01—Abstract
Summary
Summary of the 10-K filed March 28, 1997. Cited figures are marked; the original filing is the authoritative source.
Danaher Corporation's 1996 10-K shows a company in rapid expansion through acquisition.
Net revenues rose 22% to $1.81 billiona from $1.49 billion, and operating profit grew 25% to $226.1 million. Net earnings more than doubled to $207.8 million ($3.47 per share), but this figure is inflated by an approximately $80 million after-tax gain on the January 1996 sale of Fayette Tubular Products, a discontinued operation. Earnings from continuing operations rose 21% to $128.0 million ($2.13 per share), which is the more reliable measure of underlying performance.
Growth was driven largely by the July 1996 Acme-Cleveland acquisition (about $200 millionb) and the full-year effect of the September 1995 Joslyn acquisition (about $245 million). Gross margin improved 1.5 points to 31.6%, while SG&A rose to 19.1% of sales, reflecting the higher cost structure of acquired businesses. The company operates two segments.
Tools and Components (61%c of revenue) includes Sears Craftsman tools, Matco, and Jacobs Chuck, with a 11.6% operating margin. Process/Environmental Controls (39% of revenue) is the faster-growing segment, up 47%, with a 15.8% margin, and is anchored by Veeder-Root underground fuel-tank leak detection products.
Balance sheet leverage remains modest: total debt fell to $236 milliond from $284 million, and operating cash flow reached $217 million. Key risks include customer concentration, with Sears accounting for 14% of sales, a pending product liability suit involving air tools with up to $85 million of indemnification exposure, and environmental and wood-treating litigation at former Joslyn sites.
02—Key points
Key Highlights
- Net revenues grew 22% to $1,811.9 million, with Process/Environmental Controls up 47% largely from acquisitions and Tools and Components up 10%.
- Net earnings of $207.8 million ($3.47/share) include about $79.8 million from the Fayette Tubular Products divestiture gain; continuing operations earned $128.0 million ($2.13/share), up 21%.
- Gross margin expanded to 31.6% from 30.1%, driven by productivity gains and a mix shift toward higher-margin acquired businesses.
- Operating cash flow of $217.1 million covered capital expenditures of $51.3 million, and debt was reduced by $48 million to $236.3 million.
- Major acquisitions in 1996 included Acme-Cleveland (about $200 million) and the full-year effect of Joslyn (about $245 million acquired in 1995).
- Sears, Roebuck accounted for 14% of 1996 consolidated sales, a notable customer concentration that management says could have an adverse effect if lost.
- Litigation exposure includes a product liability suit covering about 3,000 plaintiffs tied to former air tool operations (maximum indemnification of about $85 million, partly insured) and wood-treating class action claims at a former JMC site.
03—Questions
Frequently Asked Questions
Why did net earnings more than double in 1996 when operating growth was about 25%?
The increase is mainly due to a one-time gain of roughly $80 million from selling Fayette Tubular Products in January 1996, which is reported as discontinued operations. Excluding this gain, earnings from continuing operations rose about 21%, to $128.0 million, or $2.13 per share.
How much of Danaher's growth came from acquisitions versus organic growth?
Acquisitions drove most of the growth. In Tools and Components, revenue rose 10%, with about 5 points from acquisitions, 5 points from volume, and less than 1 point from pricing. In Process/Environmental Controls, revenue rose 47%, with 44 points from acquisitions, 3 points from volume, and less than 1 point from pricing.
How concentrated is Danaher's customer base, and what are the risks?
Sears, Roebuck is the largest customer at about 14% of 1996 sales, down from 16% in 1995 and 21% in 1994. Danaher Tool Group manufactures Sears' Craftsman mechanics' tools under a five-year evergreen agreement. Management acknowledges that losing Sears could materially affect operations.
What are the major legal and environmental liabilities?
Danaher faces a product liability suit involving about 3,000 plaintiffs over former air tools made by a subsidiary sold in 1987. The company's maximum indemnification obligation is about $85 million, and it expects insurance to cover a substantial part of any damages. Joslyn Manufacturing also faces a class action over a former Louisiana wood-treating site and environmental remediation at former wood-treating sites. Environmental compliance reserves stood at $82.6 million at year-end 1996. Management says these matters should not have a materially adverse effect on financial condition, though the outcomes are uncertain.
How healthy is Danaher's balance sheet and liquidity position?
Total debt fell to $236.3 million at year-end 1996 from $283.6 million, and the company had $26.4 million in cash. About $100 million of privately placed notes carry a 7.2% average rate and mature through April 2003. Danaher also had $250 million of unused revolving credit capacity through September 2001. Operating cash flow of $217 million comfortably funded capital expenditures and dividends, and management considers available funds sufficient for the foreseeable future.
04—Continue