Danaher Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2015; comparisons are with the periods ended June 27, 2014. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Sales | $5.127 billion | $4.964 billion | $10.000 billion | $9.626 billion |
| Gross profit / margin | $2.760 billion / 53.8% | $2.620 billion / 52.8% | $5.360 billion / 53.6% | $5.073 billion / 52.7% |
| Operating profit / margin | $931 million / 18.2% | $889 million / 17.9% | $1.705 billion / 17.1% | $1.678 billion / 17.4% |
| Net earnings | $696 million | $676 million | $1.265 billion | $1.256 billion |
| Diluted EPS | $0.97 | $0.95 | $1.76 | $1.76 |
| Operating cash flow | Not separately presented | Not separately presented | $1.618 billion | $1.503 billion |
Management reported Q2 sales growth of 3.5% and first-half growth of 4.0%; existing businesses contributed 3.5% and 4.0%, respectively, while acquisitions added 6.5% and currency translation reduced sales by 6.5% in both periods. Gross margin improved, but first-half operating margin fell 30 basis points year over year. Q2 operating-margin improvement reflected volume and cost savings, partly offset by acquisition-related dilution. SG&A rose to 28.9% of Q2 sales from 28.1%, reflecting growth investments and acquired-business spending.
By segment, Q2 sales increased notably in Dental, largely from acquisitions, and in Environmental and Life Sciences & Diagnostics. Test & Measurement and Industrial Technologies reported lower sales. Dental’s first-half operating margin declined to 11.7% from 14.8%, including Nobel Biocare inventory fair-value charges and lower existing-business sales.
Cash, debt and liquidity
- Cash and equivalents were $3.342 billion at July 3, 2015, versus $3.006 billion at year-end 2014. First-half operating cash flow was $1.618 billion; investing activities used $938 million and financing activities used $299 million.
- Capital expenditures were $258 million and acquisitions used $599 million in the first half. Management expected 2015 capital spending of $650–$700 million.
- Debt totaled $3.163 billion, including $450 million of commercial paper; long-term debt on the balance sheet was $3.053 billion. The company said it was in compliance with debt covenants and believed liquidity was sufficient.
- After quarter-end, Danaher issued €2.7 billion of euro-denominated notes and expanded commercial-paper and revolving-credit capacity to $11 billion to help finance the proposed Pall acquisition. These subsequent financing actions are not reflected in July 3 balance-sheet debt.
Outlook, material developments and risks
- Management expected sales growth to continue but cautioned about macroeconomic and geopolitical uncertainty. It estimated currency translation would reduce full-year 2015 sales by about 5.5% if July 3 exchange rates persisted. The projected second-half effective tax rate was approximately 23.5%, excluding discrete items.
- Danaher agreed to acquire Pall for $127.20 per share in cash, at an enterprise value of approximately $13.8 billion. Closing was expected in the second half of 2015 and remained subject to shareholder, antitrust and other conditions. The company cited growth and cost-synergy opportunities, while warning of integration, financing, execution and goodwill-impairment risks.
- Danaher announced a planned tax-free separation into a science and technology company and a diversified industrial company, targeting completion by the end of 2016, subject to approvals and other conditions.
- On July 14, 2015, Danaher completed the split-off of most of its communications business to NetScout. The business will be treated as discontinued operations from Q3 2015; Danaher expected to record a non-cash gain, not yet finalized in this filing.
- Foreign currency translation produced a first-half loss of $635 million in other comprehensive income, compared with a gain of $52 million in the prior-year period.
- A Danish tax authority dispute involved assessments of approximately $178 million, with possible additional assessments of about $100 million for later years. Danaher disputed the claims; management said the outcome was uncertain and could materially affect results.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter. No share repurchases were made in the first half.
Key facts for investors to verify
- Completion, financing cost and integration performance of the Pall acquisition, including the terms and conditions of the post-quarter euro-note and credit-facility financing.
- Progress, costs, approvals and expected benefits of the planned corporate separation.
- Resolution and potential financial impact of the Danish tax assessments.
- Underlying sales and margin trends after adjusting for currency, acquisitions, Nobel Biocare purchase accounting and the communications-business disposition.
- Whether currency movements, working-capital needs and acquisition-related spending affect cash generation and leverage.