Danaher Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding periods ended October 1, 2021. Amounts are in U.S. dollars. Results reflect continuing operations unless noted.
Business context and results
Danaher operates Life Sciences, Diagnostics, and Environmental & Applied Solutions. Q3 reported sales rose 6.0% to $7.663 billion; core sales grew 10.0%, acquisitions contributed 1.5%, and currency translation reduced reported growth by 5.5%. For the first nine months, sales rose 8.5% to $23.102 billion, with 10.5% core growth, a 2.0% acquisition contribution, and a 4.0% currency headwind.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $7.663B | $7.229B | $23.102B | $21.305B |
| Gross profit margin | 59.8% | 60.3% | 60.6% | 61.1% |
| Operating profit | $2.015B | $1.309B | $6.392B | $5.311B |
| Operating profit margin | 26.3% | 18.1% | 27.7% | 24.9% |
| Net earnings from continuing operations | $1.572B | $1.158B | $4.977B | $4.559B |
| Diluted EPS from continuing operations | $2.10 | $1.54 | $6.67 | $6.10 |
| Operating cash flow, continuing operations | Not provided for quarter | Not provided for quarter | $5.978B | $6.025B |
Segments and material changes
- Life Sciences: Q3 sales $3.776B, up 4.0% reported and 8.0% core; operating margin 27.7% versus 26.8%. Nine-month core growth was 7.5%; margin was 28.7% versus 30.0%, reflecting acquired-business dilution, investment and cost pressures.
- Diagnostics: Q3 sales $2.679B, up 9.5% reported and 13.5% core; operating margin 28.4% versus 5.9%. Nine-month core growth was 16.0%. Comparisons benefited substantially from the prior-year $547 million contract-settlement expense; COVID-19 molecular diagnostic testing also contributed to sales growth.
- Environmental & Applied Solutions: Q3 sales $1.208B, up 5.0% reported and 10.5% core; operating margin 23.7% versus 22.3%. Nine-month core growth was 9.0%, while margin declined to 23.1% from 23.9%.
Consolidated Q3 operating margin rose sharply year over year, principally because Q3 2021 included the $547 million pretax settlement expense. The filing attributes additional comparative benefit to prior-year acquisition-related charges. Gross margin nevertheless declined year over year, with higher materials, transportation, labor and restructuring/productivity costs among the pressures.
Cash, debt and liquidity
- Cash and equivalents were $5.150B at September 30, 2022, versus $2.586B at December 31, 2021. Current assets were $14.250B and current liabilities $8.002B.
- Total debt was $19.247B, including $705M current and $18.542B long-term, compared with $22.176B at year-end 2021. The company reported compliance with all debt covenants. Its $5.0B revolving credit facility expires August 2024.
- Nine-month operating cash flow was $5.978B, down $47M year over year. Receivables, inventory and payables used approximately $1.0B of cash, versus $490M in the prior-year period.
- Investing activities used $1.418B, including $823M of capital expenditures and $304M for acquisitions. Financing activities used $1.664B, including dividends and debt repayments. Cash increased by $2.564B over the nine months.
- Danaher said cash, operating cash flow and other liquidity sources should meet its expected needs. It repatriated approximately $2.5B of non-U.S. cash in June and forecast 2022 capital spending of approximately $1.5B.
Outlook, commentary and risks
- The filing does not provide a specific revenue or earnings forecast. Management expected the effective tax rate for the remainder of 2022 to be approximately 19.3%.
- At September 30 exchange rates, management estimated currency would reduce Q4 2022 sales by approximately 6.0% and full-year sales by approximately 4.5% year over year; the U.S. dollar strengthened further after quarter-end.
- Management said supply-chain disruptions had eased versus Q2 and freight costs had begun to stabilize, although some electronic components remained difficult to procure. Price increases and Danaher Business System measures largely mitigated cost pressures in the reported periods. Inflation, labor constraints, interest rates and broader economic uncertainty remain risks.
- In September, Danaher announced a planned tax-free separation of Environmental & Applied Solutions, which had 2021 sales of approximately $4.7B. The target is Q4 2023, subject to board approval, financing, tax opinions and rulings, and regulatory approvals; completion and benefits are not assured.
- Danaher recorded a $43M pretax charge in the first nine months related primarily to Russian receivables, inventory and contractual obligations. It suspended shipments to Russia except for specified products supporting diagnosis, treatment, vaccines and therapeutics. Further impacts from the conflict, sanctions and European energy disruption are uncertain.
- Other notable items: Q3 and nine-month 2022 other expense included investment losses of $64M and $186M, respectively, versus gains of $128M and $330M in the comparable 2021 periods. Foreign-currency translation losses were $1.039B for Q3 and $2.824B year to date, reducing comprehensive income and equity but not representing operating earnings expense.
Most important facts for investors to verify
- How much of continuing sales and Diagnostics growth is sustainable as COVID-19 testing demand changes, and how the planned Environmental & Applied Solutions separation affects reported growth.
- Whether margins can hold up against input, labor and restructuring costs once the favorable comparison with the 2021 settlement charge rolls off.
- Cash conversion and working-capital trends, particularly inventory growth and the cash-flow impact of supply-chain mitigation.
- Foreign-exchange exposure, currency-sensitive debt and investment valuations, including the effect of further dollar strength.
- Milestones, financing, costs, tax and regulatory conditions, and timing for the proposed 2023 separation; also monitor Russia-related and other geopolitical exposures.