Microsoft Excel LibreOffice Calc

Danaher Corp. (DHR)

Economic Value Added (EVA)

Difficulty: Advanced

EVA is registered trademark of Stern Stewart.

Economic value added or economic profit is the difference between revenues and costs,where costs include not only expenses, but also cost of capital.

Economic Profit

Danaher Corp., economic profit calculation

US$ in thousands

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net operating profit after taxes (NOPAT)1 2,595,025  2,270,343  1,846,600  2,615,199  2,916,937 
Cost of capital2 10.29% 10.05% 9.70% 9.74% 10.94%
Invested capital3 44,884,325  42,956,143  42,607,891  43,577,571  31,903,753 
Economic profit4 (2,025,480) (2,046,269) (2,284,650) (1,630,208) (572,746)

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-22), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25).

2018 Calculations

1 NOPAT. See Details »

2 Cost of capital. See Details »

3 Invested capital. See Details »

4 Economic profit = NOPAT – Cost of capital × Invested capital
= 2,595,025 – 10.29% × 44,884,325 = -2,025,480

Item Description The company
Economic profit Economic profit is a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital. Danaher Corp.’s economic profit increased from 2016 to 2017 and from 2017 to 2018.

Net Operating Profit after Taxes (NOPAT)

Danaher Corp., NOPAT calculation

US$ in thousands

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Net earnings 2,650,900  2,492,100  2,553,700  3,357,400  2,598,400 
Deferred income tax expense (benefit)1 (195,100) (426,900) (383,900) (151,300) 177,300 
Increase (decrease) in allowance for doubtful accounts2 4,300  13,700  14,100  13,900  1,100 
Increase (decrease) in LIFO reserve3 —  —  —  —  — 
Increase (decrease) in deferred revenue4 28,100  138,400  99,000  69,200  96,600 
Increase (decrease) in accrued warranty liability5 (1,600) 3,200  2,000  (2,500) (2,100)
Increase (decrease) in accrual balance of productivity improvement and restructuring cost6 (19,100) 9,200  (22,400) (20,700) 42,800 
Increase (decrease) in equity equivalents7 (183,400) (262,400) (291,200) (91,400) 315,700 
Interest expense 157,400  162,700  184,400  162,800  122,700 
Interest expense, operating lease liability8 13,224  14,435  15,200  20,899  20,965 
Adjusted interest expense 170,624  177,135  199,600  183,699  143,665 
Tax benefit of interest expense9 (35,831) (61,997) (69,860) (64,295) (50,283)
Adjusted interest expense, after taxes10 134,793  115,138  129,740  119,404  93,382 
(Gain) loss on marketable securities —  (72,800) (223,400) (12,400) (122,600)
Interest income (9,200) (7,500) (200) (5,300) (16,700)
Investment income, before taxes (9,200) (80,300) (223,600) (17,700) (139,300)
Tax expense (benefit) of investment income11 1,932  28,105  78,260  6,195  48,755 
Investment income, after taxes12 (7,268) (52,195) (145,340) (11,505) (90,545)
(Income) loss from discontinued operations, net of tax13 —  (22,300) (400,300) (758,700) — 
Net operating profit after taxes (NOPAT) 2,595,025  2,270,343  1,846,600  2,615,199  2,916,937 

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-22), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25).

2018 Calculations

1 Elimination of deferred tax expense. See Details »

2 Addition of increase (decrease) in allowance for doubtful accounts.

3 Addition of increase (decrease) in LIFO reserve. See Details »

4 Addition of increase (decrease) in deferred revenue.

5 Addition of increase (decrease) in accrued warranty liability.

6 Addition of increase (decrease) in accrual balance of productivity improvement and restructuring cost.

7 Addition of increase (decrease) in equity equivalents to net earnings.

8 Interest expense on capitalized operating leases = Operating lease liability × Discount rate
= 958,225 × 1.38% = 13,224

9 Tax benefit of interest expense = Adjusted interest expense × Statutory income tax rate
= 170,624 × 21.00% = 35,831

10 Addition of after taxes interest expense to net earnings.

11 Tax expense (benefit) of investment income = Investment income, before tax × Statutory income tax rate
= 9,200 × 21.00% = 1,932

12 Elimination of after taxes investment income.

13 Elimination of discontinued operations.

Item Description The company
NOPAT Net operating profit after taxes is income from operations, but after removement of taxes calculated on cash basis that are relevant to operating income. Danaher Corp.’s NOPAT increased from 2016 to 2017 and from 2017 to 2018.

Cash Operating Taxes

Danaher Corp., cash operating taxes calculation

US$ in thousands

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Income tax provision 641,900  469,000  457,900  725,300  883,400 
Less: Deferred income tax expense (benefit) (195,100) (426,900) (383,900) (151,300) 177,300 
Add: Tax savings from interest expense 35,831  61,997  69,860  64,295  50,283 
Less: Tax imposed on investment income 1,932  28,105  78,260  6,195  48,755 
Cash operating taxes 870,899  929,792  833,400  934,700  707,628 

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-22), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25).

Item Description The company
Cash operating taxes Cash operating taxes are estimated by adjusting income tax expense for changes in deferred taxes and tax benefit from the interest deduction. Danaher Corp.’s cash operating taxes increased from 2016 to 2017 but then slightly declined from 2017 to 2018 not reaching 2016 level.

Invested Capital

Danaher Corp., invested capital calculation (financing approach)

US$ in thousands

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Notes payable and current portion of long-term debt 51,800  194,700  2,594,800  845,200  71,900 
Long-term debt, excluding current portion 9,688,500  10,327,400  9,674,200  12,025,200  3,401,500 
Operating lease liability1 958,225  751,843  690,891  713,271  620,253 
Total reported debt & leases 10,698,525  11,273,943  12,959,891  13,583,671  4,093,653 
Total Danaher stockholders’ equity 28,214,400  26,358,200  23,002,800  23,690,300  23,378,100 
Net deferred tax (assets) liabilities2 2,311,200  2,333,300  2,851,800  3,106,700  1,835,100 
Allowance for doubtful accounts3 120,400  116,100  102,400  134,200  122,600 
LIFO reserve4 —  —  —  —  — 
Deferred revenue5 799,000  770,900  632,500  794,100  953,300 
Accrued warranty liability6 77,400  79,000  75,800  135,100  139,100 
Accrual balance of productivity improvement and restructuring cost7 47,200  66,300  57,100  90,900  134,000 
Equity equivalents8 3,355,200  3,365,600  3,719,600  4,261,000  3,184,100 
Accumulated other comprehensive (income) loss, net of tax9 2,791,100  1,994,200  3,021,700  2,311,200  1,433,700 
Noncontrolling interests 12,300  9,600  74,000  73,700  71,700 
Adjusted total Danaher stockholders’ equity 34,373,000  31,727,600  29,818,100  30,336,200  28,067,600 
Investments10 (187,200) (45,400) (170,100) (342,300) (257,500)
Invested capital 44,884,325  42,956,143  42,607,891  43,577,571  31,903,753 

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-22), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25).

1 Addition of capitalized operating leases.

2 Elimination of deferred taxes from assets and liabilities. See Details »

3 Addition of allowance for doubtful accounts receivable.

4 Addition of LIFO reserve. See Details »

5 Addition of deferred revenue.

6 Addition of accrued warranty liability.

7 Addition of accrual balance of productivity improvement and restructuring cost.

8 Addition of equity equivalents to total Danaher stockholders’ equity.

9 Removal of accumulated other comprehensive income.

10 Subtraction of investments.

Item Description The company
Invested capital Capital is an approximation of the economic book value of all cash invested in going-concern business activities. Danaher Corp.’s invested capital increased from 2016 to 2017 and from 2017 to 2018.

Cost of Capital

Danaher Corp., cost of capital calculations

Fair Value1 Weights Cost of Capital
Equity2 78,911,844  78,911,844  ÷ 89,912,470  = 0.88 0.88 × 11.58% = 10.16%
Notes payable and long-term debt3 10,042,400  10,042,400  ÷ 89,912,470  = 0.11 0.11 × 1.38% × (1 – 21.00%) = 0.12%
Operating lease liability4 958,225  958,225  ÷ 89,912,470  = 0.01 0.01 × 1.38% × (1 – 21.00%) = 0.01%
Total: 89,912,470  1.00 10.29%

Based on: 10-K (filing date: 2019-02-21).

1 US$ in thousands

2 Equity. See Details »

3 Notes payable and long-term debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 67,908,388  67,908,388  ÷ 79,702,031  = 0.85 0.85 × 11.58% = 9.86%
Notes payable and long-term debt3 11,041,800  11,041,800  ÷ 79,702,031  = 0.14 0.14 × 1.92% × (1 – 35.00%) = 0.17%
Operating lease liability4 751,843  751,843  ÷ 79,702,031  = 0.01 0.01 × 1.92% × (1 – 35.00%) = 0.01%
Total: 79,702,031  1.00 10.05%

Based on: 10-K (filing date: 2018-02-21).

1 US$ in thousands

2 Equity. See Details »

3 Notes payable and long-term debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 58,790,167  58,790,167  ÷ 72,170,959  = 0.81 0.81 × 11.58% = 9.43%
Notes payable and long-term debt3 12,689,900  12,689,900  ÷ 72,170,959  = 0.18 0.18 × 2.20% × (1 – 35.00%) = 0.25%
Operating lease liability4 690,891  690,891  ÷ 72,170,959  = 0.01 0.01 × 2.20% × (1 – 35.00%) = 0.01%
Total: 72,170,959  1.00 9.70%

Based on: 10-K (filing date: 2017-02-22).

1 US$ in thousands

2 Equity. See Details »

3 Notes payable and long-term debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 59,919,874  59,919,874  ÷ 73,949,745  = 0.81 0.81 × 11.58% = 9.38%
Notes payable and long-term debt3 13,316,600  13,316,600  ÷ 73,949,745  = 0.18 0.18 × 2.93% × (1 – 35.00%) = 0.34%
Operating lease liability4 713,271  713,271  ÷ 73,949,745  = 0.01 0.01 × 2.93% × (1 – 35.00%) = 0.02%
Total: 73,949,745  1.00 9.74%

Based on: 10-K (filing date: 2016-02-24).

1 US$ in thousands

2 Equity. See Details »

3 Notes payable and long-term debt. See Details »

4 Operating lease liability. See Details »

Fair Value1 Weights Cost of Capital
Equity2 61,557,933  61,557,933  ÷ 66,059,186  = 0.93 0.93 × 11.58% = 10.79%
Notes payable and long-term debt3 3,881,000  3,881,000  ÷ 66,059,186  = 0.06 0.06 × 3.38% × (1 – 35.00%) = 0.13%
Operating lease liability4 620,253  620,253  ÷ 66,059,186  = 0.01 0.01 × 3.38% × (1 – 35.00%) = 0.02%
Total: 66,059,186  1.00 10.94%

Based on: 10-K (filing date: 2015-02-25).

1 US$ in thousands

2 Equity. See Details »

3 Notes payable and long-term debt. See Details »

4 Operating lease liability. See Details »

Economic Spread

Danaher Corp., economic spread calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US$ in thousands)
Economic profit1 (2,025,480) (2,046,269) (2,284,650) (1,630,208) (572,746)
Invested capital2 44,884,325  42,956,143  42,607,891  43,577,571  31,903,753 
Ratio
Economic spread3 -4.51% -4.76% -5.36% -3.74% -1.80%

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-22), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25).

2018 Calculations

1 Economic profit. See Details »

2 Invested capital. See Details »

3 Economic spread = 100 × Economic profit ÷ Invested capital
= 100 × -2,025,480 ÷ 44,884,325 = -4.51%

Ratio Description The company
Economic spread The ratio of economic profit to invested capital, also equal to the difference between return on invested capital (ROIC) and cost of capital. Danaher Corp.’s economic spread improved from 2016 to 2017 and from 2017 to 2018.

Economic Profit Margin

Danaher Corp., economic profit margin calculation

Microsoft Excel LibreOffice Calc
Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (US$ in thousands)
Economic profit1 (2,025,480) (2,046,269) (2,284,650) (1,630,208) (572,746)
Sales 19,893,000  18,329,700  16,882,400  20,563,100  19,913,800 
Add: Increase (decrease) in deferred revenue 28,100  138,400  99,000  69,200  96,600 
Adjusted sales 19,921,100  18,468,100  16,981,400  20,632,300  20,010,400 
Ratio
Economic profit margin2 -10.17% -11.08% -13.45% -7.90% -2.86%

Based on: 10-K (filing date: 2019-02-21), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-22), 10-K (filing date: 2016-02-24), 10-K (filing date: 2015-02-25).

2018 Calculations

1 Economic profit. See Details »

2 Economic profit margin = 100 × Economic profit ÷ Adjusted sales
= 100 × -2,025,480 ÷ 19,921,100 = -10.17%

Ratio Description The company
Economic profit margin The ratio of economic profit to sales. It is the company’s profit margin covering income efficiency and asset management. Economic profit margin is not biased in favor of capital-intensive business models, because any added capital is a cost to the economic profit margin. Danaher Corp.’s economic profit margin improved from 2016 to 2017 and from 2017 to 2018.