Danaher Corporation (DHR) — Q3 2023 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 29, 2023, compared with the corresponding 2022 periods. Danaher reported Biotechnology, Life Sciences, Diagnostics and Environmental & Applied Solutions (EAS) segments. The EAS separation to Veralto closed September 30, one day after the quarter end; accordingly, this quarter’s results and balance sheet include EAS and Veralto-related balances. Danaher said Veralto would be classified as a discontinued operation beginning in Q4.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $6.873B | $7.663B | $21.197B | $23.102B |
| Gross profit / margin | $4.000B / 58.2% | $4.584B / 59.8% | $12.411B / 58.6% | $14.010B / 60.6% |
| Operating profit / margin | $1.438B / 20.9% | $2.015B / 26.3% | $4.661B / 22.0% | $6.392B / 27.7% |
| Net earnings | $1.129B | $1.572B | $3.685B | $4.977B |
| Diluted EPS | $1.51 | $2.10 | $4.94 | $6.67 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $5.545B | $5.978B |
| Capital expenditures | Not presented for quarter | Not presented for quarter | $981M | $823M |
Unless noted, amounts are U.S. dollars. Sales declined 10.5% in Q3 and 8.0% year to date on a reported basis; core sales declined 11.5% and 7.5%, respectively. Price increases contributed 3.0% to sales growth in both periods, while Q3 currency translation increased reported sales by 0.5% and year-to-date translation reduced them by 1.0%.
Financial position and liquidity
- At September 29, cash and equivalents were $12.277B, versus $5.995B at December 31, 2022. Current assets were $21.205B and current liabilities $9.367B.
- Total debt was $22.060B, including $2.604B of Veralto debt consolidated before the separation; $2.547B was classified as current. Long-term debt was $19.513B. The debt balance included €1.9B of commercial paper outstanding. Danaher reported compliance with its debt covenants.
- Cash from operations was down $433M, or 7%, year over year for the first nine months. Cash provided by financing activities was $1.973B, including the approximately $2.6B distribution funded by Veralto debt issuance. Investing activities used $1.064B.
- Interest expense rose to $73M for Q3 and $208M year to date; interest income increased to $79M and $186M, respectively.
Material changes and operating trends
- Biotechnology sales fell 19% in Q3 and 17% year to date; core sales fell 21% and 16.5%. Management cited lower COVID-related demand, bioprocessing customer destocking, and weaker demand in China, where funding conditions and activity levels deteriorated. Segment operating margin fell to 25.1% in Q3 from 33.7%.
- Diagnostics sales declined 16% in Q3 and 13% year to date, mainly reflecting lower COVID-19 molecular testing demand. Clinical diagnostics grew, including more than 20% Q3 growth in non-respiratory disease tests. Q3 segment margin declined to 23.9% from 28.4%.
- Life Sciences Q3 sales decreased 1% and core sales decreased 2.5%; year-to-date sales increased 2.5%. Management described weaker pharma and biopharma demand and lower COVID-related sales, partly offset by strength in research, academic and applied end-markets. Q3 margin declined to 18.3% from 20.5%.
- EAS sales increased 3.5% in both periods, while core sales rose 1.0% in Q3 and 3.0% year to date. The segment remained part of Danaher’s reported results through September 29; it was separated effective September 30.
Consolidated Q3 operating margin contracted 540 basis points. Management attributed most of the decline to lower core sales, mix and reduced cost leverage; separation preparation costs, impairment charges and acquired-business dilution also weighed on margins. Year-to-date margin fell 570 basis points. Q2 2023 cost of sales included $87M of charges, primarily excess Biotechnology inventory.
Outlook, management commentary and risks
- Management expected COVID-related vaccine and therapeutics demand to decline further in Q4 2023 versus Q4 2022; testing-product demand could fluctuate with case levels. It said lower Biotechnology demand and customer inventory reductions were expected to continue at least through year-end.
- Management forecast 2023 capital spending of approximately $1.5B, excluding spending for businesses contributed to Veralto. It expected an approximately 18.5% effective tax rate for the remainder of 2023, subject to earnings mix and other variables.
- Danaher agreed to acquire Abcam for approximately $5.7B, including assumed indebtedness and net of acquired cash, subject to regulatory and shareholder approvals. It expected to fund the purchase with cash and/or commercial paper.
- The company reported $12.3B of cash and said liquidity, including operating cash flow and available funding sources, was sufficient for its expected needs. It planned to use part of the Veralto distribution for upcoming debt maturities and part to help fund regular dividends. The $5.0B Danaher revolving credit facility expires in August 2028; no borrowings were outstanding under it at quarter end.
- Management cited risks from ongoing COVID-related demand normalization, tighter credit conditions affecting emerging biotech customers, competition, currency movements, supply-chain and labor costs, regulation, and execution and approval risks for acquisitions and separations. Danaher was monitoring the Israel conflict and did not expect a material business impact as of the report date. The IRS settlement concerning proposed 2016–2018 self-insurance tax adjustments was not material; other audit matters remained open.
- Unusual and nonrecurring items included $101M of EAS separation costs year to date, impairment charges, and investment losses. The nine-month period also included a $46M impairment of equity-method investments. Danaher reported no material changes to its critical accounting estimates and said disclosure controls were effective.
Most important facts for investors to verify
- How the Veralto separation affects Danaher’s post-separation revenue base, cash, debt, costs and discontinued-operations presentation; the September 29 balance sheet still includes Veralto debt.
- Whether Biotechnology and Diagnostics demand stabilizes as COVID-related sales and customer inventory adjustments continue to normalize.
- Abcam transaction approvals, closing timing, purchase financing and subsequent impact on leverage and liquidity.
- Whether operating margins and cash generation recover after the steep Q3 decline, and how much of the margin pressure reflects lower volumes versus temporary separation, inventory and impairment costs.
- Debt maturities, commercial-paper refinancing and the use of Veralto distribution proceeds; assess reported debt in light of the separation-related balances.