Danaher Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 1, 2021; comparisons are with periods ended October 2, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Danaher operates in Life Sciences, Diagnostics, and Environmental & Applied Solutions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $7,229 | $5,884 | $21,305 | $15,524 |
| Gross profit / margin | $4,359 / 60.3% | $3,226 / 54.8% | $13,009 / 61.1% | $8,521 / 54.9% |
| Operating profit / margin | $1,309 / 18.1% | $1,088 / 18.5% | $5,311 / 24.9% | $2,630 / 16.9% |
| Net earnings from continuing operations | $1,158 | $883 | $4,559 | $2,405 |
| Diluted EPS from continuing operations | $1.54 | $1.16 | $6.10 | $3.22 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $6,025 | $3,994 |
Q3 sales grew 23.0% year over year; core sales grew 20.5%, with foreign exchange adding 1.5% and acquisitions net of divestitures adding 1.0%. Nine-month sales rose 37.0%; core sales grew 24.5% (27.0% including Cytiva), foreign exchange added 2.5%, and acquisitions net of divestitures added 10.0%. Recurring revenue was $5,419 million in Q3 and $15,818 million year to date.
Q3 segment sales and operating profit were: Life Sciences $3,632 million and $975 million; Diagnostics $2,449 million and $145 million; Environmental & Applied Solutions $1,148 million and $256 million. Life Sciences and Diagnostics sales grew strongly, including COVID-related demand; Diagnostics’ Q3 operating profit was particularly affected by the contract settlement described below.
Cash, debt, and liquidity
- At October 1, 2021, cash and equivalents were $2,552 million, down from $6,035 million at year-end 2020. Total debt was $23,598 million, including $4,069 million of commercial paper; long-term debt was $23,591 million. The company reported compliance with all debt covenants.
- Nine-month operating cash flow was $6,025 million. Capital expenditures were $874 million; operating cash flow less capital expenditures was approximately $5,151 million. Cash paid for acquisitions was $10,628 million, principally for Aldevron.
- Danaher has a $5.0 billion revolving credit facility expiring in 2024 that is available for direct borrowing and provides credit support for its commercial paper programs. Management said cash, operating cash flow, and other liquidity sources should meet short- and long-term needs.
- Cash dividends paid were $551 million in the first nine months. The filing forecasts 2021 capital spending of approximately $1.5 billion.
Material changes and unusual items
- On August 30, Danaher acquired Aldevron for approximately $9.6 billion in cash, financed with cash on hand and commercial paper. Aldevron joined Life Sciences; the acquisition added $6,078 million of goodwill and $3,514 million of identifiable intangible assets in the preliminary allocation.
- Q3 included a $547 million pretax contract settlement expense after Beckman Coulter modified and partially terminated a commercial arrangement with Quidel and resolved related litigation. The charge included $542 million that was noncash at recognition. The agreements provide for predominantly fixed payments of approximately $75 million annually through 2029; their present value was estimated at $581 million. The settlement permits Beckman to develop and sell BNP tests and distribute Quidel’s current BNP assay.
- Q3 operating margin declined to 18.1% from 18.5%, primarily because of the settlement charge, despite stronger volumes, favorable mix, productivity savings, and currency effects. Nine-month margin increased to 24.9% from 16.9%, reflecting growth and comparison with substantial 2020 Cytiva acquisition-related charges, partly offset by the 2021 settlement.
- Other income included $128 million of Q3 investment gains; nine-month investment gains were $330 million. These gains and an $86 million tax benefit from release of reserves related to former Fortive joint tax returns contributed to reported earnings and are not equivalent to recurring operating performance.
- Foreign currency translation reduced comprehensive income by $396 million in Q3 and $909 million for the first nine months. This affected equity through other comprehensive income rather than operating earnings.
Outlook, commentary, and risks
- Management expected core sales to grow in Q4 2021 versus the prior year, but at lower year-over-year rates than in the first nine months. It cited continued demand for COVID-related testing, vaccine and treatment development products, and recovery in non-COVID businesses; the timing and extent of pandemic effects remained uncertain.
- Management expected supply-chain and labor-availability pressures to continue. Certain components and commodities faced constraints, contributing to cost inflation and logistics delays. The filing also identifies potential effects from COVID-19, foreign exchange, competition, regulation, acquisitions and integration, and increased indebtedness.
- The company expected an effective tax rate of approximately 20.2% for the remainder of 2021. The nine-month reported rate was 17.3%, benefiting from discrete tax items.
- A Danish tax assessment concerning interest deductions for 2004–2015 totaled approximately DKK 2.1 billion, or $328 million at the period-end exchange rate. Danaher is contesting the assessment; management said it did not expect resolution to have a future material adverse effect, but the outcome and timing remain uncertain.
Important facts for investors to verify
- Whether Q4 and subsequent growth is supported by underlying non-COVID demand, and how COVID-related demand normalizes.
- The settlement’s ongoing cash-payment and financing treatment, and its effect on Diagnostics results and margins.
- Aldevron integration, final purchase-price allocation, goodwill and intangible-asset assumptions, and returns relative to the acquisition price.
- Commercial-paper refinancing and liquidity needs following the Aldevron acquisition, alongside planned capital spending and dividend commitments.
- How recurring earnings compare with results affected by investment gains, tax benefits, acquisition accounting adjustments, and other one-time items; and the eventual resolution of the Danish tax matter.