Danaher Corporation — Q2 2014 Form 10-Q
Business context and reporting period. Danaher reported unaudited results for the quarter ended June 27, 2014, and the six months then ended. It operates across Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. Amounts below are in millions of dollars unless stated otherwise.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Sales | $4,963.6 | $4,737.5 | $9,626.3 | $9,182.2 |
| Gross profit | $2,620.2 | $2,495.5 | $5,073.1 | $4,821.2 |
| Operating profit | $889.3 | $843.6 | $1,678.2 | $1,574.5 |
| Net earnings | $676.4 | $616.8 | $1,256.1 | $1,308.7 |
| Diluted EPS | $0.95 | $0.87 | $1.76 | $1.85 |
| Gross margin | 52.8% | 52.7% | 52.7% | 52.5% |
| Operating margin | 17.9% | 17.8% | 17.4% | 17.1% |
Second-quarter sales rose 5.0% year over year: 3.0% from existing businesses, 1.5% from acquisitions, and 0.5% from currency. First-half growth had the same mix. Q2 net earnings increased about 10%, while first-half net earnings and diluted EPS declined about 4% and 5%, respectively.
First-half operating cash flow was $1,502.9, versus $1,535.7. Capital expenditures were $278.6; operating cash flow less capital expenditures was approximately $1,224.3. Cash and equivalents at June 27 were $3,321.1, compared with $3,115.2 at year-end 2013. Total debt was approximately $3,069, down from $3,499; cash exceeded debt by approximately $252. Current assets were $9,507.3 and current liabilities $4,406.7. The company reported compliance with debt covenants.
Material changes and segment performance
- Company-wide operating margin improved 10 basis points in Q2 and 30 basis points for the first half. Management cited higher volumes and productivity/restructuring savings, partly offset by acquisition dilution and growth investments.
- Life Sciences & Diagnostics led Q2 segment sales growth, up 7.0%; its operating margin rose to 15.8% from 14.4%. Environmental sales grew 6.0%, with margin down to 21.0% from 21.6%.
- Industrial Technologies sales increased 5.5% and margin rose to 23.8% from 23.5%. Dental sales rose 2.5%, while Q2 margin fell to 14.8% from 15.3%.
- Test & Measurement sales were essentially flat in Q2; existing-business sales declined 2.0%, and margin fell to 18.4% from 20.9%, reflecting communications weakness and acquisition dilution.
- In the first six months, Danaher acquired 14 businesses for $606.7 cash, net of cash acquired. Their prior annual sales totaled approximately $250, and preliminary goodwill recorded was $330.4.
Outlook, risks, contingencies, and unusual items
- Management expected existing-business sales to continue growing year over year in the second half of 2014 at a level in line with the first half. It remained cautious about macroeconomic and geopolitical uncertainty. High-growth markets delivered high-single-digit existing-business growth in Q2 and represented approximately 27% of sales.
- Management estimated 2014 capital spending at approximately $650. The forecast second-half effective tax rate was approximately 24%, excluding discrete items. Currency at June 27 rates was expected to add about 0.5% to full-year sales year over year.
- Management expected negative existing-business sales growth to continue for the remainder of 2014 in the Test & Measurement communications businesses, citing weak network-management demand and delayed wireless-carrier spending.
- Denmark issued tax assessments of approximately $205 relating to withholding tax and interest for 2004–2009; if the claims succeed, a further approximately $150 through June 2014, plus future interest, could be assessed. German tax discussions were ongoing without final assessments. Danaher disputed the positions and intended to defend them; resolution could take years and could materially adversely affect results, including the tax rate.
- Q2 2014 other income included a $19.2 pretax gain on the sale of marketable securities, equal to $0.02 per diluted share after tax. First-half 2013 included a $229.8 pretax gain on the sale of the Apex joint venture, a major factor in the year-over-year first-half earnings comparison.
- The company held $2.5 billion of its $3.3 billion cash balance outside the U.S.; some foreign cash may be subject to U.S. tax upon repatriation. Expected 2014 defined-benefit pension contributions were approximately $50 for U.S. plans and $55 for non-U.S. plans.
Most important facts for investors to verify
- Whether second-half existing-business growth matched management’s expectation of first-half growth, and whether Test & Measurement communications weakness persisted.
- How acquisition performance, integration, and dilution affected margins and cash generation after the 14 first-half acquisitions.
- Developments in the Danish and German tax matters, including potential additional assessments and interest.
- Whether capital spending, pension contributions, and working-capital trends aligned with disclosed expectations; first-half working capital absorbed cash.
- The earnings impact of unusual investment-sale gains and the comparability of reported first-half earnings with 2013.