Business context and reporting period
Danaher Corporation’s unaudited Form 10-Q covers the quarter ended June 28, 2013 and the six months then ended, compared with the corresponding 2012 periods. Danaher reports five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies.
Key financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Sales | $4.738 billion | $4.554 billion | $9.182 billion | $8.870 billion |
| Operating profit | $843.6 million | $811.3 million | $1.575 billion | $1.546 billion |
| Net earnings from continuing operations | $616.8 million | $600.2 million | $1.309 billion | $1.120 billion |
| Diluted EPS from continuing operations | $0.87 | $0.84 | $1.85 | $1.57 |
| Operating cash flow from continuing operations | Not separately provided | Not separately provided | $1.536 billion | $1.696 billion |
- Q2 sales rose 4.0%; growth from existing businesses was 2.5%, acquisitions added 2.0%, and currency reduced reported growth by 0.5%. First-half sales rose 3.5%, with 1.5% from existing businesses, 2.5% from acquisitions, and a 0.5% currency headwind.
- Gross margin increased to 52.7% in Q2 from 51.7%; first-half gross margin was 52.5% versus 51.8%. Operating margin was 17.8% in Q2 in both years; first-half margin declined to 17.1% from 17.4%.
- First-half operating cash flow fell 9% year over year. Management attributed the decline principally to timing of taxes and customer deposits, working-capital movements, and restructuring payments.
- At June 28, cash and equivalents were $2.325 billion, versus $1.679 billion at year-end 2012. Total debt was approximately $4.155 billion, down from $5.343 billion; long-term debt was $4.101 billion and current debt $53.9 million. The company reported covenant compliance and no borrowings under its $2.5 billion revolving credit facility.
Changes, segments, and unusual items
- Q2 revenue increased in Environmental (+8.0%), Life Sciences & Diagnostics (+5.5%), Dental (+3.0%), and Industrial Technologies (+2.0%); Test & Measurement was flat. Life Sciences & Diagnostics had the largest segment sales and improved Q2 operating margin to 14.4% from 13.1%. Test & Measurement sales and margin weakened, with instrument demand soft; Industrial Technologies’ existing-business sales declined despite acquisition-led reported growth.
- Danaher sold its 50% interest in the Apex Tool Group joint venture in February for consideration of $797 million, including cash and a note. The sale produced a $229.8 million pretax and $143.6 million after-tax gain, or $0.20 per diluted share, in Q1 2013. This gain contributes to first-half continuing earnings and makes the year-over-year earnings comparison less representative of recurring performance. Danaher had no continuing involvement in Apex after the sale.
- Five businesses were acquired during the first half for $323 million net cash consideration; their reported prior-year annual sales totaled $158 million. Acquisition-related margin dilution partly offset operating improvements.
- First-half 2012 results included $92.9 million of earnings from discontinued operations, including a $93.7 million after-tax gain on sales of two businesses. Thus, total net earnings comparisons across periods are affected by different divestiture-related items.
Outlook, risks, and other disclosures
- Management said overall market conditions remained challenging, particularly in Western Europe, but expected existing-business sales growth to improve slightly in the second half of 2013 compared with 2012 and the first half. This was not a specific full-year revenue or EPS forecast.
- Management expected 2013 capital spending of approximately $500 million and a second-half effective tax rate of approximately 23.5%, excluding discrete items. It expected approximately $52 million of non-U.S. pension contributions; U.S. pension contributions were not expected to be significant.
- Currency translation reduced first-half sales by approximately 0.5%. If June 28 exchange rates persisted, management estimated a roughly 1.0% year-over-year revenue reduction for full-year 2013 from currency effects.
- Risks highlighted include macroeconomic and market weakness, competition and pricing, acquisition integration and goodwill impairment, foreign exchange, regulation and product quality, indebtedness, litigation, and pension and supply-chain exposures. Tax authorities in Denmark and Germany had raised significant issues involving interest deductions or taxation at certain subsidiaries; assessments had not been issued, and management stated the outcome was uncertain and could be material.
- The company had $41.0 million remaining in accruals for 2012 restructuring actions at June 28. The board approved a new authorization on July 16, after quarter-end, to repurchase up to 20 million shares; no shares were repurchased in Q2.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Separate recurring operating performance from the Apex sale gain and the prior-year discontinued-operation gain when assessing earnings growth.
- Check whether second-half existing-business growth improved as management expected, particularly in Western Europe, Test & Measurement instruments, and Industrial Technologies motion businesses.
- Monitor cash conversion and working capital, given the year-over-year decline in operating cash flow and cash use from inventories and accrued liabilities.
- Review the outcome and potential financial effect of the Denmark and Germany tax matters, along with future effective tax-rate changes.
- Assess acquisition integration, margin effects, and goodwill and intangible-asset impairment exposure; goodwill was $15.535 billion and other intangible assets were $6.196 billion at June 28.