Danaher Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2009; comparisons are to the periods ended June 27, 2008. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Sales | $2.674 billion | $3.284 billion | $5.301 billion | $6.313 billion |
| Operating profit | $344 million | $510 million | $684 million | $924 million |
| Operating margin | 12.9% | 15.5% | 12.9% | 14.6% |
| Net earnings | $296 million | $363 million | $533 million | $640 million |
| Diluted EPS | $0.89 | $1.09 | $1.61 | $1.92 |
| Operating cash flow | — | $802 million | $915 million |
Q2 sales fell 18.5% year over year; sales from existing businesses declined 15%, with currency translation reducing reported sales by 5.5% and acquisitions contributing about 2%. First-half sales declined 16%; existing-business sales fell 13%. Gross margin was 47.2% in Q2 versus 47.5% and 47.6% for the first half versus 47.2%.
Segments and notable changes
- Q2 sales declined across all four segments: Professional Instrumentation 17%, Medical Technologies 12%, Industrial Technologies 25.5%, and Tools & Components 23%.
- Industrial demand was particularly weak, including test and measurement, motion, and consumer-oriented markets. Professional Instrumentation test and measurement sales fell 30.5% in Q2. Medical acute-care diagnostics grew, while life-science and dental demand weakened.
- Lower volume reduced operating leverage. Restructuring savings, lower material costs, and expense reductions partly offset the decline. Q2 operating margin also reflected 125 basis points of year-over-year pressure from restructuring costs.
Cash, debt, and liquidity
- Cash and equivalents were $1.258 billion at July 3, 2009, up from $393 million at year-end 2008. Current assets were $4.789 billion and current liabilities $2.508 billion.
- Total debt was approximately $2.904 billion, up from $2.619 billion at year-end; cash exceeded debt by approximately $1.646 billion. The company issued $750 million of 5.40% notes due 2019 and ended the period with $180 million of commercial paper outstanding.
- First-half operating cash flow was $802 million, down $113 million year over year. Investing used $273 million, including $140 million for acquisitions and $84 million of capital expenditures. Financing provided $300 million, mainly reflecting the note offering, partly offset by net debt repayments.
- Danaher reported $1.45 billion and $75 million revolving credit facilities, with no borrowings outstanding at quarter-end. Management said available cash, operating cash flow, commercial paper, and committed facilities should support liquidity.
Outlook, unusual items, and risks
- Management described continuing deterioration in demand amid the global downturn and said global demand might continue to contract. No specific revenue or earnings guidance was provided.
- Management estimated 2009 capital spending of approximately $190 million, subject to business conditions. Planned 2009 restructuring and related costs totaled approximately $160 million; $56 million had been incurred by July 3, leaving $104 million expected. The actions were expected to generate annualized savings of $140 million.
- The Q2 effective tax rate was 5.8%, including a $60.5 million benefit from resolving uncertain tax positions. Management expected an approximately 25% tax rate for the balance of 2009 excluding discrete items, and said about $40 million of additional tax benefits might arise in the second half.
- Management estimated that currency rates prevailing at July 3, if sustained, would reduce full-year 2009 reported sales by approximately 3% relative to 2008. The filing highlights risks from economic contraction, competition, acquisitions, debt, currency movements, goodwill impairment, litigation, regulation, and pension exposure.
- Three businesses were acquired for $140 million net cash consideration; together they had about $50 million in annual sales based on their last completed fiscal years. A goodwill assessment for one reporting unit found no impairment, but management noted estimates remain sensitive to economic conditions.
Investor verification priorities
- Assess how much of reported earnings reflects the $60.5 million tax benefit and whether the possible second-half tax benefit occurs.
- Track demand recovery, especially in industrial and test-and-measurement markets, and the effect of currency on reported results.
- Compare restructuring spending and realized savings with the $160 million cost plan and $140 million annualized savings estimate.
- Monitor operating cash flow, working-capital trends, debt levels, and the company’s ability to maintain access to commercial paper markets.
- Review goodwill and other asset valuations against actual performance and evolving economic assumptions.