Danaher Corporation — FY2016 Form 10-K
Business context and reporting period. This is Danaher’s annual report for the year ended December 31, 2016, not a standalone fourth-quarter filing. Danaher reported four continuing segments: Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. It completed the Fortive separation on July 2, 2016; prior periods were recast to show Fortive and the previously separated communications business as discontinued operations.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $16.88 billion | $14.43 billion |
| Operating profit | $2.75 billion | $2.16 billion |
| Net earnings from continuing operations | $2.15 billion | $1.75 billion |
| Diluted continuing-operations EPS | $3.08 | $2.47 |
| Operating cash flow, continuing operations | $3.09 billion | $2.83 billion |
| Capital expenditures | $590 million | $513 million |
| Total debt at year-end | $12.27 billion | $12.87 billion |
| Cash and equivalents at year-end | $964 million | $791 million |
- Reported sales rose 17.0%; management attributed 3.0 percentage points to existing businesses, 15.0 points to acquisitions, and a 1.0-point reduction to currency. Operating profit grew about 27% and continuing-operations net earnings about 23%.
- Gross margin increased to 55.3% from 53.8%; operating margin rose to 16.3% from 15.0%. Continuing-operations net margin was approximately 12.8%, versus 12.1%.
- Operating cash flow less capital expenditures was approximately $2.50 billion, compared with $2.32 billion in 2015; this is a simple calculation, not a company-reported free-cash-flow measure.
- Year-end current assets were $6.67 billion and current liabilities $6.87 billion. The resulting current ratio was approximately 0.97. Danaher reported $7.0 billion of credit facilities, no facility borrowings at year-end, and approximately $1.1 billion of additional borrowing capacity under its stated availability calculation. It reported compliance with debt covenants.
- Sales and operating profit by segment: Life Sciences $5.37 billion and $819 million; Diagnostics $5.04 billion and $786 million; Dental $2.79 billion and $419 million; Environmental & Applied Solutions $3.69 billion and $870 million.
Material changes and unusual items
- The $4.0 billion Cepheid acquisition closed in November 2016 and expanded Diagnostics into molecular diagnostics. Danaher also acquired seven other businesses for $882 million. The company cited expected cost synergies from applying its Danaher Business System and combined purchasing power.
- Life Sciences sales rose 62%, mainly reflecting Pall, acquired in 2015; its operating margin increased to 15.3% from 9.9%, including the comparison benefit of lower Pall acquisition-related charges. Diagnostics sales grew 4.5%, including Cepheid; Dental sales grew 2.0%; Environmental & Applied Solutions sales grew 4.0%.
- The Fortive distribution generated approximately $3.0 billion in net cash proceeds for Danaher. The company used some proceeds to repay maturing debt and redeem approximately $1.9 billion of notes, paying $188 million in make-whole premiums. It also distributed $485 million in cash and approximately $2.0 billion of noncash net assets to Fortive in connection with the separation.
- Continuing-operations earnings included a $223 million pretax gain on the sale of marketable equity securities and a $179 million pretax loss on early debt extinguishment. The 2016 restructuring charge was $152 million, compared with $98 million in 2015.
- Total net earnings fell to $2.55 billion from $3.36 billion, despite higher continuing earnings, mainly because 2015 included the $767 million after-tax gain on the communications-business disposition and more earnings from discontinued operations. Fortive contributed $400 million of after-tax discontinued-operations earnings in 2016 before separation.
Outlook, commentary and risks
- Management provided no specific 2017 sales or earnings forecast in the cited filing text. It expected 2017 capital expenditures of approximately $750 million and a continuing-operations effective tax rate of approximately 21%.
- If December 31, 2016 exchange rates persisted through 2017, Danaher estimated currency would reduce 2017 sales by approximately 2.5% relative to 2016. Management said 2016 existing-business growth was 3.0%; high-growth markets, about 29% of sales, grew at a high-single-digit rate, while developed markets grew at a low-single-digit rate.
- Key risks include acquisition integration and debt, competitive and pricing pressures, slower or cyclical end markets, foreign-exchange exposure, regulation and product quality, cybersecurity, supply-chain constraints, and potential impairment of substantial goodwill and intangible assets ($35.6 billion net at year-end).
- Tax authorities in Denmark assessed approximately $195 million, including interest through year-end, for withholding tax on intercompany interest for 2004–2009; Danaher anticipated a further assessment of approximately $115 million for 2010–2012. The company is contesting the matter and cautioned that resolution could materially affect results and the tax rate.
- Danaher recorded a $159 million environmental reserve and stated it did not believe reasonably possible environmental payments above reserves would materially affect the financial statements. It likewise did not expect litigation liabilities above reserves to be material, while noting outcomes remain uncertain. The Fortive separation also carries potential tax and indemnification risks.
Important facts for investors to verify
- Separate organic growth and acquired growth, particularly the contribution and post-acquisition performance of Pall and Cepheid; confirm whether anticipated integration savings are being realized.
- Debt maturities, commercial-paper refinancing capacity, interest expense, and liquidity after the acquisition and Fortive-related transactions.
- The durability of margin improvement after acquisition-related charges, restructuring costs, and other unusual items are considered.
- Resolution and reserve adequacy for the Danish tax assessments, environmental matters, and separation-related indemnification and tax exposure.
- Actual 2017 currency effects, capital spending, and effective tax rate versus management’s estimates.