Danaher Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 29, 2018; comparisons are with the corresponding 2017 periods. Unless noted, amounts are in U.S. dollars and reflect continuing operations.
Business context and performance
Danaher operates in Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. Management said demand increased across the company in Q2. Reported sales growth included acquisition and foreign-exchange effects; core growth excludes both.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $4,981m | $4,510m | $9,676m | $8,716m |
| Reported sales growth | 10.5% | — | 11.0% | — |
| Core sales growth | 6.0% | — | 5.5% | — |
| Operating profit | $868m | $677m | $1,611m | $1,294m |
| Operating margin | 17.4% | 15.0% | 16.6% | 14.8% |
| Net earnings from continuing operations | $674m | $557m | $1,240m | $1,041m |
| Diluted EPS from continuing operations | $0.95 | $0.79 | $1.75 | $1.48 |
| Gross margin | 56.6% | 55.0% | 56.4% | 55.3% |
In Q2, currency translation increased reported sales by about 2.5 percentage points and acquisitions contributed about 2.0 points. For the first half, the respective contributions were about 4.0 and 1.5 points. Management attributed improved margins mainly to sales volume, productivity and restructuring savings, and currency effects. Prior-year restructuring charges related to a discontinued product line also benefited the year-over-year comparison; Q2 2018 included acquisition-related costs and a gain on resolution of acquisition matters.
Q2 segment sales and operating profit were: Life Sciences $1,605m and $292m; Diagnostics $1,551m and $274m; Dental $733m and $105m; Environmental & Applied Solutions $1,092m and $251m. Dental’s first-half core sales declined 0.5%, and its operating margin fell to 11.1% from 14.7%; management cited weaker equipment and traditional consumables demand, distributor inventory reductions, pricing pressure, and growth investments.
Cash flow, debt and liquidity
- First-half operating cash flow was $1,865m, up from $1,571m. Capital expenditures were $292m; operating cash flow less capital expenditures was approximately $1,573m (calculated from reported figures).
- Investing activities used $2,365m, principally reflecting $2,068m paid for acquisitions. Financing activities provided $850m, including increased commercial-paper borrowing to help fund IDT.
- Cash and equivalents were $904m at June 29, 2018, versus $630m at year-end 2017. Current assets were $6,913m and current liabilities $4,605m.
- Total debt was $11,321m, including $3,355m of euro commercial paper; long-term debt was $11,146m. Debt increased from $10,522m at year-end, principally reflecting IDT financing. The company reported covenant compliance.
- Danaher had $4.0bn of revolving-credit capacity and a new $1.0bn 364-day facility; it reported approximately $1.6bn of additional borrowing capacity after supporting commercial paper. Management forecast adequate liquidity.
- Cash dividends paid in the first half were $209m. The Q2 declared dividend was $0.16 per share, a 14% increase year over year. No shares were repurchased in the first half.
Outlook, material developments and risks
- Management expected overall year-over-year sales growth to continue through the rest of 2018, while cautioning about macroeconomic and geopolitical uncertainty, including trade and tariffs. No specific full-year revenue or EPS guidance is provided in the filing. Full-year 2018 capital spending was forecast at approximately $700m.
- In April, Danaher acquired Integrated DNA Technologies (IDT) for approximately $2.1bn net of cash acquired, funded with cash and commercial paper. IDT had 2017 revenue of about $260m; approximately $1.1bn of goodwill was preliminarily recorded. Acquisition integration, dilution and valuation estimates remain relevant.
- In July 2018, after quarter-end, Danaher announced its intention to spin off Dental as a separate public company, targeting completion in the second half of 2019. Completion depends on board approval, financing, tax opinions and rulings, and regulatory approvals; the transaction may be delayed or not completed.
- Currency helped first-half reported sales, but management estimated that exchange rates prevailing at June 29 would reduce second-half 2018 sales by about 1% year over year. A $641m Q2 foreign-currency translation loss contributed to a steep decline in comprehensive income; it did not reduce reported net earnings.
- The effective tax rate was 19.3% in Q2 and 19.9% for the first half, versus 13.6% and 15.4% in 2017. The comparison reflects tax-law changes and differing discrete tax benefits. Danaher continued to assess TCJA and GILTI accounting; final effects could differ from provisional estimates.
- Denmark tax authorities assessed approximately $245m, including interest, for 2004–2009 withholding-tax matters; Danaher anticipated a further assessment of about $145m for 2010–2012. Management disputes the positions and is contesting them; resolution is uncertain and could materially affect results, including the tax rate.
- Other identified risks include acquisition integration, competition, regulation, foreign exchange, debt and market conditions. The filing reported effective disclosure controls and no material change to previously reported risk factors. A Clean Air Act matter was expected to settle for about $175,000 plus injunctive relief, with no material adverse effect expected.
Important facts for investors to verify
- Whether core growth and margin gains persist after separating acquisition, currency, prior-year restructuring and Q2 unusual-item effects.
- IDT’s contribution to revenue, earnings and cash generation, and the eventual purchase-price allocation and goodwill.
- Progress, financing, tax treatment and approvals for the proposed Dental separation.
- Commercial-paper refinancing capacity, debt maturities and leverage following the IDT acquisition.
- Developments in the Danish tax dispute, TCJA/GILTI estimates and the company’s effective tax rate.
- Second-half sales and foreign-exchange trends relative to management’s stated outlook.