Danaher Corporation — Form 10-Q Summary
Reporting period: Third quarter ended October 2, 2020, and nine months ended October 2, 2020; comparisons are to the periods ended September 27, 2019. Danaher reports three segments: Life Sciences, Diagnostics, and Environmental & Applied Solutions. Results are for continuing operations unless noted.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $5.883 billion | $4.378 billion | $15.524 billion | $13.043 billion |
| Operating profit | $1.088 billion | $776 million | $2.630 billion | $2.308 billion |
| Operating margin | 18.5% | 17.7% | 16.9% | 17.7% |
| Gross margin | 54.8% | 55.8% | 54.9% | 55.8% |
| Net earnings from continuing operations | $884 million | $631 million | $2.406 billion | $1.639 billion |
| Diluted EPS from continuing operations | $1.16 | $0.84 | $3.22 | $2.20 |
| Operating cash flow from continuing operations | Not separately provided for the quarter | Not separately provided for the quarter | $3.994 billion | $2.662 billion |
- Q3 reported revenue rose 34.5%; core sales grew 9.0%, or 14.0% including Cytiva. For the nine-month period, reported revenue rose 19.0%; core sales grew 4.5%, or 7.5% including Cytiva.
- Q3 segment revenue: Life Sciences $2.923 billion, Diagnostics $1.889 billion, Environmental & Applied Solutions $1.072 billion. Nine-month segment revenue was $7.215 billion, $5.176 billion, and $3.132 billion, respectively.
- Q3 Life Sciences operating margin fell to 17.3% from 20.2%, principally reflecting Cytiva-related purchase-accounting charges. Diagnostics margin improved to 21.6% from 16.6%; Environmental & Applied Solutions margin decreased to 22.9% from 23.7%.
- At October 2, cash and equivalents were $5.688 billion, versus $19.912 billion at year-end 2019. Total debt was $21.826 billion, including $21.806 billion long-term debt; current debt was $20 million. The filing reports compliance with debt covenants and approximately $5.6 billion of available credit-facility capacity after commercial-paper backstops.
- Total assets were $72.891 billion and stockholders’ equity was $37.973 billion. Goodwill was $34.270 billion and net intangible assets were $20.854 billion.
Material changes and unusual items
- Danaher acquired GE Life Sciences’ biopharma business, renamed Cytiva, on March 31, 2020, for approximately $20.7 billion net of acquired cash and assumed approximately $0.4 billion of pension liabilities. Cytiva contributed materially to reported growth and is included in Life Sciences results beginning in Q2.
- To obtain regulatory approval for the acquisition, Danaher sold product lines for net proceeds of $826 million and recognized a $455 million pretax gain ($305 million after tax, or $0.42 per diluted share) in Q2. The gain increased nine-month reported earnings and is not a discontinued operation.
- Cytiva-related inventory fair-value adjustments reduced gross margin by approximately 380 basis points in Q3 and 280 basis points for the nine-month period. Acquisition-related inventory and deferred-revenue adjustments, transaction costs, and integration preparation also weighed on operating-margin comparisons. The filing reports $417 million of inventory step-up amortization for the first nine months.
- Nine-month operating cash flow increased about 50% year over year. Investing cash use was $20.658 billion, primarily reflecting acquisitions. Financing cash provided was $2.426 billion; financing included debt activity and May common- and preferred-stock offerings that generated net proceeds of approximately $1.73 billion and $1.67 billion, respectively.
- Effective tax rates were 13.5% for Q3 and 18.5% for the first nine months, compared with 19.8% and 29.6%. The company settled its 2012–2015 IRS audit in Q3 without a material financial-statement impact; later tax years remain subject to review.
Outlook, management commentary, and risks
- Management expected core sales, both excluding and including Cytiva, to grow in Q4 versus the prior year, assuming pandemic conditions continued to moderate and restrictions did not materially worsen. It gave no specific numerical sales-growth guidance in the filing.
- COVID-19-related demand contributed approximately 1,000 basis points to Q3 core revenue growth including Cytiva. Management expected related demand to continue at least into Q4, but anticipates it may subside as the pandemic does. COVID-19 also depressed other businesses, including through reduced elective procedures, patient visits, research activity, and equipment demand. Management noted sequential improvement from Q2 to Q3 and no significant supply-chain disruption to date.
- Management forecast approximately $800 million of full-year 2020 capital spending and an effective tax rate of approximately 19.6% for the remainder of 2020. Forecasts remain subject to business conditions and tax-related factors.
- COVID-19 risks include renewed restrictions, weaker demand, collection delays or uncollectible receivables, supply-chain constraints and cost increases, capacity limitations, cybersecurity threats, and uncertain demand for the company’s testing and vaccine-support products. The filing also highlights Cytiva integration, acquisition-related impairment, and leverage and refinancing risks.
- Danaher disclosed Danish withholding-tax assessments of approximately $581 million in aggregate, including interest, for periods 2004–2015. The company is appealing and vigorously defending its position; the outcome and potential financial impact are uncertain. It also noted that the IRS may raise similar self-insurance premium issues for years after 2015.
- After quarter-end, Danaher issued $1.0 billion of 2.6% notes due 2050 and announced redemption of €800 million of 2022 notes. The expected make-whole premium is approximately $19 million after tax and is to be recorded in Q4.
Important facts for investors to verify
- How much of reported growth and earnings is sustainable after Cytiva acquisition effects, purchase-accounting charges, and the product-line sale gain.
- Whether COVID-19-related demand persists and whether demand in non-COVID research, clinical diagnostics, and equipment markets continues to recover.
- Cash conversion and working-capital trends, particularly inventory growth and receivables collection, alongside acquisition-related debt and refinancing needs.
- Progress integrating Cytiva, realizing expected growth and synergies, and managing the resulting goodwill and intangible-asset impairment exposure.
- Developments in Danish tax appeals and U.S. tax audits, and any resulting changes to cash taxes, tax reserves, or earnings.