Danaher Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Danaher is a diversified manufacturer and services company operating in five segments: Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies. About 58% of 2013 sales were to customers outside the United States.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Sales | $19.118 billion | $18.260 billion |
| Operating profit | $3.275 billion | $3.165 billion |
| Operating margin | 17.1% | 17.3% |
| Gross margin | 52.1% | 51.6% |
| Continuing-operations net earnings | $2.695 billion | $2.299 billion |
| Diluted EPS from continuing operations | $3.80 | $3.23 |
| Operating cash flow from continuing operations | $3.585 billion | $3.502 billion |
| Capital expenditures | $552 million | $458 million |
| Cash and equivalents at year-end | $3.115 billion | $1.679 billion |
| Total debt at year-end | $3.499 billion | $5.343 billion |
Operating cash flow less capital expenditures was approximately $3.034 billion in 2013, calculated from the filing’s figures. Current assets were $9.114 billion and current liabilities $4.527 billion. The company had no borrowings under its $2.5 billion revolving credit facility and reported compliance with its debt covenants.
Reported FY 2013 results included a $230 million pretax gain on the sale of the Apex joint venture and a $202 million pretax gain on the sale of Align Technology shares. The Align sale generated $251 million in cash proceeds; Apex proceeds were $797 million, including a note receivable. These transactions materially contributed to earnings but were not operating cash flow.
Material changes and segment trends
- Consolidated sales rose 4.5% year over year: existing businesses contributed 2.5% growth, acquisitions 2.5%, and currency reduced growth by 0.5%.
- Life Sciences & Diagnostics sales increased 5.5% to $6.856 billion; operating margin rose to 14.7% from 13.3%.
- Environmental sales increased 8.5% to $3.317 billion; operating margin was 21.0%, versus 21.3%.
- Industrial Technologies sales increased 3.5% to $3.433 billion, primarily from acquisitions; existing-business sales declined 0.5%. Operating margin improved to 21.1% from 20.7%.
- Dental sales increased 3.5% to $2.095 billion; operating margin was 14.6%, versus 14.5%.
- Test & Measurement sales increased 1.0% to $3.417 billion, while operating margin fell to 19.6% from 20.7%. Instrument demand was weak, partly offset by communications growth.
- For Q4 2013, sales were $5.267 billion, operating profit $888 million, net earnings $789 million, and diluted EPS $1.11. Q4 2012 net earnings were $630 million; the 2013 comparison includes the Align share-sale gain.
Outlook, management commentary, and risks
- Management expected sales from existing businesses to grow year over year in 2014, with Industrial Technologies growth returning and other segments growing at rates similar to 2013. It cautioned that macroeconomic conditions remained challenging and uncertain.
- Management forecast a 2014 effective tax rate of approximately 24%, excluding any benefit from the U.S. research and experimentation credit, which had expired at year-end 2013. Planned 2014 capital expenditures were approximately $650 million; expected U.S. and non-U.S. pension contributions were about $50 million each.
- 2013 restructuring charges were $107 million, mostly cash costs; actions were substantially completed by year-end and expected to generate about $75 million of 2014 savings compared with 2013 expense levels.
- In 2013 Danaher acquired 14 businesses for $957 million, with approximately $300 million in aggregate annual sales at acquisition. Acquisition integration, execution, and impairment of goodwill or intangibles remain risks; goodwill and other intangible assets totaled approximately $22.3 billion.
- Tax authorities in Denmark assessed approximately $200 million related to withholding tax and interest, with potential additional assessments of about $144 million plus future interest if the claims succeed. German tax discussions were ongoing and no final assessments had been issued. Danaher said it intended to contest the matters; resolution could take years and could materially affect results.
- Environmental reserves were $133 million, including $92 million non-current. Management did not believe reasonably possible amounts above reserves would materially affect the financial statements. The company also disclosed routine litigation and other proceedings, which it did not expect to have a material effect based on information then available.
- Key broader risks include economic and market weakness, competitive and pricing pressure, product development and regulatory risks, foreign exchange exposure, supply interruptions, cybersecurity, pension funding, and access to commercial-paper markets. The company held $2.2 billion of cash outside the U.S.; repatriation of some foreign earnings could incur U.S. tax.
Most important facts for investors to verify
- How much of earnings growth and Q4 EPS reflects the Apex and Align gains, versus recurring operations?
- Whether 2014 organic growth, particularly the projected recovery in Industrial Technologies, materialized; monitor motion-control weakness and segment margins.
- Developments in the Denmark and Germany tax disputes, potential assessments, and the assumptions behind the approximately 24% tax-rate outlook.
- Cash generation and deployment, including planned capital spending, acquisitions, pension contributions, repurchases, and the 2014 note maturity.
- Whether restructuring savings were achieved and whether acquisition integration, intangible-asset impairment, or environmental liabilities changed materially.