Danaher Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 29, 2019; comparisons are with the three months ended March 30, 2018. Amounts are in U.S. dollars unless stated otherwise. Financial statements are unaudited.
Business context and performance
Danaher operates four segments: Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. Management reported higher demand across the business and 5.5% core revenue growth, excluding acquisitions and currency effects. High-growth markets, led by China, and developed markets both contributed.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Sales | $4,879.9 million | $4,695.4 million | Up 4.0% reported; core growth 5.5% |
| Gross profit / margin | $2,718.0 million / 55.7% | $2,643.6 million / 56.3% | Margin down 0.6 percentage points |
| Operating profit / margin | $723.8 million / 14.8% | $743.0 million / 15.8% | Margin down 1.0 percentage point |
| Net earnings | $333.8 million | $566.6 million | Down $232.8 million |
| Net earnings attributable to common stockholders | $327.3 million | $566.6 million | Basic and diluted EPS: $0.46 vs. $0.81 and $0.80, respectively |
| Operating cash flow | $703.3 million | $828.9 million | Down about 15% |
| Cash and equivalents | $3,910.0 million | $787.8 million at Dec. 31, 2018 | Quarter-end balance reflects equity offerings |
| Total debt | $9,494.8 million | $9,740.3 million at Dec. 31, 2018 | Includes $2.327 billion of euro commercial paper |
Capital expenditures were $155.7 million; cash paid for acquisitions was $308.2 million. The company had no borrowings under its $4.0 billion revolving credit facility and reported approximately $1.7 billion of additional borrowing capacity. It was in compliance with debt covenants.
Segments and changes versus prior year
| Segment | Sales | Operating profit | Core sales growth |
|---|---|---|---|
| Life Sciences | $1,626.9 million, up 10% | $309.0 million; margin 19.0%, up 0.6 points | 7.0% |
| Diagnostics | $1,536.8 million, up 1% | $233.1 million; margin 15.2%, down 1.1 points | 5.0% |
| Dental | $659.7 million, down 2% | $48.2 million; margin 7.3%, down 0.3 points | 2.5% |
| Environmental & Applied Solutions | $1,056.5 million, up 3% | $244.6 million; margin 23.2%, up 1.1 points | 5.5% |
Reported sales growth was reduced by a 4.0% currency headwind and partly offset by acquisitions. Companywide operating margin was pressured by a $36 million legal-contingency provision, GE Biopharma transaction costs, Dental IPO preparation costs, acquisition dilution, product mix, and higher freight and tariff costs. Higher volumes and productivity savings provided partial offsets.
Outlook, transactions, and risks
- Management expected overall year-over-year sales growth for the remainder of 2019, while citing macroeconomic and geopolitical uncertainty. If March 29 exchange rates persisted, currency was estimated to reduce full-year 2019 sales by about 2% year over year.
- Management expected a roughly 20% effective tax rate for the remainder of 2019; actual results may vary with tax settlements, jurisdictional earnings mix, and other discrete items. Full-year 2019 capital spending was forecast at approximately $750 million.
- Danaher agreed to acquire GE’s Biopharma business for approximately $21.0 billion in cash and assume about $0.4 billion of pension liabilities. Completion was expected in Q4 2019, subject to customary conditions and regulatory approvals. GE reported preliminary 2018 revenue of approximately $3.0 billion for the business. Danaher anticipated using about $3.0 billion from its March equity offerings, debt or other borrowings, and cash on hand; it expected to incur up to approximately $18 billion of additional debt.
- Danaher raised approximately $1.4 billion net from common stock and $1.6 billion net from 4.75% mandatory convertible preferred stock offerings to help fund the acquisition. The preferred shares carry cumulative dividends when declared and are expected to convert in 2022, subject to their terms.
- The company planned a Dental IPO in the second half of 2019, subject to approvals and other conditions. Any later distribution or sale of remaining Dental shares was not assured.
- Tax matters remain significant contingencies. The IRS proposed adjustments that would increase taxable income for 2012–2015 by about $2.7 billion. Danish authorities had assessed approximately $253 million, including interest, for 2004–2009 and Danaher anticipated a further assessment of about $149 million for 2010–2012. The company said it was defending its positions; outcomes and timing remain uncertain.
- The quarter included $242 million of net discrete tax charges, primarily related to estimates for prior-period uncertain tax positions and audit settlements; these charges reduced diluted EPS by $0.34. A separate $36 million pretax legal-contingency provision was recorded.
- ASC 842 lease accounting was adopted January 1, 2019, adding operating lease assets and liabilities to the balance sheet. At March 29, operating lease liabilities were $986.1 million; adoption did not significantly affect net earnings or cash flows.
- Other risks highlighted include acquisition execution and integration, higher leverage and possible credit-rating pressure, trade and tariff uncertainty, Brexit disruption, competition, regulation, foreign exchange, and the possibility that the proposed Dental transactions may be delayed or not completed.
Most important facts for investors to verify
- Whether revenue and core growth continue, particularly in Diagnostics and Dental, and whether operating margins recover from Q1 pressures.
- The resolution and potential financial impact of the IRS and Danish tax disputes, as well as the timing and nature of future discrete tax items.
- GE Biopharma closing conditions, final financing mix, resulting debt and credit ratings, and the acquired business’s post-close performance and integration costs.
- Whether the Dental IPO and any subsequent distribution proceed, on what terms, and with what separation, tax, and infrastructure costs.
- Cash generation, working-capital needs, debt refinancing, and liquidity after acquisition-related borrowing.