DHR

Danaaher Corporation 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Danaaher Corporation for the quarter and six months ended July 1, 2005. Danaaher is a multinational corporation deriving sales from the design, manufacture, and marketing of industrial and consumer products across three segments: Professional Instrumentation, Industrial Technologies, and Tools & Components. Approximately 45% of sales are derived outside the United States.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated sales increased approximately 19% for both the three and six-month periods compared to 2004. Growth was driven by acquisitions (approx. 12-12.5%), organic growth from existing businesses (approx. 5-5.5%), and favorable currency translation (approx. 1.5%) due to a stronger Euro.
• Profitability: Net earnings increased 26% for the quarter and 27% for the six-month period. Gross margins expanded to 44.1% (quarter) and 43.3% (six months) from 42.3% and 41.6% respectively, aided by cost reductions and pricing actions, though partially offset by facility closure costs in the Tools & Components segment.
• Acquisitions: The company completed 7 acquisitions in the first six months of 2005, including Linx Printing Technologies PLC ($171 million) and six smaller companies ($125 million). On July 1, 2005, the company signed an agreement to acquire Leica Microsystems AG for approximately $250 million in cash plus assumed debt and pension obligations.
• Divestitures: The company divested a business in the Industrial Technologies segment for $12.1 million, recording a $4.6 million pre-tax gain. Additionally, a $14.6 million collection on a retained interest from a prior sale resulted in a $5.3 million pre-tax gain.

Guidance, Outlook, and Risks

• Outlook: Management expects continued broad-based market expansion but at lower rates than 2004 due to difficult comparisons and a slowing semiconductor market. The company anticipates funding the Leica Microsystems acquisition and the repayment of $359 million in Eurobond notes maturing in July 2005 using available cash and potentially commercial paper or credit facilities.
• Capital Allocation: The Board authorized a $10 million share repurchase program in April 2005. Approximately 963,500 shares were repurchased in the second quarter for $49.6 million, with approximately 9 million shares remaining under the authorization.
• Risks and Contingencies:
  • Legal: A subsidiary (Raytek) faces a trebled patent infringement judgment of approximately $8 million plus legal fees; the company is appealing. Another subsidiary (Accu-Sort) is a defendant in a trade secrets suit filed by Federal Express, with a trial scheduled for January 2006.
  • Currency: The company has significant exposure to foreign exchange rates, particularly the Euro. A strengthening U.S. Dollar could adversely impact reported sales and profits.
  • Integration: Risks related to the successful integration of recent acquisitions, particularly the new Medical Technology businesses (Radiometer, KaVo, and the pending Leica acquisition).

Investor Verification Checklist

• Verify the closing status and regulatory approval of the Leica Microsystems AG acquisition.
• Monitor the outcome of the Raytek patent infringement appeal and the Accu-Sort litigation with Federal Express.
• Assess the impact of the strengthening U.S. Dollar on future international sales and margins.
• Review the integration progress and margin improvement trajectory of the newly acquired Medical Technology businesses (KaVo, Radiometer).
• Confirm the funding strategy for the July 2005 Eurobond maturity and the Leica acquisition.