 | $0.72 | Up approximately 24% |
| Gross profit margin | 48.4% | 47.9% | Improved 0.5 percentage points |
| Operating cash flow | $393.9 million | $316.7 million | Up 24% |
| Capital expenditures | $38.4 million | $36.4 million | Full-year 2010 spending expected to approximate $225 million |
Sales growth comprised 5.5% from existing businesses, 8.5% from acquisitions, and 3.5% from currency translation. Higher volume and savings from 2009 restructuring supported margins; acquisition-related charges and transaction costs reduced operating margin comparisons by 55 basis points. Q1 earnings included $30 million of pre-tax charges for acquired inventory and deferred-revenue fair-value adjustments; acquisition transaction costs were $8 million.
Segment results
| Segment | Sales | Operating profit | Operating margin |
|---|---|---|---|
| Professional Instrumentation | $1,156.9 million; +14.5% | $210.1 million | 18.2%, versus 17.7% |
| Medical Technologies | $948.3 million; +32.5% | $73.4 million | 7.7%, versus 10.8% |
| Industrial Technologies | $719.9 million; +10.5% | $136.2 million | 18.9%, versus 13.7% |
| Tools & Components | $267.1 million; +7.0% | $37.4 million | 14.0%, versus 6.6% |
Segment sales-growth rates include the effects of acquisitions, currency, divestitures, and, where applicable, inter-segment transfers. Medical Technologies’ margin decline primarily reflected acquisition charges and costs; the other segments’ margins improved with higher volumes and restructuring savings.
Balance sheet, debt and liquidity
- Cash and equivalents were $806 million at April 2, 2010, down from $1.722 billion at year-end 2009. The principal cash use was $1.263 billion for acquisitions.
- Total debt was approximately $2.886 billion, including $63.6 million current and $2.822 billion long-term, compared with approximately $2.933 billion at year-end. Debt fair value was $3.302 billion.
- Current assets were $4.541 billion and current liabilities $2.858 billion. The filing states that commercial paper is supported by revolving credit facilities; no facility borrowings were outstanding during the quarter.
- Operating cash flow was $394 million; investing activities used $1.301 billion, primarily for acquisitions. Financing activities provided $6.9 million.
- Danaher reported compliance with all debt covenants. Cash included $536 million held outside the United States.
Material changes, outlook and risks
- Acquisitions: Danaher acquired MDS’s Analytical Technologies division, including Molecular Devices, and purchased the remaining 50% of AB Sciex on January 30. The combined cash purchase price was approximately $1.1 billion, including debt assumed and net of cash acquired. Six additional businesses were acquired for approximately $191 million. The eight acquired businesses had aggregate annual sales of approximately $750 million based on their latest completed fiscal years. Purchase-price allocations remained preliminary.
- Pending Cooper joint venture: Danaher agreed to combine most of its Tools & Components segment with Cooper’s Tools business in a 50/50 joint venture. Closing was expected in Q2 2010, subject to financing of at least $190 million, regulatory approvals, and other conditions. The businesses contributed had combined 2009 sales of approximately $1.2 billion.
- Outlook: Management expected sales to continue growing during the remainder of 2010 versus 2009, assuming no significant deterioration in economic conditions. Management expected approximately $170 million of year-over-year pre-tax savings in 2010 from 2009 restructuring actions. Acquisition-related charges were expected to continue affecting margins, but at lower levels than in Q1.
- Taxes and currencies: The Q1 effective tax rate was 25.7%, versus 25.0%. Absent extension of specified U.S. tax provisions, management expected a roughly 26.5% rate for the balance of 2010, excluding discrete items. Currency translation increased Q1 reported sales by approximately 3.5%; management said prevailing April 2 exchange rates would have minimal full-year revenue impact if sustained.
- Key risks and unusual items: Risks cited include uncertain economic conditions, competitive and market pressures, acquisition integration and returns, foreign exchange, goodwill or intangible impairment, litigation and environmental exposure, product and regulatory matters, debt and pension risks, and commodity and supply-chain costs. Remaining cash payments for 2009 restructuring activities were approximately $65 million. A $4 million net discrete tax benefit was recorded in Q1.
Investor verification points
- Confirm the acquired businesses’ contribution to reported growth and the remaining acquisition-related charges and integration costs.
- Track cash generation, working capital, and liquidity after the substantial acquisition spending and reduction in cash.
- Verify whether the Cooper joint venture closed, its final financing and terms, and the resulting accounting and earnings effects.
- Assess whether management achieved the expected 2010 restructuring savings and whether margins recover as acquisition charges decline.
- Monitor tax legislation and the effective tax rate, goodwill and intangible valuations, and the risks associated with international operations and pension funding.