01—Abstract
Summary
Summary of the 10-K/A filed April 28, 1997. Cited figures are marked; the original filing is the authoritative source.
Danaher Corporation's 1996 Form 10-K shows a company that grew revenue sharply through acquisitions while improving profitability.
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 includes an approximately $80 million one-time gain from the January 1996 sale of Fayette Tubular Products. Earnings from continuing operations rose 21% to $128.0 million ($2.13 per share).
Gross margin improved 1.5 points to 31.6%b, 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 (60.9% of revenue, 11.6% operating margin) is anchored by its Sears Craftsman and NAPA relationships.
Sears alone accounted for about 14%c of 1996 sales, which the company acknowledges could adversely affect operations if lost. Process/Environmental Controls (39.1% of revenue) grew 47% on the Joslyn and Acme-Cleveland acquisitions and is positioned around underground storage tank leak detection (Veeder-Root), a business tied to environmental regulation. Its operating profit rose 39%, though segment margins are lower than the prior year's level after the Joslyn and Hengstler deals.
Balance-sheet and cash-flow trends are solid. Operating cash flow reached $217 milliond, debt fell $48 million to $236 million, and stockholders' equity rose to $800 million. Acquisitions consumed $246 million in cash.
Risk factors include a product liability indemnification exposure of up to about $85 million tied to a former air tool subsidiary, a class action involving the former Joslyn wood-treating operations, and environmental remediation obligations. Management states it believes these are not expected to have a material adverse effect, though the outcome of some matters cannot yet be predicted.
02—Key points
Key Highlights
- Net revenues up 22% to $1.81 billion, driven largely by acquisitions (Joslyn, Acme-Cleveland) and volume growth
- Net earnings of $207.8 million ($3.47/share) include an ~$80 million one-time gain on the Fayette Tubular Products divestiture; continuing operations earned $128.0 million ($2.13/share), up 21%
- Gross margin expanded 1.5 points to 31.6%; operating profit up 25% to $226.1 million
- Process/Environmental Controls segment revenue up 47% to $708 million, with operating profit up 39%, led by Veeder-Root underground storage tank leak detection
- Customer concentration: Sears, Roebuck accounted for ~14% of 1996 sales, a material dependency for the Tools segment
- Strong cash generation: operating cash flow of $217 million; total debt reduced by $48 million to $236 million
- Contingent liabilities include an air tool product liability indemnity (up to ~$85 million, ~3,000 plaintiffs) and a JMC wood-treating class action with uncertain exposure
03—Questions
Frequently Asked Questions
How much of Danaher's 1996 net income was one-time, and what is the underlying earnings power?
Net earnings of $207.8 million included roughly $79.8 million from discontinued operations, almost entirely the gain on the Fayette Tubular Products sale completed in January 1996. Earnings from continuing operations were $128.0 million, or $2.13 per share, up from $105.8 million ($1.77) in 1995, a 21% increase. Investors focusing on recurring earnings should use the continuing-operations figure.
How dependent is Danaher on Sears, Roebuck and Co.?
Sears accounted for about 14% of consolidated 1996 sales, down from 16% in 1995 and 21% in 1994. The business is supported by a five-year evergreen supply agreement requiring Sears to buy a significant portion of its Craftsman hand tool requirements from Danaher. The company acknowledges that losing this business could have an adverse effect on operations.
What are the main legal and environmental risks disclosed?
The company faces product liability litigation involving approximately 3,000 plaintiffs over air tools made by a former subsidiary sold in 1987, with a maximum indemnification obligation of about $85 million, which Danaher believes is largely covered by insurance. A JMC class action over a former Louisiana wood-treating site has uncertain size and damages, and the company has tendered the defense to its insurer. Environmental remediation provisions total roughly $82 million across current and noncurrent accruals. Management believes none of these matters will have a materially adverse effect, but the outcomes are not yet predictable.
What drove the growth in Process/Environmental Controls, and how sustainable is it?
Segment revenue rose 47% to $708 million, mostly from the full-year effect of the September 1995 Joslyn acquisition and the July 1996 Acme-Cleveland acquisition (which together contributed about 44 points of growth), with 3% from unit volume. Veeder-Root's storage tank leak detection business benefits from environmental regulation, and management says demand in North America was very strong, though weakness in Germany offset some gains. Continued growth will depend on further acquisitions and on sustained demand in North America.
How is Danaher financing its growth, and is its balance sheet healthy?
Danaher funded acquisitions (about $246 million cash in 1996) through operating cash flow ($217 million), the $155 million Fayette sale proceeds, and borrowings. Total debt fell to $236 million from $284 million, with $100 million of privately placed notes at a 7.2% average rate maturing through 2003 and a $250 million undrawn revolving facility. Stockholders' equity rose to $800 million from $586 million. Leverage appears moderate, though short-term uncommitted borrowings and a large goodwill balance ($793 million, about 45% of total assets) warrant attention.
04—Continue