Danaher Corporation — Q3 2019 Form 10-Q
Reporting period: Third quarter ended September 27, 2019; nine-month results are compared with the periods ended September 28, 2018. Unaudited consolidated results include Envista, in which Danaher held an 80.6% controlling interest at quarter-end.
Business context and performance
Danaher operates across Life Sciences, Diagnostics, Dental/Envista, and Environmental & Applied Solutions. Management reported stronger demand across the portfolio, with Q3 core sales growth in both developed and high-growth markets; China was a key source of high-growth-market demand.
- Q3 sales were $5.04 billion, up 4.0% year over year; core sales grew 5.0%. For the first nine months, sales were $15.07 billion, up 3.5%, with core growth of 5.5%. Currency translation reduced reported sales growth by approximately 1.5 percentage points in Q3 and 3.0 points year to date.
- Q3 core sales growth by segment: Life Sciences 6.5%, Diagnostics 8.0%, Dental/Envista down 1.5%, and Environmental & Applied Solutions 2.0%. Year-to-date core growth was 7.0%, 7.0%, flat, and 4.0%, respectively.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $5,037 million | $4,853 million | $15,074 million | $14,530 million |
| Gross profit margin | 55.8% | 55.4% | 55.8% | 56.1% |
| Operating profit | $835 million | $831 million | $2,442 million | $2,441 million |
| Operating profit margin | 16.6% | 17.1% | 16.2% | 16.8% |
| Net earnings attributable to common stockholders | $648 million | $664 million | $1,684 million | $1,904 million |
| Diluted EPS | $0.89 | $0.93 | $2.32 | $2.68 |
- Q3 operating profit was nearly flat despite higher sales; margin fell 50 basis points. Management cited GE Biopharma transaction and integration-preparation costs, Envista IPO/separation costs, and acquired-business dilution. These were partly offset by volume, productivity savings, and currency effects.
- Year-to-date net earnings declined primarily because of $227 million of net discrete tax charges, or $0.31 per diluted share. The nine-month effective tax rate was 29.3%, versus 19.0% in 2018; Q3 rates were 20.1% and 17.2%, respectively.
- Operating cash flow for the first nine months was $2.84 billion, versus $2.78 billion. Investing activities used $972 million, including $331 million for acquisitions and $518 million of capital expenditures. Management forecast full-year 2019 capital spending of approximately $750 million.
- At September 27, cash and equivalents were $14.25 billion, versus $788 million at year-end 2018. Total debt was $17.60 billion, versus $9.74 billion; long-term debt was $16.54 billion. Debt includes Envista borrowings because Danaher continued to consolidate Envista. Approximately $2.9 billion of euro commercial paper was classified as long-term based on refinancing capacity and intent.
- Danaher reported compliance with debt covenants and approximately $7.1 billion of additional borrowing capacity under its credit facilities and commercial-paper support. The new facilities include a $5 billion five-year revolver and a $5 billion 364-day facility.
Material changes, outlook, and notable items
- Danaher completed Envista’s IPO in September, selling a 19.4% minority stake and receiving approximately $2.0 billion of consideration, including IPO and Envista debt proceeds. Danaher retained control and consolidated Envista. It may distribute some or all of its remaining Envista stake, but has no obligation or set timetable to do so.
- Danaher agreed to acquire GE’s Biopharma Business for approximately $21.0 billion in cash and assumption of approximately $0.4 billion in pension liabilities. Management expected closing in Q1 2020, subject to regulatory approvals and required divestitures. The business reported approximately $3.0 billion in 2018 revenue. Danaher had issued approximately $6.8 billion of euro-denominated notes and raised equity/preferred capital toward financing the transaction; it expected to incur approximately $7.0 billion of additional debt.
- Management expected overall year-over-year sales growth for the remainder of 2019, but cautioned about macroeconomic and geopolitical uncertainty. At then-current exchange rates, currency was expected to reduce full-year 2019 sales by approximately 2.5%. Management expected a tax rate of approximately 20% for the remainder of 2019.
- The company planned to redeem approximately $875 million principal amount of 2020 notes in Q4 2019 using Envista proceeds; expected make-whole premiums were $7 million pretax ($5 million after tax). The company also intended to use the remaining Envista consideration for quarterly dividends.
- Significant tax contingencies remain unresolved. The IRS proposed adjustments that would increase taxable income by approximately $2.7 billion for 2012–2015 relating to deferred self-insurance premium income. Danish authorities assessed approximately $408 million including interest for 2004–2012 withholding-tax matters, with a further approximately $108 million assessment anticipated for 2013–2015. Danaher disputes the positions; outcomes and timing are uncertain and could materially affect results and cash flows.
- Danaher recorded a $36 million provision for a legal contingency during the first nine months. Other risks include GE Biopharma closing, integration, financing and regulatory conditions; higher leverage and potential credit-rating effects; Envista separation-related liabilities; foreign exchange, trade/tariff and Brexit uncertainty. Management said Brexit’s ultimate impact was uncertain and described inventory and warehouse measures to mitigate potential disruption.
Investor verification priorities
- Track GE Biopharma regulatory approvals, divestiture conditions, expected closing, final funding mix, debt levels, and integration costs.
- Review the IRS and Danish tax disputes, related reserves, possible interest and tax-rate effects, and any developments in court or audit proceedings.
- Assess recurring operating performance and margins apart from transaction, Envista separation, legal, tax, currency, and acquisition-related effects.
- Confirm the timing and terms, if any, of a further Envista distribution, and the availability of cash held by Envista; $193 million of reported cash belonged to Envista.