Danaher Corporation — Form 10-Q summary
Reporting period: Third quarter and first nine months ended October 1, 2010, compared with the periods ended October 2, 2009. The filing is unaudited. Danaher operates across Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $3.190 billion | $2.751 billion | $9.593 billion | $8.052 billion |
| Gross margin | 51.7% | 48.0% | 49.9% | 47.7% |
| Operating profit | $572.7 million | $464.6 million | $1.540 billion | $1.149 billion |
| Operating margin | 18.0% | 16.9% | 16.1% | 14.3% |
| Net earnings | $646.4 million | $351.4 million | $1.319 billion | $884.8 million |
| Diluted EPS | $0.95 | $0.53 | $1.95 | $1.33 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1.511 billion | $1.305 billion |
Reported Q3 sales rose 16%: existing businesses contributed 12.5% growth, acquisitions 5.0%, and currency translation reduced growth by 1.5%. Nine-month sales increased 19%, with 11% from existing businesses and 8% from acquisitions; currency impact was not significant. Management attributed improved margins primarily to higher volumes and savings from 2009 restructuring actions.
Q3 and nine-month net earnings include a $291 million pretax gain ($232.2 million after tax, or $0.34 per diluted share) from forming the Apex Tool Group joint venture. Thus, reported earnings growth includes a material one-time transaction gain. The prior-year comparison also included a favorable litigation settlement, affecting year-over-year segment and margin comparisons.
Liquidity, debt and capital
- Cash and equivalents were $1.635 billion at October 1, 2010, versus $1.722 billion at year-end 2009. Current assets were $5.461 billion and current liabilities $3.079 billion.
- Total borrowings were $2.862 billion, including $180 million of U.S. commercial paper; long-term debt was $2.822 billion. Net debt, using reported cash and total borrowings, was approximately $1.227 billion.
- Operating cash flow increased 16% to $1.511 billion for nine months. Investing activities used $1.667 billion, including $1.568 billion for acquisitions and $145 million for capital expenditures. Cash declined by $86.9 million over the period.
- Danaher reported $1.45 billion and $75 million revolving credit facilities with no facility borrowings during the nine-month period, and stated it was in compliance with debt covenants. Commercial paper had a 0.2% weighted-average rate and approximately 13-day maturity at quarter-end.
- Management expected 2010 capital spending of approximately $225 million. It declared a quarterly dividend of $0.02 per share. No shares were repurchased in the first nine months; 20 million shares remained authorized for repurchase.
Material developments and segment trends
- Acquisitions: Danaher acquired AB Sciex and Molecular Devices in January for approximately $1.1 billion and 13 additional businesses for $507 million. The 15 acquisitions had aggregate annual sales of approximately $900 million at acquisition. Acquisition-related inventory and deferred-revenue fair-value charges totaled $46 million pretax for the first nine months; significant transaction costs were $8 million.
- Apex joint venture: In July, Danaher contributed most of its Tools & Components businesses to a 50/50 venture with Cooper Industries. It received a 50% equity interest valued at $480 million, $45.2 million cash, and a receivable of about $44.8 million. The receivable was expected to be paid in 2011. Danaher recognized $10.5 million of equity-method earnings in Q3.
- Keithley: Danaher agreed in September to acquire Keithley Instruments for $21.60 per share in cash, approximately $300 million including assumed debt and net of cash acquired. Closing was subject to customary approvals and was expected in Q4 2010.
- Professional Instrumentation: Q3 sales rose 20.5% and operating margin increased to 21.2% from 15.6%, supported by volume, restructuring savings, and acquisitions. Test and measurement demand was particularly strong.
- Medical Technologies: Q3 sales rose 31%, largely from acquisitions, while operating margin fell to 12.6% from 21.9%. The comparison was affected by the prior-year Align litigation settlement, acquisition dilution, and acquisition-related charges.
- Industrial Technologies: Q3 sales rose 19.5% and operating margin increased to 21.1% from 17.0%, reflecting stronger demand and restructuring savings.
- Tools & Components: Q3 sales fell 53% as contributed businesses were no longer consolidated after the Apex formation. Reported operating margin rose to 27.2%, substantially affected by the transaction and portfolio changes.
Outlook, risks and contingencies
- Management expected year-over-year sales growth to continue through the remainder of 2010 if economic conditions did not materially deteriorate, but at a slower rate than Q3 because of tougher comparisons.
- Management expected approximately $170 million of incremental year-over-year pretax savings in 2010 from 2009 restructuring actions. Approximately $29 million of related restructuring liabilities remained at October 1.
- Absent extension of specified U.S. tax provisions, management expected an effective tax rate of approximately 25% for the balance of 2010, excluding discrete items. The 2010 tax legislation affecting international operations was expected to adversely affect the tax rate from 2011; the full impact remained under evaluation.
- Risks identified include economic and market uncertainty, competition, product development and acceptance, acquisition integration and returns, currency movements, goodwill impairment, tax and regulatory changes, litigation, environmental and product liabilities, indebtedness, pension-market exposure, and supply, capacity and labor issues.
- A California hazardous-waste matter involving a subsidiary was subject to an agreement in principle involving a $135,000 payment, administrative costs, an environmental project and injunctive relief. Danaher stated final resolution would not materially adversely affect results, cash flow or financial condition.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings and EPS growth is attributable to the Apex gain and other nonrecurring items, versus recurring operating performance.
- Whether underlying organic growth and margin gains persist, particularly given the slower growth outlook and substantial acquisition contribution in Medical Technologies.
- Integration, returns and purchase-accounting impacts from the 2010 acquisitions, including AB Sciex and Molecular Devices.
- Cash conversion and working-capital trends: receivables and inventory used cash as business activity increased.
- The eventual cash collection of the Apex receivable, Keithley transaction completion and financing, and the effective tax-rate impact of tax-law changes.
- Debt maturity, refinancing and liquidity capacity, and potential exposure to goodwill impairment, litigation, environmental matters and pension funding.