Danaher Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended April 1, 2022; comparisons are with the three months ended April 2, 2021. Danaher operates in Life Sciences, Diagnostics, and Environmental & Applied Solutions.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Sales | $7.688 billion | $6.858 billion | Up 12.0% |
| Gross profit / margin | $4.705 billion / 61.2% | $4.253 billion / 62.0% | Margin down 80 bps |
| Operating profit / margin | $2.172 billion / 28.3% | $1.997 billion / 29.1% | Profit up about 9%; margin down 80 bps |
| Net earnings | $1.725 billion | $1.702 billion | Up about 1% |
| Diluted EPS | $2.31 | $2.29 | Up about 1% |
| Operating cash flow | $1.968 billion | $1.871 billion | Up 5% |
| Cash and equivalents | $3.717 billion at April 1 | $2.586 billion at December 31, 2021 | Up $1.131 billion |
| Total debt | $21.778 billion | $22.176 billion at December 31, 2021 | Down $398 million |
Core sales, a non-GAAP measure excluding acquisitions and currency translation, grew 12%. Management said acquisitions added 2 percentage points to reported sales growth and currency translation reduced it by 2 points. The effective tax rate was 17.8%, versus 18.3% a year earlier, including $41 million of net discrete tax benefits. Research and development expense was $441 million, up from $380 million.
Segment results
| Segment | Sales | Year-over-year sales growth | Operating margin |
|---|---|---|---|
| Life Sciences | $3.882 billion | 9.5% reported; 7.5% core | 28.8%, down from 32.5% |
| Diagnostics | $2.644 billion | 21.5% reported; 22.5% core | 33.5%, up from 28.7% |
| Environmental & Applied Solutions | $1.162 billion | 2.5% reported; 6.5% core | 20.3%, down from 25.1% |
Cash, debt and liquidity
Investing activities used $503 million, including $250 million of capital expenditures and $274 million of investment purchases; financing activities used $274 million, including $191 million of dividends. Inventory and trade receivables/payables collectively used $482 million of operating cash in the quarter, compared with $150 million in the prior-year quarter. Cash and equivalents were approximately $3.7 billion, of which about $3.5 billion was held outside the U.S.
Debt included $2.776 billion of commercial paper. The company had a $5.0 billion revolving credit facility expiring in August 2024 and reported compliance with its debt covenants. Management believes cash, operating cash flow and other liquidity sources are sufficient for near- and long-term needs. The company expected to fund 2022 debt maturities with available cash, commercial paper, credit-facility borrowings and/or other debt issuance.
Material changes, outlook and risks
- Growth and margins: Reported sales rose 12%, but gross and operating margins each declined 80 basis points. Management cited higher material, transportation and labor costs, foreign exchange, product mix, growth investments and a $43 million Russia-related charge. Higher sales and productivity improvements partly offset these pressures.
- Different segment trends: Diagnostics growth included higher demand for COVID-19 molecular tests. Life Sciences experienced strong underlying bioprocess demand but faced difficult comparisons and weaker demand in some businesses. Environmental & Applied Solutions growth was supported by pricing, while its margin fell amid cost pressures.
- Russia-Ukraine conflict: Danaher suspended shipments to Russia except products for diagnosing and treating patients and producing vaccines and therapeutics. It recorded a $43 million pretax charge, primarily for receivable and inventory impairments and contractual obligations, and warned additional charges may occur. Russia represented about 1% of 2021 sales; Ukraine sales were de minimis.
- COVID-19 and China: Late-quarter COVID-related shutdowns in China modestly affected some operations and reduced Diagnostics patient volumes, with a more significant effect in Q2 through the filing date. Management anticipated easing and a return to normalized activity by the end of June, while emphasizing that the outcome remained uncertain.
- Management outlook: No consolidated revenue or earnings guidance is provided in the supplied filing text. Danaher forecast 2022 capital spending of approximately $1.5 billion and an effective tax rate of approximately 19.5% for the remainder of 2022. If April 1 currency rates persisted, management estimated a roughly 2% reduction to full-year sales versus the prior year.
- Other notable items: Other income (expense), net shifted to a $20 million expense from $140 million of income, principally reflecting $24 million of investment losses versus $116 million of investment gains a year earlier. On April 15, 2022, after quarter-end, all Series A mandatory convertible preferred shares converted into approximately 11.0 million common shares. The quarter included a $10 million non-U.S. pension settlement loss.
Important facts for investors to verify
- Whether Diagnostics growth and margins remain durable as COVID-related testing demand and China patient volumes change.
- Whether inflation, supply constraints, labor costs and foreign-exchange movements continue to pressure margins and reported sales.
- The full financial impact of the Russia-Ukraine conflict, including any further impairments, contractual costs or operating restrictions.
- Near-term debt maturities, commercial-paper refinancing needs, and the effect of the Series A conversion on share count and per-share results.
- How investment valuations and discrete tax benefits affect reported earnings and the effective tax rate in future periods.