Danaher Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 29, 2017; comparisons are with the periods ended September 30, 2016. Unless noted, amounts are in U.S. dollars and relate to continuing operations.
Business context and performance
Danaher reported four segments: Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. Third-quarter sales increased 9.5% to $4.528 billion, including 3.0% core revenue growth; acquisitions and other effects contributed 5.5 percentage points and foreign exchange 1.0 point. For the first nine months, sales rose 7.5% to $13.244 billion, with 2.5% core growth.
Management said high-growth markets delivered high-single-digit core growth in Q3, led primarily by China; these markets represented about 31% of sales. Developed markets grew at a low-single-digit rate.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $4,528.2 million | $4,132.1 million | $13,244.0 million | $12,298.1 million |
| Gross profit | $2,536.8 million | $2,286.0 million | $7,353.4 million | $6,834.6 million |
| Gross margin | 56.0% | 55.3% | 55.5% | 55.6% |
| Operating profit | $767.5 million | $699.1 million | $2,075.1 million | $2,022.3 million |
| Operating margin | 16.9% | 16.9% | 15.7% | 16.4% |
| Net earnings from continuing operations | $572.1 million | $402.6 million | $1,613.2 million | $1,406.4 million |
| Diluted EPS from continuing operations | $0.81 | $0.57 | $2.29 | $2.01 |
- Operating cash flow from continuing operations was $2.643 billion for the first nine months, up about 8% from $2.439 billion. Capital expenditures were $445.8 million; management expected full-year 2017 capital spending of approximately $675 million.
- At September 29, cash and equivalents were $648.6 million, versus $963.7 million at year-end 2016. Total debt was $10.909 billion, including $182.2 million classified as current; long-term debt was $10.727 billion. Net debt, calculated as total debt less cash, was approximately $10.260 billion.
- Danaher reported $2.9 billion of commercial paper classified as long-term because it intended and was able to refinance it for at least one year. It had no borrowings under its revolving credit facilities and was compliant with debt covenants. Available additional borrowing capacity was approximately $2.1 billion at quarter-end, expected to fall to approximately $1.1 billion after a facility expired October 23, 2017.
- The effective tax rate was 21.6% in Q3 and 17.7% year to date, compared with 15.5% and 26.6%, respectively, in 2016.
Material changes and unusual items
- Q3 operating margin was flat year over year. For the first nine months, margin declined 0.7 percentage point, reflecting Diagnostics restructuring charges and acquired-business dilution, partly offset by core volume growth and productivity savings.
- Danaher recorded $76 million of pretax charges ($51 million after tax, or $0.07 per diluted share) after discontinuing a Diagnostics molecular diagnostic product line. This included $49 million of noncash impairment and related charges and $27 million of cash restructuring costs. Substantially all related actions were completed; management expected approximately $40 million of recurring annual savings beginning in 2018.
- In the first nine months, Danaher acquired five businesses for $112 million net cash consideration; their combined pre-acquisition annual sales were approximately $70 million. It also paid $64 million to acquire a remaining noncontrolling interest.
- 2016 comparisons included a $223 million pretax gain on sale of marketable securities and a $179 million pretax loss on early debt extinguishment. These items affect year-over-year comparisons, particularly reported net earnings and nonoperating results. 2017 discontinued-operations earnings included a $22 million tax benefit from release of reserves related to jointly filed returns with Fortive.
- Foreign currency translation contributed $839 million to other comprehensive income for the first nine months of 2017, versus $315 million in the comparable 2016 period.
Outlook, commentary and risks
Management expected overall sales growth to continue and core revenue growth rates to improve in the remainder of 2017, while citing macroeconomic and geopolitical uncertainty, including uncertainty around monetary, fiscal, and trade policies. It expected the filtration, separation, and purification business’s core growth to improve sequentially in Q4. Management estimated a roughly 21% effective tax rate for the remainder of 2017, subject to earnings mix and other discrete items. No full-year earnings or revenue guidance was provided in the filing text.
Material disclosed risks include a Danish tax dispute: assessments for 2004–2009 totaled approximately $235 million, including interest, and Danaher anticipated a further assessment for 2010–2012 of approximately $139 million, including interest. Danaher is contesting the matter; resolution is uncertain, could take years, and could materially adversely affect results, including the tax rate. Other risks include acquisition integration and goodwill impairment, foreign exchange, indebtedness and refinancing, regulation, competition, product and technology execution, and litigation. The company reported no material change in its previously disclosed risk factors.
Important facts for investors to verify
- Whether underlying core growth accelerates as management expected, and how much reported growth depends on acquisitions and currency.
- Whether the Diagnostics product-line exit delivers the projected $40 million annual savings from 2018, and its effect on segment margins.
- Whether leverage, commercial-paper refinancing needs, and available credit capacity remain manageable after the 364-day facility expiry.
- Developments in the Danish tax dispute and potential assessments, including any change to the estimated exposure.
- Segment trends: Diagnostics’ year-to-date margin decline, Dental’s soft consumables demand and distributor realignment, and Environmental & Applied Solutions’ margin pressure.