Danaher Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended October 2, 2015; comparisons are with periods ended September 26, 2014. Figures are in U.S. dollars unless stated otherwise.
Business context and reporting period
Danaher reported five continuing segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. Pall Corporation joined Life Sciences & Diagnostics on August 31, 2015. The communications business was split off and merged with NetScout in July and is reported as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $5,023.4 million | $4,707.1 million | $14,678.3 million | $13,929.8 million |
| Gross profit margin | 52.5% | 52.1% | 52.8% | 51.9% |
| Operating profit | $800.8 million | $866.2 million | $2,490.3 million | $2,479.8 million |
| Operating margin | 15.9% | 18.4% | 17.0% | 17.8% |
| Continuing-operations net earnings | $590.0 million | $681.3 million | $1,863.5 million | $1,893.6 million |
| Diluted continuing-operations EPS | $0.85 | $0.95 | $2.62 | $2.65 |
| Net cash from operating activities | Not separately stated for the quarter | $2,570.2 million, including $2,507.3 million from continuing operations | $2,519.0 million, including $2,450.8 million from continuing operations |
Q3 total net earnings were $1,403.3 million, including an $813.3 million after-tax gain on the communications-business disposition; this gain is not recurring operating earnings. Nine-month total net earnings were $2,668.8 million, including $805.3 million from discontinued operations.
- Reported sales rose 6.5% in Q3 and 5.5% year to date. Existing-business sales grew 3.0% and 4.0%, respectively; acquisitions contributed 10.5% and 8.0%, while currency translation reduced reported sales by 7.0% and 6.5%.
- Q3 operating profit fell despite higher sales, with operating margin down 250 basis points. Management cited Pall-related transaction and integration costs, acquired-inventory fair-value charges, acquired-business dilution, separation costs, growth investments, and currency effects.
- At October 2, cash and equivalents were $1,833.5 million, versus $3,005.6 million at year-end 2014. Total debt was $15,012.0 million, including $3,489.3 million current and $11,522.7 million long term, compared with $3,473.4 million total at year-end 2014.
- Investing activities used $14,690.6 million in the first nine months, primarily reflecting $14,207.1 million of acquisition spending. Capital expenditures were $438.7 million.
Material changes, outlook, and risks
- Pall acquisition and financing: Danaher acquired Pall for approximately $13.6 billion net of assumed debt and acquired cash. Pall reported approximately $2.8 billion of fiscal 2015 revenue. Financing included cash, commercial paper, and euro- and U.S.-dollar-denominated notes. Management expects cost synergies from integration, but reported acquisition-related costs and purchase-accounting charges weighed on margins.
- Liquidity and debt: Commercial paper outstanding was approximately $6.8 billion, with a weighted-average rate of 0.2% and remaining maturity of about 36 days. The company had no borrowings under its revolving credit facilities and stated it was in compliance with debt covenants. It had $11.0 billion of combined commercial-paper and credit-facility capacity at the time described; the 364-day facility and commercial-paper capacity were reduced after quarter-end.
- Outlook: Management expected overall sales growth to continue, while noting macroeconomic and geopolitical uncertainty. It estimated currency translation could reduce full-year 2015 sales by approximately 6% if October 2 exchange rates persisted. Expected 2015 capital spending was $650–$700 million; the forecast continuing-operations tax rate for Q4 was approximately 23.5%, excluding discrete items.
- Separation: Danaher targeted a tax-free separation into a science and technology company and a diversified industrial company during 2016, subject to approvals, financing, tax opinions, and other conditions. Completion and timing were not assured.
- Contingency: Danish tax authorities assessed approximately $172 million, including interest, for withholding tax on accrued interest for 2004–2009. If the claims succeed, additional assessments of about $104 million for 2010–2012 were considered likely. Danaher disputed the claims; management said resolution could take years and could materially adversely affect results.
- Other risks: Foreign-exchange volatility, integration and acquisition execution, increased debt and refinancing needs, separation costs and execution, and regulatory, litigation, and tax exposures could affect results. Foreign-currency translation reduced nine-month comprehensive income by $793.7 million.
Important facts for investors to verify
- Whether Pall integration delivers the expected synergies and improves Life Sciences & Diagnostics margins after acquisition-related charges.
- Underlying organic sales trends and the effect of currency movements, particularly in emerging markets.
- Debt repayment and refinancing plans, commercial-paper dependence, and liquidity following the Pall acquisition.
- Developments in the Danish tax dispute and the potential additional exposure.
- Progress, costs, approvals, and timing for the planned 2016 separation.