Danaher Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 24, 2015. This is an annual filing, not a standalone fourth-quarter report. The company operates five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies.
Financial performance and position
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Sales | $19.914 billion | $19.118 billion | +4.0% |
| Operating profit | $3.431 billion | $3.275 billion | +4.8% |
| Operating margin | 17.2% | 17.1% | +0.1 percentage point |
| Net earnings from continuing operations | $2.598 billion | $2.695 billion | -3.6% |
| Diluted EPS from continuing operations | $3.63 | $3.80 | -4.5% |
| Gross margin | 52.4% | 52.1% | +0.3 percentage point |
| Operating cash flow | $3.758 billion | $3.585 billion | +4.8% |
| Capital expenditures | $598 million | $552 million | +8.3% |
| Cash and equivalents at year-end | $3.006 billion | $3.115 billion | -$110 million |
| Total debt at year-end | $3.473 billion | $3.499 billion | -$26 million |
Cash exceeded debt by approximately $468 million at year-end. The company reported $5.396 billion in current liabilities and $9.431 billion in current assets. It had $765 million of commercial paper outstanding and a $2.5 billion revolving credit facility with no borrowings outstanding; Danaher reported compliance with facility covenants.
Sales growth comprised 3.5% from existing businesses, 1.5% from acquisitions and a 1.0% adverse currency effect. Sales from outside the United States represented 57% of total revenue. Fourth-quarter 2014 sales were $5.417 billion, operating profit $887 million, and net earnings $662 million; comparable 2013 figures were $5.267 billion, $888 million, and $789 million, respectively.
Material changes and notable items
- Life Sciences & Diagnostics was the largest segment, with sales of $7.186 billion, up 5.0%; its operating margin rose to 15.4% from 14.7%.
- Environmental sales rose 7.0% to $3.547 billion, but its operating margin declined to 19.9% from 21.0%. Dental sales rose 4.5% to $2.193 billion, while margin fell to 13.9% from 14.6%.
- Test & Measurement sales rose 1.5% to $3.462 billion, but operating profit fell to $658 million and margin declined to 19.0% from 19.6%, reflecting weakness in communications. Industrial Technologies sales rose 2.5% to $3.526 billion and margin improved to 22.7% from 21.1%.
- Danaher acquired 17 businesses for approximately $3.131 billion net of cash acquired, including 97% of Nobel Biocare for approximately $1.9 billion. Acquisition spending was the principal reason investing activities used $3.444 billion of cash.
- Restructuring charges were approximately $154 million, mostly incurred in the second half. Management expected approximately $125 million of savings in 2015. The company also reported $156.5 million of other income, including gains on marketable securities ($122.6 million) and the EVS/hybrid product-line sale ($33.9 million).
- Comprehensive income fell to $950 million from $2.969 billion, principally reflecting a $1.235 billion foreign-currency translation loss and $361 million of pension and post-retirement benefit losses.
- The quarterly dividend rate increased to $0.10 per share in 2014. No common shares were repurchased during 2014.
Outlook, risks, and contingencies
- Management expected 2015 sales from existing businesses to grow year over year at a level in line with 2014. It cautioned that macroeconomic and geopolitical uncertainty could affect results.
- At year-end exchange rates, management estimated currency would reduce 2015 sales by approximately 3.5% versus 2014. The company expected a 2015 effective tax rate of approximately 24.0% and capital spending of $650–$700 million.
- Danaher agreed to combine most of its communications business with NetScout through a distribution to shareholders followed by a merger. The transaction, expected in 2015, remained subject to approvals and closing conditions; the Department of Justice had issued a second request for information, extending antitrust review. The business represented 22% of 2014 Test & Measurement sales.
- Denmark tax authorities assessed approximately $190 million, including interest, for withholding tax on intercompany interest for 2004–2009; a further approximately $106 million could be assessed for 2010–2012 if the claims succeed. Danaher disputed the assessments. Separately, it recorded approximately $60 million of expense for a German tax settlement in the fourth quarter.
- Other material risk areas include foreign exchange, global economic and customer-spending conditions, acquisition integration and goodwill impairment, regulation of medical devices and healthcare, supply-chain constraints, competition, cybersecurity, pension funding, and litigation and environmental claims. The company recorded $119 million of environmental reserves and stated it did not believe excess environmental or litigation exposures were reasonably likely to materially affect its financial statements.
- Management and the independent auditor concluded internal control over financial reporting was effective; the assessment excluded Nobel Biocare and Devicor, acquired late in 2014. The auditor issued an unqualified opinion on the consolidated financial statements.
Key facts for investors to verify
- Whether the NetScout transaction closed, its final terms and consideration, and the implications of separating a business that accounted for 22% of Test & Measurement sales.
- Whether the expected $125 million of 2015 restructuring savings were achieved and how integration of Nobel Biocare affected sales, margins, and synergies.
- Developments in the Danish tax dispute and any resulting cash, tax-rate, or reserve impacts.
- Whether 2015 organic growth, the forecast currency headwind, and planned capital expenditures tracked management’s outlook.
- Cash conversion and debt after the acquisition-heavy year, including the refinancing of commercial paper and upcoming debt maturities.
- Segment margin trends, especially continued communications weakness and the margin effects of acquisitions and restructuring.