Danaher Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended July 2, 2010. Danaher Corporation is a large accelerated filer operating in four segments: Professional Instrumentation, Medical Technologies, Industrial Technologies, and Tools & Components. The reporting period includes the impact of a two-for-one stock split effected on June 10, 2010, and significant M&A activity, including the acquisition of AB Sciex and Molecular Devices and the formation of a joint venture (Apex Tool Group) with Cooper Industries.
Key Financial Metrics
| Metric ($ in millions) | 3 Months Ended July 2, 2010 |
6 Months Ended July 2, 2010 |
|---|---|---|
| Sales | $3,310.9 | $6,403.1 |
| Net Earnings | $372.5 | $672.7 |
| Diluted EPS | $0.55 | $1.00 |
| Operating Profit | $533.9 | $967.2 |
| Operating Margin | 16.1% | 15.1% |
| Gross Margin | 49.5% | 49.0% |
| Operating Cash Flow | N/A | $931.8 |
| Cash and Equivalents | $1,232.9 | $1,232.9 |
| Total Debt (Current + Long-term) | $2,825.0 | $2,825.0 |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 24.0% year-over-year (YoY) for the quarter and 20.5% for the six-month period. Growth was driven by 14.0% from existing businesses and 11.0% from acquisitions in the quarter.
- Profitability: Operating profit rose 55.2% YoY for the quarter. Operating margins expanded to 16.1% (Q2) and 15.1% (6M) compared to 12.9% in the prior year periods, aided by volume growth and cost savings from 2009 restructuring.
- Acquisitions: The company spent approximately $1.4 billion on acquisitions in the first half of 2010, primarily the $1.1 billion purchase of AB Sciex and Molecular Devices. This activity significantly increased goodwill and intangible assets.
- Joint Venture: On July 4, 2010, Danaher contributed most of its Tools & Components segment to a 50/50 joint venture with Cooper Industries (Apex Tool Group). A pre-tax gain of approximately $300 million is expected to be recorded in Q3 2010.
- Currency Impact: A stronger U.S. dollar reduced reported sales by 1.0% in the quarter, though it provided a 1.0% benefit for the six-month period.
Guidance, Outlook, and Risks
- Outlook: Management expects sales to continue growing YoY for the remainder of 2010, though at a moderating rate compared to Q2. Acquisition-related charges are expected to continue impacting operating margins through the balance of the year.
- Tax Rate: The effective tax rate for the balance of 2010 is projected at approximately 26.5%, assuming no extension of certain U.S. tax provisions (R&D credit, foreign income exclusions) that expired in 2009.
- Liquidity: The company holds $1.2 billion in cash and equivalents. It maintains a $1.45 billion revolving credit facility and a $75 million supplemental facility, with no borrowings outstanding under these facilities as of July 2, 2010.
- Risks: Key risks include global economic uncertainty, foreign currency fluctuations, integration risks from acquisitions, and potential impairment of goodwill. The company also faces risks related to the expiration of tax credits and the outcome of the Apex joint venture accounting.
Investor Verification Checklist
- Apex Joint Venture Gain: Verify the final accounting treatment and timing of the ~$300 million pre-tax gain from the Tools & Components contribution to Apex Tool Group.
- Acquisition Integration: Monitor the integration progress and financial contribution of AB Sciex and Molecular Devices, which are expected to drive growth in the Medical Technologies segment.
- Tax Rate Volatility: Track legislative developments regarding the U.S. R&D tax credit and foreign income exclusions, as their non-extension impacts the projected 26.5% effective tax rate.
- Tools Segment Deconsolidation: Confirm the impact of deconsolidating the Tools & Components segment on future revenue and earnings comparisons starting in Q3 2010.
- Goodwill Valuation: Review the $10.2 billion goodwill balance, particularly the $740.9 million added in H1 2010, for potential impairment risks if economic conditions deteriorate.