Danaher Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 28, 2019; comparisons are with the periods ended June 29, 2018. Danaher reports four segments: Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Sales | $5.157B | $4.981B | $10.037B | $9.676B |
| Core sales growth (non-GAAP) | 5.5% | — | 5.5% | — |
| Gross margin | 55.8% | 56.6% | 55.8% | 56.4% |
| Operating profit | $884M | $868M | $1.608B | $1.611B |
| Operating margin | 17.1% | 17.4% | 16.0% | 16.6% |
| Net earnings | $731M | $674M | $1.065B | $1.240B |
| Diluted EPS | $0.97 | $0.95 | $1.43 | $1.75 |
| Operating cash flow | Not separately provided | Not separately provided | $1.875B | $1.865B |
- Q2 reported sales rose 3.5%; currency reduced sales growth by 3.0 percentage points and acquisitions contributed 1.0 point negatively to the comparison. H1 reported sales also rose 3.5%, with a 3.5-point currency headwind and a 1.5-point acquisition impact.
- H1 operating cash flow less capital expenditures was approximately $1.538B ($1.875B less $337M), versus approximately $1.573B in the prior-year period. The company attributed essentially flat operating cash flow to working-capital and tax-payment timing, among other factors.
- At June 28, cash and equivalents were $5.434B; total debt was $10.298B, including $153.7M current and $10.144B long-term. Total current assets were $11.604B and current liabilities $5.008B. The $4.0B revolving credit facility had no outstanding borrowings; Danaher reported about $1.0B of additional borrowing capacity based on facility availability and commercial-paper backstop usage.
Material changes and segment trends
- Q2 revenue growth was broad-based, with core sales growth of 7.5% in Life Sciences and Diagnostics, 4.0% in Environmental & Applied Solutions, and a 0.5% decline in Dental. Dental sales fell 3.0% as reported.
- Life Sciences and Environmental & Applied Solutions expanded Q2 operating margins year over year; Diagnostics margin declined 20 basis points and Dental declined 310 basis points. Dental faced weaker pricing and higher sales and marketing investment.
- H1 net earnings fell $175M year over year, primarily because of $227M in net discrete tax charges ($0.31 per diluted share). H1 reported effective tax rate was 34.1%, versus 19.9% a year earlier. Q2’s effective rate was 18.4%, including $15M of net discrete tax benefits.
- Danaher raised approximately $3.0B net through March common-stock and mandatory-convertible-preferred offerings to help fund the pending GE Biopharma purchase. Cash rose from $788M at year-end to $5.434B, principally reflecting those offerings and financing activities.
Outlook, commentary, and significant items
- Management expected overall year-over-year sales growth for the remainder of 2019, while cautioning about macroeconomic and geopolitical uncertainty, including trade and tariffs. If June 28 exchange rates persisted, currency was expected to reduce full-year 2019 sales by approximately 1.5% year over year.
- Management forecast a 2019 effective tax rate of approximately 20% for the remainder of the year and capital expenditures of approximately $750M for full-year 2019. No specific full-year revenue or EPS guidance is stated in the provided filing text.
- The proposed GE Life Sciences Biopharma acquisition had an approximately $21.0B cash purchase price, plus assumption of approximately $0.4B of pension liabilities; closing was expected in Q4 2019, subject to customary conditions and regulatory approvals. Danaher expected to fund it with equity and preferred proceeds, debt or other borrowings, and cash on hand; it said it could incur up to approximately $18B of additional debt. The filing highlights execution, integration, leverage, credit-rating, and regulatory risks.
- Danaher intended to pursue an Envista IPO in the second half of 2019, subject to approvals and other conditions, and contemplated a later distribution of some or all remaining ownership. Neither the IPO nor a distribution was assured.
- Material tax contingencies include an IRS challenge to deferred self-insurance premium income that could increase taxable income for 2012–2015 by approximately $2.7B, and Danish withholding-tax assessments of about $262M for 2004–2009, with additional assessments anticipated for later years. Danaher disputed the positions; outcomes and timing were uncertain and could materially affect results and cash flows.
- The company recorded a $36M provision for a legal contingency in H1 ($29M after tax, or $0.04 per diluted share). Foreign-exchange translation losses were $57M in H1 2019, compared with $347M in H1 2018. Adoption of lease accounting added $971M of operating-lease right-of-use assets and $1.012B of lease liabilities at January 1, 2019; management said adoption did not significantly affect net earnings or cash flows.
Key investor verification points
- Track the GE Biopharma transaction’s regulatory progress, final financing mix, incremental debt, closing timing, and integration performance.
- Monitor resolution and potential cash or earnings consequences of the IRS and Danish tax disputes, including changes in reserves and effective tax rate.
- Check whether Envista’s planned IPO proceeds and any subsequent distribution occur, and assess associated costs and tax conditions.
- Evaluate Dental’s pricing, core sales, and margins, as well as whether growth and cost savings offset weaker gross margins, tariffs, freight costs, and currency effects.
- Reconcile cash-flow generation and working-capital movements against acquisition funding needs, capital spending, dividends, and debt maturities.