Danaher Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 29, 2013; unaudited. Comparisons are with the three months ended March 30, 2012, unless otherwise noted.
Business context and performance
Danaher operates five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. Management reported modestly higher overall demand. High-growth markets grew at a high-single-digit rate and represented about 24% of sales; U.S. sales were essentially flat, while Western Europe and Japan contracted.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $4,444.7 million | $4,316.2 million |
| Gross profit / margin | $2,325.7 million / 52.3% | $2,235.5 million / 51.8% |
| Operating profit / margin | $730.9 million / 16.4% | $734.9 million / 17.0% |
| Continuing-operations earnings | $691.9 million | $520.0 million |
| Diluted EPS from continuing operations | $0.98 | $0.73 |
| Net earnings | $691.9 million | $612.9 million |
| Operating cash flow | $636.5 million | $645.3 million |
Q1 2013 continuing-operations earnings included a $229.8 million pretax ($143.6 million after-tax, or $0.20 per diluted share) gain on the sale of the Apex joint venture. Q1 2012 net earnings included $92.9 million of discontinued-operations earnings, including a gain on business sales; therefore, total net earnings are not directly comparable.
Sales increased 3.0%: existing businesses contributed 1.0% growth, acquisitions 3.0%, and currency translation reduced growth by 1.0%. Gross margin rose 50 basis points, while operating margin fell 60 basis points, reflecting acquisition dilution and the Apex divestiture, partly offset by volume, restructuring savings, and productivity gains.
Cash and equivalents were $2,150.7 million at March 29, 2013, versus $1,678.7 million at year-end 2012. Total debt was $4,471.3 million, including $67.0 million current and $4,404.3 million long-term, versus $5,343.1 million total debt at year-end. Current assets were $7,910.0 million and current liabilities $3,926.5 million. The company had no borrowings under its $2.5 billion revolving credit facility and reported compliance with debt covenants. Investing cash flow was $554.7 million, including $692.0 million of proceeds from the Apex sale; financing cash use was $710.5 million, principally from net repayment of short-term borrowings.
Segment changes
- Test & Measurement: Sales +1.0%; operating profit fell to $187.3 million from $191.6 million. Instrument demand was weak; communications demand was strong.
- Environmental: Sales +4.5%; operating profit rose to $135.1 million from $129.1 million. Operating margin was flat at 18.6%.
- Life Sciences & Diagnostics: Sales +1.5%; operating profit declined to $199.3 million from $205.9 million. Margin fell to 12.7% from 13.3%, with acquisition dilution and the new medical-device excise tax among the pressures.
- Dental: Sales +3.0%; operating profit increased to $62.9 million from $58.9 million; margin improved to 13.1% from 12.7%.
- Industrial Technologies: Sales +7.0%, driven principally by acquisitions; existing-business sales declined 1.5%. Operating profit increased to $170.9 million from $157.8 million.
Outlook, risks, and unusual items
- Management expected Q2 2013 existing-business sales growth to be in line with the overall growth rates experienced in 2012 and Q1 2013. It characterized U.S. and Western European macro conditions as challenging.
- Management forecast a full-year 2013 effective tax rate of approximately 23.5%, excluding discrete items, and capital spending of approximately $500 million. The medical-device excise tax increased Q1 cost of sales by about $8 million; the expected full-year impact was about $35 million.
- Management estimated currency translation would reduce 2013 revenue by approximately 0.5% year over year if March 29 exchange rates persisted; further U.S. dollar strengthening could worsen the impact.
- Danaher sold its 50% Apex interest in February for consideration of $797 million, including $759 million cash and a $38 million note receivable. It acquired one business for $12 million in Q1 and announced a $300 million Life Sciences & Diagnostics acquisition that closed after quarter-end.
- Other notable items included a $19 million tax benefit primarily related to reinstated tax benefits and credits, partly offset by changes in estimates for prior-period uncertain tax positions; a $42 million cash outflow for 2012 restructuring actions; and a $256.5 million foreign-currency translation loss in other comprehensive income.
- Key disclosed risks include macroeconomic weakness, competition and pricing pressure, acquisition and integration risks, foreign-exchange movements, regulation and healthcare cost changes, litigation and contingencies, product and supply-chain issues, cybersecurity, pension funding, and possible goodwill or intangible-asset impairment. Management reported no 2013 goodwill-impairment triggering events.
Important facts for investors to verify
- Separate recurring operating performance from the Apex gain and compare continuing operations with continuing operations, not total net earnings.
- Check whether organic growth and margins improve, particularly in instruments, motion-related businesses, and developed markets; track acquisition contributions and dilution.
- Monitor cash conversion, restructuring payments, planned capital spending, and the use of Apex proceeds, alongside the 2013 debt maturities and refinancing plans.
- Assess the assumptions behind the tax-rate and currency outlook, the full-year medical-device excise-tax estimate, and non-U.S. pension contributions estimated at about $52 million.
- Review the subsequent $300 million acquisition’s integration, purchase-price allocation, and effect on leverage and earnings; also monitor litigation, warranty, and other contingencies.