Danaher Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 28, 2018; comparative periods ended September 29, 2017. Financial statements are unaudited and generally reflect continuing operations. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $4.853B | $4.528B | $14.530B | $13.244B |
| Gross profit | $2.691B | $2.537B | $8.151B | $7.353B |
| Operating profit | $831M | $759M | $2.441B | $2.053B |
| Net earnings from continuing operations | $664M | $572M | $1.904B | $1.613B |
| Diluted EPS from continuing operations | $0.93 | $0.81 | $2.68 | $2.29 |
| Operating cash flow | Not separately presented for the quarter | $2.784B | $2.643B |
- Q3 sales grew 7.0% reported and 6.5% on a core basis; nine-month sales rose 9.5% reported and 6.0% core. Acquisitions contributed to reported growth, while currency reduced nine-month reported growth.
- Gross margin was 55.4% in Q3, down 60 basis points year over year; for nine months it was 56.1%, up 60 basis points. Operating margin increased 30 basis points in Q3 and 130 basis points year to date.
- Q3 segment sales were Life Sciences $1.597B, Diagnostics $1.503B, Dental $680M and Environmental & Applied Solutions $1.074B. Core growth was strongest in Life Sciences and Environmental & Applied Solutions; Dental core sales declined 0.5%.
- Q3 recurring revenue was $3.354B of total sales of $4.853B. The filing reports approximately $1.8B of remaining performance obligations; about 44% was expected to be recognized over the following 12 months.
Balance sheet, debt and liquidity
- At September 28, cash and equivalents were $776M, total debt was $10.618B, and stockholders’ equity was $27.685B. Cash less total debt implies net debt of approximately $9.842B.
- Cash increased from $630M at year-end 2017. Total debt increased from $10.522B; approximately $3.3B of euro commercial paper was classified as long-term based on the company’s stated intent and refinancing capacity.
- Nine-month investing cash use was $2.652B, including $2.173B for acquisitions; capital expenditures were $441M. Operating cash flow less capital expenditures was approximately $2.343B, versus $2.197B in the prior-year period.
- Danaher reported $4.0B of committed revolving credit capacity and a $1.0B 364-day facility; it said approximately $1.7B of additional borrowing capacity was available after considering commercial paper backstops. No borrowings were outstanding under either facility, and the company was in compliance with debt covenants.
Material developments and outlook
- Danaher acquired Integrated DNA Technologies (IDT) in April for approximately $2.1B net of cash acquired, financed with cash and commercial paper. The company also acquired another business for $95M. Acquisition cash spending was a major reason investing cash use rose sharply year over year.
- Danaher announced its intention to spin off Dental as a separate publicly traded company, targeting the second half of 2019. Completion is conditional on approvals, financing, tax opinions and other requirements; the transaction may be delayed or not completed.
- Management expected overall year-over-year sales growth to continue through the remainder of 2018, while citing macroeconomic and geopolitical uncertainty, including trade and tariff risks. At September 28 exchange rates, currency was expected to reduce Q4 sales by approximately 1.5% year over year. No specific full-year earnings or EPS guidance is provided in the supplied filing text.
- Management expected a Q4 2018 effective tax rate of approximately 20% and forecast full-year capital spending of about $675M. Forecast 2018 pension contributions were approximately $30M for U.S. plans and $50M for non-U.S. plans.
- Reported tax rates were 17.2% for Q3 and 19.0% year to date. Q3 included $23M of net tax benefits; year-to-date results also included $9M of second-quarter net tax benefits. These items supported reported earnings and may not recur.
- Foreign-currency translation losses were $162M in Q3 and $509M year to date, reducing comprehensive income. The U.S. dollar’s strength also weighed on Q3 reported sales.
Risks, contingencies and unusual items
- Danish tax authorities assessed approximately $247M, including interest, for withholding tax relating to 2004–2009 and Danaher anticipated a further assessment of approximately $146M for 2010–2012. The company disputes the positions; resolution is uncertain, could take years and could materially affect results.
- The company’s 2017 Tax Cuts and Jobs Act accounting included a provisional $1.2B transition-tax liability payable over eight years. Its analysis of certain tax provisions, including GILTI, was ongoing; final impacts could differ materially from provisional estimates.
- Management cited risks including economic and geopolitical conditions, tariffs, foreign exchange, competition, regulation, acquisition integration, product and technology execution, cybersecurity, supply constraints, litigation and indebtedness. It reported no material change to previously disclosed risk factors during the quarter.
- The 2017 comparative period included $22M of discontinued-operations tax benefit; 2018 had no discontinued-operations earnings. Prior-year operating comparisons were also affected by restructuring and impairment charges, while 2018 included IDT-related transaction and inventory fair-value charges.
Important facts for investors to verify
- Whether core growth and operating-margin improvement persist, particularly given Dental’s declining sales and margin pressure.
- IDT’s contribution to organic growth, margins and cash generation, and progress on integration and purchase-price allocation.
- The funding, approvals, tax treatment and timing of the proposed Dental spin-off.
- Commercial-paper refinancing and liquidity capacity, alongside the company’s debt balance and acquisition-related funding needs.
- Developments in the Danish tax dispute and finalization of Tax Cuts and Jobs Act and GILTI accounting.
- Whether management’s sales, Q4 tax-rate, capital-spending and pension-contribution expectations are achieved.