Danaher Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended April 1, 2022. Danaher operates in Biotechnology, Life Sciences, Diagnostics, and Environmental & Applied Solutions (EAS). Amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Prior-year period | Change |
|---|---|---|---|
| Sales | $7.167 billion | $7.688 billion | Down 7.0%; core sales down 4.0%, currency translation reduced sales 3.0% |
| Gross profit / margin | $4.370 billion / 61.0% | $4.705 billion / 61.2% | Margin down 20 basis points |
| Operating profit / margin | $1.794 billion / 25.0% | $2.172 billion / 28.3% | Margin down 330 basis points |
| Net earnings | $1.450 billion | $1.725 billion | Down 16% |
| Diluted EPS | $1.94 | $2.31 | Down 16% |
| Operating cash flow | $1.947 billion | $1.968 billion | Down $21 million |
SG&A was $2.147 billion, or 30.0% of sales, versus 27.2% a year earlier; R&D was $429 million, or 6.0% of sales, versus 5.7%. The effective tax rate was 19.4%, compared with 17.8%.
Cash and equivalents were $7.379 billion at March 31, up from $5.995 billion at year-end 2022. Total debt was $19.832 billion, including $1.571 billion classified as current; long-term debt was $18.261 billion. The company reported compliance with all debt covenants. It had a $5.0 billion revolving credit facility expiring in August 2024 and approximately $2.034 billion of euro-denominated commercial paper outstanding.
Investing activities used $304 million, including $275 million of capital expenditures; financing activities used $262 million, including $204 million of dividends. The company forecast 2023 capital spending of approximately $1.5 billion and stated that cash, operating cash flow, and other liquidity sources should meet its needs. Remaining performance obligations were approximately $4.9 billion, with about 57% expected to be recognized over the next 12 months.
Material changes and segment results
Management attributed the overall sales decline primarily to lower demand for COVID-19-related products, partly offset by demand for other products. Foreign exchange reduced reported sales by 3.0%; price increases contributed 3.0% to year-over-year sales growth. Core sales declined at a mid-single-digit rate in developed markets, while high-growth markets increased at a low-single-digit rate.
| Segment | Sales | Reported sales change | Operating profit | Operating margin |
|---|---|---|---|---|
| Biotechnology | $1.864 billion | Down 16.0%; core down 13.0% | $596 million | 32.0%, down from 36.1% |
| Life Sciences | $1.709 billion | Up 2.5%; core up 5.0% | $321 million | 18.8%, down from 19.1% |
| Diagnostics | $2.376 billion | Down 10.0%; core down 7.5% | $677 million | 28.5%, down from 33.5% |
| Environmental & Applied Solutions | $1.218 billion | Up 5.0%; core up 6.5% | $299 million | 24.5%, up from 20.3% |
Biotechnology and Diagnostics declines reflected reduced COVID-19 therapeutics, vaccine-production, and testing demand. Life Sciences growth reflected strength in several research and industrial filtration product lines, partly offset by weaker COVID-related products. EAS growth was led by water quality. Consolidated operating margin comparisons were also affected by prior-year Russia-related charges, lower sales and mix, growth investments, EAS separation costs, and acquired-business dilution.
Outlook, risks, and unusual items
- Management expected demand for products supporting COVID-19 vaccines and therapeutics to continue declining in 2023, including into the second half, and expected to review costs, particularly in Biotechnology and Diagnostics. COVID-19 testing demand may fluctuate with case levels.
- Management expected a full-year 2023 effective tax rate of approximately 19.5%. Its currency scenario stated that if March 31 exchange rates prevailed, full-year 2023 sales would be essentially flat from 2022 due to currency; this is a currency impact estimate, not total sales guidance. The filing provides no clear overall full-year sales or EPS guidance.
- Danaher targeted completion of the EAS separation into Veralto in Q4 2023, subject to board approval, financing, tax opinions and rulings, and regulatory approvals. EAS generated approximately $4.8 billion of 2022 sales. Separation-related costs were $28 million pretax ($25 million after tax) in Q1.
- Management said higher interest rates and tighter credit had adversely affected demand at some customers, including emerging biotechnology companies, although Danaher’s liquidity and interest costs had not been significantly affected. Other disclosed risks include competition, supply-chain and labor costs, foreign exchange, regulation, cybersecurity, litigation, and the execution and tax treatment of the planned separation.
- The IRS settled proposed adjustments concerning self-insurance premium income for 2016–2018; the settlement’s impact on the financial statements, cash flows, and effective tax rate was not material. The audit remains open on other matters, and the IRS could propose similar adjustments for later periods.
- All outstanding Series B mandatory convertible preferred shares converted on April 17, 2023 into approximately 8.6 million common shares. The filing also disclosed ongoing phased integration of Biotechnology business processes and replacement or modification of certain internal controls; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether COVID-related demand and customer inventory reductions continue to weigh on Biotechnology and Diagnostics, and how non-COVID demand offsets those declines.
- Whether margin performance improves as sales mix, growth spending, cost inflation, and productivity actions evolve.
- Progress and completion conditions for the targeted Q4 2023 Veralto separation, including financing, tax rulings, approvals, and total separation costs.
- Near-term debt maturities and commercial-paper refinancing, alongside cash generation, capital spending, and dividend commitments.
- The effect of the Series B conversion on common shares outstanding and per-share results, and developments in the remaining IRS audit matters.