Danaher Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the periods ended October 1, 2010. Amounts below are U.S. dollars. Danaher completed its Beckman Coulter acquisition on June 30, 2011; its results are included from June 25. The Pacific Scientific Aerospace business was sold in April and presented as discontinued operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $4.518B | $3.093B | $11.575B | $9.318B |
| Gross profit | $2.205B | $1.612B | $5.911B | $4.686B |
| Gross margin | 48.8% | 52.1% | 51.1% | 50.3% |
| Operating profit | $656M | $553M | $1.873B | $1.492B |
| Operating margin | 14.5% | 17.9% | 16.2% | 16.0% |
| Continuing-operations earnings | $523M | $634M | $1.393B | $1.289B |
| Diluted continuing-operations EPS | $0.74 | $0.93 | $2.00 | $1.90 |
| Net earnings | $523M | $646M | $1.602B | $1.319B |
- Q3 sales increased 46.0%: existing businesses contributed 7.5% growth, currency 3.5%, and acquisitions 35.0%. Nine-month sales rose 24.0%, including 8.5% existing-business growth, 3.0% currency benefit and a net 12.5% acquisition contribution.
- Q3 operating profit increased, but margin fell 340 basis points. Management attributed pressure principally to acquired businesses and Beckman Coulter acquisition charges; higher volume and productivity partly offset the impact. Nine-month operating margin improved 20 basis points.
- Q3 continuing earnings and diluted EPS declined despite sales growth. Nine-month continuing earnings and EPS increased. Nine-month net earnings also included a $202M after-tax gain on the aerospace business sale; prior-year results included a $291M pre-tax gain on contribution of businesses to the Apex joint venture.
- Effective tax rates on continuing operations were 9.9% for Q3 and 19.9% for nine months, versus 22.2% and 24.1%. 2011 rates benefited from favorable tax-position resolutions and statute expirations, reducing tax expense by $64.9M in Q3 and $67.8M year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow from continuing operations was $1.894B, up 28% from $1.477B. Total operating cash flow, including discontinued operations, was $1.799B. Capital expenditures were $218M; operating cash flow from continuing operations less capital expenditures was approximately $1.676B, a simple derived measure.
- Investing activities used $5.604B, mainly reflecting $6.087B of acquisition cash outlays; proceeds from the aerospace sale were $680M. Financing activities provided $2.623B, including equity and debt issuance.
- At September 30, cash and equivalents were $484M, down from $1.633B at year-end 2010. Current assets were $6.315B and current liabilities $4.124B.
- Total debt was approximately $5.896B, versus $2.825B at year-end 2010; long-term debt on the balance sheet was $5.813B. U.S. commercial paper outstanding was $1.6B, at a weighted average 0.2% rate and approximately seven-day maturity. Danaher reported compliance with debt covenants and no borrowings under its revolving credit facilities.
- Beckman Coulter was funded with existing cash, approximately $966M of common-stock proceeds, approximately $1.8B of senior-note proceeds, and commercial paper; Danaher also assumed about $1.6B of debt and subsequently retired substantially all of the acquired notes. The retirement generated a $32.9M pre-tax charge.
Business trends, outlook and risks
- All five reporting segments recorded higher year-over-year sales in Q3. Life Sciences & Diagnostics sales more than doubled, primarily because of Beckman Coulter, but the segment’s Q3 operating margin was 3.3%, versus 12.3% a year earlier, reflecting acquisition mix, integration and fair-value charges. Test & Measurement, Environmental, Dental and Industrial Technologies reported Q3 operating-margin improvement.
- Management expected Q4 2011 sales to grow year over year, but more slowly than in the first nine months. It anticipated approximately $100M of restructuring costs in Q4, as certain actions were accelerated amid macroeconomic uncertainty. Beckman Coulter integration was expected to continue pressuring Life Sciences & Diagnostics margins, though less than in Q3 and year to date.
- Management expected a 24.5% effective tax rate for the balance of 2011, excluding discrete items. It forecast approximately $350M of 2011 capital spending and pension contributions of about $50M to U.S. plans and $47M to non-U.S. plans.
- Key risks include global economic uncertainty, competition, acquisition integration and returns, foreign-exchange movements, indebtedness, goodwill impairment, litigation, product and regulatory exposure, and pension funding. Beckman Coulter faced FDA questions concerning troponin test-kit clearances, facility inspection observations and a warning letter; the company anticipated submitting updated 510(k) applications in Q1 2012, subject to clinical results and other factors.
- Other unusual items include the $202M after-tax aerospace-sale gain, the $32.9M pre-tax debt-extinguishment charge, and favorable tax items. Danaher reported a $141M warranty accrual at September 30. The filing does not provide a clear quantified estimate for potential costs from the Beckman Coulter FDA matters.
Investor verification priorities
- Verify the pace, cost and expected benefits of Beckman Coulter integration, including synergy delivery and the effect on segment margins.
- Track Q4 sales growth, the planned $100M restructuring charge and subsequent restructuring savings.
- Assess leverage, commercial-paper refinancing dependence, debt maturities, and liquidity after the acquisition.
- Monitor FDA clearance and remediation developments at Beckman Coulter, including possible operational or financial consequences.
- Separate recurring operating performance from acquisition-related charges, the aerospace-sale gain, prior-year Apex gain and discrete tax benefits.