01—Abstract
Summary
Summary of the 10-K filed March 19, 1999. Cited figures are marked; the original filing is the authoritative source.
Danaher Corporation's 1998 Form 10-K shows a company that grew sharply through acquisitions.
Sales rose about 17% to $2.91 billiona, and the Pacific Scientific acquisition ($420 million) and Dr. Lange GmbH drove much of the increase, with the Fluke Corporation merger accounted for as a pooling of interests. Operating profit rose 22% to $366.8 million, and gross margin improved 1.5 points to 37.4%. Diluted EPS was $1.32, which includes a $0.21 after-tax charge from the Fluke merger.
Excluding that charge, earnings would have been higher. Process/Environmental Controls (55.5%b of sales) grew fastest, with a 24% sales increase and operating margin rising to 13.8%, while Tools and Components grew 8.5% with a 12.3% operating margin. The balance sheet took on more leverage.
Total debt rose from $199 million to $473 millionc, largely to fund $526 million of net acquisition payments, and total assets grew to $2.74 billion. Operating cash flow of $331 million covered $90 million of capital expenditures, and the company had $250 million of unused revolver capacity at year-end. Management describes the funding position as sufficient for the foreseeable future.
Equity rose to $1.35 billion, and retained earnings grew to $979 milliond. Key risks include customer concentration (Sears, Roebuck accounted for about 10% of 1998 sales), indemnification exposure from a former subsidiary's air tool product liability litigation (maximum obligation of about $85 million, with a settlement agreed in principle), environmental liabilities from JMC's former wood-treating operations, and integration risk from recent acquisitions.
The filing also notes that the Year 2000 and Euro conversion costs were not material. Note that the selected financial data table contains some apparent typographical errors, such as a 1996 operating profit shown as 67,406 instead of 267,406 in the income statement.
02—Key points
Key Highlights
- Sales increased about 17% to $2.91 billion in 1998 from $2.49 billion in 1997, driven mainly by the Pacific Scientific and Dr. Lange acquisitions, with unit volume up about 2% and prices roughly flat in Process/Environmental Controls.
- Operating profit rose 22% to $366.8 million, and gross margin expanded 1.5 points to 37.4%, reflecting productivity gains, mix shift toward acquired higher-margin products, and the absence of Fluke's 1997 European restructuring costs.
- Diluted EPS was $1.32 (basic $1.36), including a $40.8 million pre-tax ($28.6 million after-tax, $0.21 per share) one-time charge related to the Fluke merger.
- Total debt more than doubled to $473 million from $199 million, including $250 million of 6% notes due 2008 issued in October 1998, to fund about $526 million of net cash paid for acquisitions.
- Operating cash flow was $331 million, capital expenditures were $90 million, and $250 million of revolving credit capacity remained unused at December 31, 1998.
- Process/Environmental Controls, the faster-growing segment, delivered 55.5% of sales and a 13.8% operating margin, with Veeder-Root leak detection systems identified as a strategic growth area.
- Sears, Roebuck accounted for about 10% of consolidated sales, and the company estimates losing this business would have a material adverse effect; a $85 million maximum indemnification exposure from a former air tool subsidiary is being settled.
03—Questions
Frequently Asked Questions
How much did Danaher's sales and profits grow in 1998?
Sales grew about 17%, from $2.49 billion in 1997 to $2.91 billion in 1998. Operating profit grew 22%, from $301.1 million to $366.8 million. Net earnings rose 3.6%, to $182.9 million from $176.6 million, but this figure includes the Fluke merger charge. Most of the growth came from acquisitions rather than organic volume.
How did the Fluke merger and the Pacific Scientific acquisition affect the financials?
The Fluke merger (July 1998, about 17.8 million shares issued) was accounted for as a pooling of interests, so prior periods were restated to combine the companies and the merger costs ($40.8 million pre-tax) hit 1998 earnings. The Pacific Scientific acquisition ($420 million cash, March 1998) was a purchase, so its results are included only from the first quarter of 1998 onward, and it added about $1.2 billion of goodwill and intangibles to the balance sheet.
Is Danaher's debt level a concern for investors?
Debt increased to $473 million from $199 million, and the debt-to-equity ratio rose to roughly 35% from 17%. Management describes this as manageable given operating cash flow of $331 million, interest expense of $24.9 million, and an undrawn $250 million credit facility maturing in 2001. The company's notes carry relatively low fixed rates, and the filing estimates a 100 basis point rate increase would reduce the market value of fixed-rate debt by about $19 million.
What are the main legal and contingent risks disclosed?
The main risks are: (1) indemnification of a buyer for product liability claims over air tools made before 1987, involving about 3,000 plaintiffs and a maximum obligation of about $85 million, with a settlement agreed in principle; (2) a class action involving a former JMC wood-treating site in Louisiana, with liability capped by an insurance agreement; and (3) environmental remediation at former JMC wood-treating sites, for which the company has made a provision. Management believes none of these will have a material adverse effect on financial condition.
Who are Danaher's major customers, and how concentrated is that exposure?
Sears, Roebuck and Co. accounted for about 10% of 1998 consolidated sales (11% in 1997 and 1996), through the Danaher Tool Group's Craftsman hand tool business under a five-year evergreen agreement. Management describes the relationship as long-standing but states that loss or a material reduction of this business could have a material adverse effect on operations.
04—Continue