Danaher Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 26, 2014. Unaudited results are compared with the periods ended September 27, 2013. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $4,870.3 million | $4,669.1 million | $14,496.6 million | $13,851.3 million |
| Gross profit | $2,565.7 million | $2,424.7 million | $7,638.8 million | $7,245.9 million |
| Operating profit | $865.8 million | $812.4 million | $2,544.0 million | $2,386.9 million |
| Net earnings | $680.6 million | $597.0 million | $1,936.7 million | $1,905.7 million |
| Diluted EPS | $0.95 | $0.84 | $2.71 | $2.69 |
| Gross margin | 52.7% | 51.9% | 52.7% | 52.3% |
| Operating margin | 17.8% | 17.4% | 17.5% | 17.2% |
Q3 sales rose 4.5% year over year: 3.0% from existing businesses, 2.0% from acquisitions and a 0.5% currency headwind. Nine-month sales also rose 4.5%, with 3.0% existing-business growth and 1.5% acquisition contribution; currency impact was negligible. Higher volume and productivity savings supported margins, partly offset by acquisition dilution and investment in product development, sales and marketing.
Segments
Q3 sales increased in Environmental (10.5%), Life Sciences & Diagnostics (4.0%), Dental (3.5%) and Industrial Technologies (2.0%); Test & Measurement sales grew 1.5%, as acquisitions offset a decline in existing-business sales. Life Sciences & Diagnostics and Industrial Technologies reported improved operating margins; Test & Measurement margin fell to 17.5% from 19.2%, primarily reflecting weakness in higher-margin communications sales and acquisition dilution. Segment results also reflected varied market and geographic demand.
Cash, debt and liquidity
- Nine-month operating cash flow was $2,519 million, versus $2,507 million in 2013. Working capital used $238 million of cash, compared with $25 million in the prior-year period.
- Investing cash outflow was $998 million, including $635 million for acquisitions and $421 million of capital expenditures. Financing cash outflow was $499 million, including $405 million of repayments on borrowings with maturities longer than 90 days.
- Cash and equivalents were $4,025 million at September 26, 2014, up from $3,115 million at year-end 2013. Total debt was $3,036 million, including $450 million of commercial paper; the company reported no borrowings under its $2.5 billion revolving credit facility and was in compliance with debt covenants.
- Cash included $2.9 billion held outside the United States. Management said liquidity was sufficient for operating needs, debt service and strategic investments, while noting that some foreign cash may face U.S. tax upon repatriation.
- Cash dividends paid in the first nine months were $157 million. No shares were repurchased during the period.
Outlook, transactions and notable items
- Management expected existing-business sales growth in Q4 to be in line with the growth levels experienced in the first nine months, while citing macroeconomic and geopolitical uncertainty. The filing gives no specific EPS or full-year revenue guidance.
- A cost-reduction plan expected to be substantially completed by year-end 2014 was forecast to generate approximately $125 million of pretax charges, mostly in Q4 and substantially all involving cash expenditure.
- Full-year 2014 capital spending was expected to approximate $650 million. Management forecast a Q4 effective tax rate of approximately 23.5%, excluding discrete items.
- In September, Danaher agreed to acquire Nobel Biocare for approximately CHF 2.0 billion (about $2.1 billion at the cited exchange rate), including assumed debt and net of cash acquired. The offer remained conditional; completion was expected in Q4 2014 or Q1 2015. Danaher owned approximately 14% of Nobel Biocare as of October 15, 2014 and expected to use available cash to finance the acquisition.
- In August, Danaher sold its EVS/hybrid product line for $87 million cash and recorded a $34 million pretax gain ($0.04 per diluted share). The disposal was not treated as a discontinued operation.
- After quarter-end, Danaher announced an agreement to distribute its Communications business to shareholders and combine it with a NetScout subsidiary. Closing was expected in 2015, subject to approvals and other conditions; the transaction may not close as planned or deliver expected benefits.
- Q3 comprehensive income was a loss of $5 million, primarily reflecting a $671 million foreign-currency translation loss as the U.S. dollar strengthened. This reduced accumulated other comprehensive income to a $380 million deficit.
- Danaher reported Danish tax assessments of approximately $195 million, with potential additional assessments of about $145 million through September 2014 plus future interest if the claims succeed. German tax discussions were ongoing without final assessments. Management disputed the positions and intended to defend them; resolution could take years and materially affect results.
- Other income included a $34 million pretax gain on the EVS/hybrid sale and $24 million of pretax gains from marketable-security sales for the nine-month period. Danaher expected to liquidate a remaining marketable-security position in Q4 and estimated a gain of about $0.07 per diluted share at then-current prices.
Key facts for investors to verify
- Whether Nobel Biocare’s tender offer meets its conditions, closes on schedule and is financed as expected; assess the resulting debt, integration and synergy implications.
- Whether Q4 existing-business growth matches management’s outlook, especially in Communications, and how the proposed NetScout transaction affects the remaining portfolio.
- The timing, cash cost and execution of the planned $125 million restructuring, alongside working-capital trends and the $650 million capital-spending estimate.
- Developments in the Danish and German tax disputes, including potential assessments, interest and any change to the company’s tax-rate outlook.
- Foreign-exchange effects on reported results and equity, and the availability and tax consequences of cash held outside the United States.