Danaher Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended April 3, 2020; comparable period ended March 29, 2019. Amounts are in U.S. dollars unless noted. Financial statements are unaudited.
Business context
Danaher reports three continuing-operations segments: Life Sciences, Diagnostics, and Environmental & Applied Solutions. On March 31, 2020, it acquired GE’s Biopharma business, renamed Cytiva, for approximately $20.7 billion in cash and assumed approximately $0.4 billion of pension liabilities. Cytiva generated about $3.3 billion of revenue in 2019 and was included in Life Sciences, but contributed no results to Q1 because it closed near quarter-end.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $4,343 million | $4,220 million |
| Gross profit / margin | $2,443 million / 56.2% | $2,355 million / 55.8% |
| Operating profit / margin | $698 million / 16.1% | $720 million / 17.1% |
| Net earnings from continuing operations | $595 million | $332 million |
| Diluted EPS from continuing operations | $0.81 | $0.45 |
| Operating cash flow from continuing operations | $826 million | $713 million |
| Capital expenditures | $133 million | $140 million |
Q1 reported sales rose 3.0%; core revenue growth, a non-GAAP measure excluding acquired businesses and currency effects, was 4.5%. Recurring revenue was $3,207 million, versus $2,975 million. The effective tax rate was 16.3%, compared with 53.8%; the prior-year rate included $245 million of discrete tax charges, while Q1 2020 included $27 million of discrete tax benefits. The earnings comparison therefore reflects significant tax effects, not just operating performance.
At April 3, cash and equivalents were $4.37 billion, total debt was $25.97 billion (including $3.23 billion classified as current), and long-term debt was $22.74 billion. Current assets were $11.14 billion and current liabilities were $8.47 billion. Debt was up from $21.73 billion at year-end 2019. Q1 investing cash outflow was $20.87 billion, primarily due to the Cytiva purchase; financing cash inflow was $4.63 billion. The company reported compliance with debt covenants at quarter-end.
Material changes and segment performance
- Operating margin fell 100 basis points year over year. Cytiva transaction and integration-preparation costs reduced the comparison by about 100 basis points; impairment charges reduced it by about 20 basis points. Higher volumes and productivity savings provided a partial offset.
- Life Sciences sales were $1,650 million, up 1.5% reported and 2.5% core; operating profit was $326 million, with a 19.7% margin.
- Diagnostics sales were $1,627 million, up 6.0% reported and 8.0% core; operating profit was $251 million, with a 15.4% margin.
- Environmental & Applied Solutions sales were $1,066 million, up 1.0% reported and 2.5% core; operating profit was $240 million, with a 22.5% margin. Its operating margin declined 70 basis points.
- Cash declined from $19.91 billion at year-end, mainly reflecting the Cytiva acquisition. Goodwill increased to $33.73 billion from $22.71 billion, including $11.50 billion preliminarily recorded for Cytiva.
Outlook, risks and unusual items
- Management expected COVID-19 to have a greater negative effect on sales in Q2 than in Q1, particularly in North America and Western Europe, as shutdown measures expanded. Demand for COVID-19 testing, treatment and vaccine-related products was expected to partly offset broader weakness. The duration and financial impact were uncertain and could be material.
- Management forecast approximately $725 million of full-year 2020 capital spending, subject to business conditions, and an effective tax rate of approximately 19.5% for the remainder of 2020. No consolidated revenue or earnings guidance was provided in the filing.
- On April 30, 2020, Danaher completed the sale of most product lines required to be divested in connection with Cytiva for approximately $825 million cash; it expected to recognize a gain in Q2. The divested lines generated about $170 million of 2019 revenue.
- After quarter-end, Danaher borrowed $2.5 billion under its 364-day credit facility on April 7 and issued additional euro-denominated notes on April 8. As of May 1, approximately $3.4 billion of $5.0 billion in total credit-facility availability was being used to backstop commercial paper.
- Management identified risks from COVID-19 to customer demand, collections, supply chains, workforce and capital-market access, as well as integration, execution, goodwill and elevated-debt risks from Cytiva. Debt ratings were reduced two notches upon the acquisition’s closing; the filing states debt was approximately $27.5 billion as of May 1.
- Significant unresolved tax matters include an IRS challenge involving approximately $2.7 billion of proposed taxable-income adjustments for 2012–2015, and Danish withholding-tax assessments totaling approximately $524 million at the exchange rates cited in the filing. Danaher said it was contesting the matters; outcomes and potential financial effects remain uncertain.
Important facts for investors to verify
- Whether reported and core sales trends, COVID-19-related demand, and margins developed as management anticipated after Q1.
- Cytiva’s post-acquisition revenue, earnings, integration costs, realized synergies, and final purchase-price allocation; also the Q2 divestiture gain and proceeds.
- Debt, commercial-paper refinancing, credit-facility availability, interest expense, ratings and covenant headroom following the acquisition and subsequent financing.
- Operating cash conversion, receivable collections, inventory levels, and the ability to fund capital spending, dividends and debt service amid pandemic conditions.
- Developments in the IRS and Danish tax disputes, including any change to reserves, cash exposure or the effective tax rate.