Danaher Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 1, 2022; comparable periods ended July 2, 2021. Unaudited results. Danaher reports Life Sciences, Diagnostics, and Environmental & Applied Solutions.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $7.751B | $7.218B | $15.439B | $14.076B |
| Operating profit | $2.205B | $2.005B | $4.377B | $4.002B |
| Net earnings from continuing operations | $1.680B | $1.699B | $3.405B | $3.401B |
| Diluted EPS from continuing operations | $2.25 | $2.28 | $4.56 | $4.57 |
| Gross margin | 60.9% | 60.9% | 61.1% | 61.5% |
| Operating margin | 28.4% | 27.8% | 28.4% | 28.4% |
- Sales growth: GAAP sales rose 7.5% in Q2 and 9.5% in H1. Core sales growth was 9.5% and 10.5%, respectively; acquisitions added 2.5% in each period, while currency translation reduced sales by 4.5% and 3.5%.
- Segment sales, Q2: Life Sciences $3.967B, up 6.0%; Diagnostics $2.561B, up 9.5%; Environmental & Applied Solutions $1.223B, up 6.5%. Core growth was 7.0%, 12.5%, and 10.0%, respectively.
- Earnings and margins: Operating profit increased in Q2 and H1, but continuing-operations diluted EPS declined modestly. Net investment losses (including unrealized losses) weighed on other income: $98M in Q2 and $122M in H1, versus gains of $86M and $202M in the prior-year periods. H1 gross margin declined 0.4 percentage points year over year.
- Cash flow: Operating cash flow from continuing operations was $3.968B in H1, compared with $3.991B. Capital expenditures were $546M; operating cash flow less capex was approximately $3.422B (calculated). Cash used in investing was $903M and cash used in financing was $1.434B.
- Liquidity and debt: Cash and equivalents were $3.984B at July 1, 2022, versus $2.586B at December 31, 2021. Total debt was $20.062B, down from $22.176B; net debt was approximately $16.078B (calculated). The company had a $5.0B revolving credit facility, reported covenant compliance, and stated its liquidity was sufficient for expected needs.
- Balance sheet: Total assets were $81.806B; current assets $13.229B and current liabilities $7.556B. Goodwill was $39.276B and other intangible assets $20.907B.
Material changes versus prior comparable periods
- Q2 core sales growth was broad-based, with developed-market core sales growth at a low-double-digit rate and high-growth-market growth at a mid-single-digit rate. China activity recovered toward more normalized levels by June after COVID-related restrictions.
- Diagnostics margin increased to 31.2% in Q2 from 27.8%, supported by sales growth, mix, productivity and acquired businesses. Life Sciences margin declined to 29.6% from 30.6%; Environmental & Applied Solutions rose to 25.1% from 24.4%.
- H1 continuing-operations net earnings were nearly flat, while common-stockholder net earnings were $3.342B versus $3.405B. Prior-year results included an $86M discontinued-operations tax benefit; there were no discontinued-operations earnings in 2022.
- Foreign currency translation losses reduced H1 comprehensive income: translation adjustments were negative $1.785B, versus negative $514M in H1 2021. Accumulated other comprehensive loss widened to $2.745B.
- H1 cash from operations was nearly unchanged despite higher cash tied up in working capital, particularly inventory. Cash used in investing fell from $2.060B to $903M, mainly because acquisition spending was lower.
Outlook, commentary, risks and unusual items
- Management outlook: Forecasts approximately $1.5B of 2022 capital expenditures and an approximately 19.5% effective tax rate for the remainder of 2022. No full-year revenue or EPS guidance is provided in the supplied filing text.
- Currency: At exchange rates prevailing on July 1, management estimated currency would reduce year-over-year second-half 2022 sales by about 4.0% and full-year sales by about 3.5%. The U.S. dollar continued strengthening after quarter-end, creating further potential pressure.
- Costs and supply: Supply-chain disruptions, shortages, shipping delays, inflation, labor availability and labor costs affected businesses. Management said productivity measures largely offset these pressures in the period, but continued monitoring them amid economic uncertainty and rising interest rates.
- COVID-19: China shutdowns affected some operations during Q2 before restrictions eased. Future pandemic effects remain uncertain, including demand for COVID-related testing and vaccine or therapy production products.
- Russia and Ukraine: Danaher suspended shipments to Russia except products for diagnosing and treating patients and producing vaccines and therapeutics. It recorded a $43M pretax charge in H1, primarily for receivable and inventory impairments and contractual obligations; further charges are possible. Russia represented approximately 1% of 2021 sales; Ukraine sales were described as de minimis.
- Other unusual items: A $9M Q2 impairment charge related to technology and customer relationships was recorded. H1 also included a $10M pension settlement loss. MCPS Series A converted into 11.0M common shares on April 15, 2022; Series B remains outstanding and is scheduled to convert in April 2023.
- Other risks: The filing identifies exposure to foreign exchange movements, inflation and supply constraints, pandemic developments, geopolitical events, acquisition integration, regulatory and legal matters, tax audits, debt and impairment risk. It reports no material change in market-risk disclosures and says disclosure controls were effective.
Important facts for investors to verify
- Whether core sales growth and Diagnostics’ COVID-related testing demand remain sustainable as comparisons and pandemic conditions change.
- Actual currency effects versus management’s July 1 estimates, particularly given subsequent dollar strength.
- Whether inflation, labor and supply-chain pressures continue to be offset by productivity, and how they affect segment and consolidated margins.
- Working-capital trends, especially inventory, and cash conversion relative to operating cash flow and planned capital spending.
- Potential additional Russia-related costs, developments in the conflict, and the status and resolution of disclosed tax audits and other contingencies.
- Debt maturities, commercial-paper access, liquidity needs, and the terms and conversion impact of the remaining Series B preferred stock.