Danaher Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended July 3, 2020; comparisons are with periods ended June 28, 2019. Danaher reports Life Sciences, Diagnostics, and Environmental & Applied Solutions. Financial statements are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $5.297bn | $4.445bn | $9.641bn | $8.665bn |
| Gross profit | $2.853bn | $2.484bn | $5.295bn | $4.839bn |
| Gross margin | 53.8% | 55.9% | 54.9% | 55.8% |
| Operating profit | $845m | $812m | $1.542bn | $1.531bn |
| Operating margin | 15.9% | 18.3% | 16.0% | 17.7% |
| Net earnings from continuing operations | $927m | $676m | $1.522bn | $1.009bn |
| Diluted EPS from continuing operations | $1.24 | $0.90 | $2.06 | $1.36 |
| Operating cash flow from continuing operations | Not separately stated | Not separately stated | $2.271bn | $1.769bn |
- Q2 reported sales increased 19.0%, substantially reflecting Cytiva, acquired March 31. Core sales declined 0.5%; core sales including Cytiva grew 3.5%. For the first half, reported sales rose 11.5%, core sales rose 2.0%, and core sales including Cytiva rose 4.0%.
- Q2 earnings included a $455m pretax ($305m after-tax; $0.42 per diluted share) gain on divested product lines required for Cytiva regulatory approval. The gain was reported outside operating profit, so reported net earnings growth is not solely reflective of ongoing performance.
- Margins were pressured by Cytiva acquisition accounting adjustments and transaction costs: acquisition-related inventory and deferred-revenue fair-value adjustments reduced Q2 operating-margin comparisons by 400 basis points companywide. The adjustments reduced gross-margin comparisons by about 400 basis points in Q2 and 220 basis points for the first half.
- By segment, Q2 sales were $2.642bn in Life Sciences, $1.660bn in Diagnostics, and $995m in Environmental & Applied Solutions. Segment operating profit was $412m, $293m, and $222m, respectively. Diagnostics core sales grew 5%; Life Sciences core sales including Cytiva grew 8%; Environmental & Applied Solutions core sales declined 8.5%.
Cash, debt and liquidity
- At July 3, cash and equivalents were $5.539bn, versus $19.912bn at year-end 2019. Current assets were $12.344bn and current liabilities $5.600bn.
- Total debt was $22.387bn, versus $21.729bn at December 31, 2019; long-term debt was $22.370bn. The company reported compliance with debt covenants. It had approximately $4.5bn available under credit facilities and said it expected cash, operating cash flow and other liquidity sources to meet needs.
- Six-month investing cash outflow was $20.329bn, principally the $20.736bn cash consideration for Cytiva. Financing activities provided $3.746bn. Cash fell by $14.373bn over the six months, primarily reflecting the acquisition and related funding flows.
- Six-month capital expenditures were $288m; management forecast approximately $800m for full-year 2020, subject to business conditions. Interest expense was $126m for the first half, up from $40m a year earlier, largely due to higher debt.
- Danaher raised approximately $1.73bn from common stock and $1.67bn from Series B mandatory convertible preferred stock in May. The preferred stock carries a 5.00% cumulative dividend and is scheduled to mandatorily convert in April 2023.
Outlook, commentary and risks
- Management expected core sales and core sales including Cytiva to grow in Q3 2020, assuming pandemic impacts lessen and stay-at-home restrictions continue to lift. No specific full-year sales or earnings guidance was provided.
- COVID-19 drove strong demand in molecular diagnostics, acute-care testing, and bioprocessing, including Cytiva; reduced elective procedures, non-COVID research activity, and equipment purchases weighed on other businesses. Management said it had not experienced significant supply-chain disruptions to date, but described future effects as highly uncertain and potentially material.
- Management expected a 19.5% effective tax rate for the remainder of 2020, subject to earnings mix, tax contingencies, and other discrete items. Currency rates, if unchanged from July 3 levels, were expected to reduce full-year 2020 sales by about 1% year over year.
- Tax disputes remain significant contingencies. The IRS proposed adjustments that would increase taxable income by approximately $2.7bn for 2012–2015; Danaher is defending its position. Danish assessments for withholding tax, including interest, totaled approximately $553m across the cited tax years; appeals are pending, and the ultimate outcome and financial effect are uncertain.
- Other principal risks include COVID-19 impacts on demand, collections, supply chains and capital markets; integrating Cytiva and realizing expected benefits; higher debt and potentially lower credit ratings; impairment risk on goodwill and intangibles; and regulatory, competitive, foreign-exchange, and litigation exposures.
Most important facts for investors to verify
- Underlying earnings and margins excluding the $455m divestiture gain and Cytiva-related purchase-accounting and transaction charges.
- Cytiva’s ongoing growth, integration costs, realized synergies, purchase-price allocation, and contribution to Life Sciences results.
- COVID-19’s changing effects on testing and bioprocessing demand versus elective care, research activity, and equipment sales.
- Debt repayment plans, borrowing costs, refinancing access, and liquidity as acquisition-related cash balances and commercial paper needs change.
- Progress and potential exposure in the IRS and Danish tax disputes, including any updates to assessments or reserves.