DANAHER CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide a reader of Danaher Corporation's
("Danaher," the "Company," "we," "us" or "our") financial statements with a
narrative from the perspective of Company management. The Company's MD&A is
divided into five sections:
• Information Relating to Forward-Looking Statements
• Overview
• Results of Operations
• Liquidity and Capital Resources
• Critical Accounting Estimates
You should read this discussion along with the Company's MD&A and audited financial statements as of and for the year endedDecember 31, 2019 and Notes thereto, included in the Company's 2019 Annual Report on Form 10-K ("2019 Form 10-K") and the Company's Consolidated Condensed Financial Statements and related Notes as of and for the three and six-month periods endedJuly 3, 2020 included in this Report. Unless otherwise indicated, all financial results in this report refer to continuing operations. INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to theSecurities and Exchange Commission , in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are "forward-looking statements" within the meaning ofthe United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management's plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions and the integration thereof (including the integration of the acquisition of the Biopharma business of General Electric Company's ("GE") Life Sciences division, now known as Cytiva (the "Cytiva Acquisition")), divestitures, spin-offs, split-offs or other distributions, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; future regulatory approvals and the timing and conditionality thereof; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; future foreign currency exchange rates and fluctuations in those rates; the potential or anticipated direct or indirect impact of COVID-19 on our business, results of operations and/or financial condition; general economic and capital markets conditions; the anticipated timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that Danaher intends or believes will or may occur in the future. Terminology such as "believe," "anticipate," "should," "could," "intend," "will," "plan," "expect," "estimate," "project," "target," "may," "possible," "potential," "forecast" and "positioned" and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that in some cases have affected us in the past and that in the future could cause actual results to differ materially from those envisaged in the forward-looking statements include the following: • The COVID-19 pandemic has adversely impacted, and poses risks to, our
business, results of operations and financial condition, the nature and
extent of which remain highly uncertain and unpredictable.
• The Cytiva Acquisition could negatively impact our business, results of
operations and financial condition.
• Our outstanding debt has increased significantly as a result of the Cytiva
Acquisition and we may incur additional debt in the future. Our existing and
future indebtedness may limit our operations and our use of our cash flow and
negatively
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impact our credit ratings; and any failure to comply with the covenants that apply to our indebtedness could adversely affect our liquidity and financial statements. • Conditions in the global economy, the particular markets we serve and the
financial markets can adversely affect our business and financial statements.
• Significant developments or uncertainties stemming from the
administration, including changes in
reaction of other countries thereto, particularly
effect on our business.
• Our growth could suffer if the markets into which we sell our products and
services decline, do not grow as anticipated or experience cyclicality.
• We face intense competition and if we are unable to compete effectively, we
can experience decreased demand and decreased market share. Even when we
compete effectively, we can be required to reduce prices for our products and
services.
• Our growth depends in part on the timely development and commercialization,
and customer acceptance, of new and enhanced products and services based on
technological innovation.
• Our reputation, ability to do business and financial statements can be
impaired by improper conduct by any of our employees, agents or business
partners.
• Certain of our businesses are subject to extensive regulation by the
as well as laws regulating fraud and abuse in the health care industry and
the privacy and security of health information. Failure to comply with those
regulations can adversely affect our reputation, ability to do business and
financial statements.
• Our products are subject to clinical trials, the results of which may be
unexpected, or perceived as unfavorable by the market, and could have a
material adverse effect on our business, financial condition or results of
operations.
• Off-label marketing of our products could result in substantial penalties.
• Certain modifications to our products can require new 510(k) clearances or
other marketing authorizations and can require us to recall or cease
marketing our products.
• The health care industry and related industries that we serve have undergone,
and are in the process of undergoing, significant changes in an effort to
reduce costs, which can adversely affect our financial statements.
• Any inability to consummate acquisitions at our historical rate and at
appropriate prices, and to make appropriate investments that support our
long-term strategy, could negatively impact our growth rate and stock price.
• Our acquisition of businesses, investments, joint ventures and other
strategic relationships can negatively impact our financial statements.
• The indemnification provisions of acquisition agreements by which we have
acquired companies may not fully protect us and as a result we may face
unexpected liabilities.
• Divestitures or other dispositions could negatively impact our business and
contingent liabilities from businesses that we or our predecessors have
disposed could adversely affect our financial statements.
• We could incur significant liability if any of the 2015 separation and
split-off of our communications business, the 2016 separation and spin-off of
Fortive Corporation ("Fortive") or the 2019 separation, initial public
offering ("IPO") and split-off of Envista Holdings Corporation ("Envista") is
determined to be a taxable transaction.
• Potential indemnification liabilities pursuant to the 2015 separation and
split-off of our communications business, the 2016 separation and spin-off of
Fortive or the 2019 separation, IPO and split-off of Envista could materially
and adversely affect our business and financial statements.
• A significant disruption in, or breach in security of, our information
technology systems or data or violation of data privacy laws can adversely
affect our business, reputation and financial statements.
• Our operations, products and services expose us to the risk of environmental,
health and safety liabilities, costs and violations that can adversely affect
our business, reputation and financial statements.
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• Our businesses are subject to extensive regulation; failure to comply with
those regulations can adversely affect our financial statements and our
business, including our reputation.
• Our restructuring actions can have long-term adverse effects on our business.
• We may be required to recognize impairment charges for our goodwill and other
intangible assets.
• Foreign currency exchange rates can adversely affect our financial statements.
• Changes in our tax rates or exposure to additional income tax liabilities or
assessments can affect our profitability. In addition, audits by tax
authorities can result in additional tax payments for prior periods.
• Changes in tax law relating to multinational corporations could adversely
affect our tax position.
• We are subject to a variety of litigation and other legal and regulatory
proceedings in the course of our business that can adversely affect our
business and financial statements.
• If we are unable to adequately protect our intellectual property, or if third
parties infringe our intellectual property rights, we can suffer competitive
injury or expend significant resources enforcing our rights. These risks are
particularly pronounced in countries in which we do business that do not have
levels of protection of intellectual property comparable to the United
States.
• Third parties from time to time claim that we are infringing or
misappropriating their intellectual property rights and we can suffer
significant litigation expenses, losses or licensing expenses or be prevented
from selling products or services.
• The
intellectual property that we license and could exclusively license it to a
third party if we fail to achieve practical application of the intellectual
property.
• Defects and unanticipated use or inadequate disclosure with respect to our
products or services (including software), or allegations thereof, can
adversely affect our business, reputation and financial statements.
• The manufacture of many of our products is a highly exacting and complex
process, and if we directly or indirectly encounter problems manufacturing
products, our reputation, business and financial statements can suffer.
• Adverse changes in our relationships with, or the financial condition,
performance, purchasing patterns or inventory levels of, key distributors and
other channel partners can adversely affect our financial statements.
• Certain of our businesses rely on relationships with collaborative partners
and other third parties for development, supply and marketing of certain
products and potential products, and such collaborative partners or other
third parties can fail to perform sufficiently.
• Our financial results are subject to fluctuations in the cost and
availability of commodities that we use in our operations.
• If we cannot adjust our manufacturing capacity or the purchases required for
our manufacturing activities to reflect changes in market conditions and
customer demand, our profitability may suffer. In addition, our reliance upon
sole or limited sources of supply for certain materials, components and
services can cause production interruptions, delays and inefficiencies.
• Changes in laws or governmental regulations can reduce demand for our
products or services or increase our expenses.
• Work stoppages, union and works council campaigns and other labor disputes
could adversely impact our productivity and results of operations.
• International economic, political, legal, compliance and business factors
could negatively affect our financial statements.
• The
effect on us.
• If we suffer loss to our facilities, supply chains, distribution systems or
information technology systems due to catastrophe or other events, our
operations could be seriously harmed.
• Our defined benefit pension plans are subject to financial market risks that
could adversely affect our financial statements.
See Part I-Item 1A of the Company's 2019 Form 10-K and Part II-Item 1A of each of this report and the Company's Quarterly Report on Form 10-Q for the quarter endedApril 3, 2020 ("First Quarter 2020 Form 10-Q") for further discussion 32
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regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. Except to the extent required by applicable law, we do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
OVERVIEW
General
As a result of the Company's geographic and industry diversity, the Company faces a variety of opportunities and challenges, including rapid technological development (particularly with respect to computing, automation, artificial intelligence, mobile connectivity, communications and digitization) in most of the Company's served markets, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force, consolidation of the Company's competitors and increasing regulation. The Company operates in a highly competitive business environment in most markets, and the Company's long-term growth and profitability will depend in particular on its ability to expand its business in high-growth geographies and high-growth market segments, identify, consummate and integrate appropriate acquisitions, develop innovative and differentiated new products and services with higher gross profit margins, expand and improve the effectiveness of the Company's sales force, continue to reduce costs and improve operating efficiency and quality, and effectively address the demands of an increasingly regulated environment. The Company is making significant investments, organically and through acquisitions, to address the rapid pace of technological change in its served markets and to globalize its manufacturing, research and development and customer-facing resources (particularly in high-growth markets) in order to be responsive to the Company's customers throughout the world and improve the efficiency of the Company's operations. The COVID-19 Pandemic The global spread of a novel strain of coronavirus (COVID-19) has led to unprecedented restrictions on, and disruptions in, business and personal activities, including as a result of preventive and precautionary measures that we, other businesses, our communities and governments have taken and are taking to mitigate the spread of the virus and to manage its impact. The Company continues to actively monitor the pandemic and has taken and intends to continue taking steps to identify and mitigate the adverse impacts on, and risks to, the Company's business (including but not limited to its employees, customers, business partners, manufacturing capabilities and capacity, and supply and distribution channels) posed by the spread of COVID-19 and the governmental and community responses thereto. The Company's businesses have activated their business continuity plans as a result of this pandemic, including taking steps in an effort to help keep our workforce healthy and safe, and are assessing and updating those plans on an ongoing basis. As a result of COVID-19 the Company's businesses have modified certain of their respective business practices (including in many cases with respect to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and the Company expects to take such further actions as may be required by government authorities or as determined to be in the best interests of our employees, customers and other business partners. The Company has developed return-to-work protocols designed to help ensure the health and safety of its employees, customers and business partners, for its businesses to apply as and when return-to-work is legally permissible and deemed appropriate. We are also working with our suppliers to understand the existing and potential future negative impacts to our supply chain and take actions in an effort to mitigate such impacts. To date we have not experienced any significant supply chain disruptions. We are also deploying our capabilities, expertise and scale to address the critical health needs related to COVID-19. We have developed and made available a diagnostic test for the rapid detection of COVID-19 and a diagnostic test that can detect antibodies in blood to confirm current or past exposure to COVID-19. In addition, our businesses are providing critical support to firms that are seeking to develop and produce a vaccine for COVID-19, among other support. As further discussed below, while COVID-19 has positively impacted revenues for certain of our businesses, the pandemic and response thereto had an overall negative material impact on our revenues and profitability in the first half of 2020 and the global demand for many of our products and services may remain depressed at least in the near-term if not longer. As noted below and subject to the assumptions discussed below, the Company expects core sales and core sales including Cytiva to grow in the third quarter of 2020 compared to the prior year. However, due to the speed with which the COVID-19 situation continues to evolve, the global breadth of its spread, the range of governmental and community responses thereto and our geographic and business line diversity, its further impact on our business remains highly uncertain, but may be materially negative and will depend on future developments including: • the duration of the weaker macroeconomic environment and the timing and
extent of recovery in the global demand for our products and services;
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• the pace at which medical providers resume patient care and testing that
is not related to the COVID-19 pandemic, the timing of when research
performed by laboratories and other institutions return to normal levels,
and payment and funding dynamics related to the foregoing; and
• the development and rate of adoption of the products we are offering to
help address the pandemic and the effects thereof; competitive product
launches and related pricing pressure; impacts from changes in the mix of
our product offerings; and the degree to which COVID-19 testing solutions
and any vaccines are made available and utilized.
Business Performance and Outlook During the second quarter of 2020, the Company's overall revenues increased 19.0% compared to the comparable period of 2019. The acquisition of Cytiva contributed 21.5% to the increase in revenues in the second quarter of 2020. Year-over-year core sales decreased 0.5% compared to the prior period while core sales including Cytiva increased 3.5% year-over-year during the second quarter of 2020. Several businesses benefited from demand for products and services in response to the COVID-19 pandemic, led by the molecular diagnostics business within the diagnostic segment and led by bioprocessing in the filtration, separation and purification technologies business and at Cytiva in the life sciences segment. Cytiva's core sales grew more than 20% reflecting strength in its served markets and its support in helping its customers develop and potentially produce a vaccine for COVID-19. The strong performances in these businesses were largely offset by decreased demand in the Company's instrument related businesses. For the six-month period endedJuly 3, 2020 , overall revenues increased by 11.5%. The acquisition of Cytiva contributed 11.0% to the increase in revenues in the six-month period. Core sales increased 2.0% in the six-month period endedJuly 3, 2020 compared to the prior period, as a result of the same factors which drove core sales for the second quarter of 2020. For the six-month period, core sales including Cytiva increased 4.0%, which include the results of Cytiva beginning with the second quarter of 2020. For the definition of "core sales" and "core sales including Cytiva" refer to "-Results of Operations" below. Geographically, the Company saw increases in core sales including Cytiva in both developed markets and the high-growth markets. Developed markets grew at a mid-single digit rate during the second quarter of 2020 compared to the second quarter of 2019, with both led primarily by increases inNorth America andWestern Europe , while high-growth markets increased slightly during the second quarter of 2020 as compared to the comparable period of 2019, driven primarily by increases inChina and theMiddle East , partially offset by the impact of the COVID-19 pandemic and the response thereto in other high-growth markets. High-growth markets represented approximately 30% of the Company's total sales in the second quarter of 2020. For additional information regarding the Company's sales by geographical region during the three and six-month periods endedJuly 3, 2020 andJune 28, 2019 , refer to Note 2 to the accompanying Consolidated Condensed Financial Statements. The Company's net earnings from continuing operations for the three and six-month periods endedJuly 3, 2020 totaled$927 million and approximately$1.5 billion , respectively, compared to$676 million and approximately$1.0 billion for the three and six-month periods endedJune 28, 2019 . Net earnings attributable to common stockholders for the three and six-month periods endedJuly 3, 2020 totaled$893 million or$1.24 per diluted common share and approximately$1.5 billion or$2.06 per diluted common share, respectively, compared to$709 million or$0.97 per diluted common share and approximately$1.0 billion or$1.43 per diluted common share for the three and six-month periods endedJune 28, 2019 , respectively. The provision for uncertain tax positions recorded in the first quarter of 2019 discussed below in "-Results of Operations - Income Taxes" and 2020 net earnings from Cytiva are the primary drivers of the year-over-year increase in net earnings and diluted earnings per common share for the three and six-month periods endedJuly 3, 2020 . Despite differences in our businesses, on an overall basis, the Company saw core sales growth stabilize to some degree as the quarter progressed. Geographically, the stabilization appears to generally correspond to areas where the spread of the coronavirus and related responses have moderated. The Company continues to see improving activity inChina , withEurope following at a slower pace. Resumption of activity in theU.S. is mixed, with many states only recently beginning phased reopenings while other states experience setbacks. COVID-19 related research and development among biotech and pharmaceutical customers is generating strong demand for the Company's bioprocessing, genomic and automation solutions in the Company's life science businesses. In the remainder of the life sciences businesses however, widespread shutdowns continue to adversely impact non-COVID related research lab activity. In its diagnostics businesses, the Company continues to see very strong demand for molecular point-of-care and acute care testing, which is also driving a significant increase in instrument placements globally. The remainder of the diagnostic businesses continue to experience reduced demand primarily because of lower volumes of elective procedures and wellness visits. In the environmental and applied solutions businesses, the divergence of demand between consumables and equipment appears to be moderating. While the ultimate impact of COVID-19 on future periods is highly uncertain, the Company expects core sales and core sales including Cytiva to grow in the third quarter of 2020, assuming the impact of the pandemic lessens compared to what was experienced in the first half of 2020 and the governments inthe United States and internationally continue to lift stay-at-home 34
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and quarantine mandates. Demand for instruments and consumables related to COVID-19-related testing capabilities as well as supporting customers in pursuit of new COVID-19-related treatments and vaccines are expected to continue to mitigate the broader negative impact of the pandemic. As discussed above, an increase of COVID-19 related cases and the re-imposition of government required restrictions could have a material negative impact on the Company's core growth, earnings and cash flows. Acquisitions The Company's growth strategy contemplates future acquisitions and strategic investments. Operations and results can be affected by the rate and extent to which appropriate acquisition and investment opportunities are available and successfully consummated, acquired businesses are effectively integrated and anticipated synergies or cost savings are achieved. OnMarch 31, 2020 , the Company acquired the Biopharma business of General Electric Company's Life Sciences division, now known as Cytiva, for a cash purchase price of approximately$20.7 billion , subject to certain adjustments, and the assumption of approximately$0.4 billion of pension liabilities. Cytiva is a leading provider of instruments, consumables and software that support the research, discovery, process development and manufacturing workflows of biopharmaceutical drugs. Cytiva had revenues of approximately$3.3 billion in 2019 and is included in the Company's Life Sciences segment results beginning in the second quarter of 2020. The acquisition is expected to provide additional sales and earnings growth opportunities for the Company's Life Sciences segment by expanding the business' geographic and product line diversity, including new product and service offerings that complement the Company's current biologics workflow solutions. As a condition to obtaining certain regulatory approvals for the closing of the transaction, the Company was required to divest certain of its existing product lines in the Life Sciences segment that in the aggregate generated revenues of approximately$170 million in 2019. OnApril 30, 2020 , the Company completed the sale of the majority of these product lines for a cash purchase price, net of cash transferred and transaction costs, of$810 million and recognized a pretax gain on sale of$455 million ($305 million after-tax or$0.42 per diluted common share) in the second quarter of 2020. For a description of the Company's Cytiva Acquisition and the financing thereof, refer to Note 3 to the accompanying Consolidated Condensed Financial Statements. Currency Exchange Rates On a year-over-year basis, currency exchange rates negatively impacted reported sales by approximately 2.0% and 1.5% for the three and six-month periods endedJuly 3, 2020 , respectively, compared to the comparable periods of 2019, primarily due to the strength of theU.S. dollar against most major currencies in the first half of 2020. If the currency exchange rates in effect as ofJuly 3, 2020 were to prevail throughout the remainder of 2020, currency exchange rates would reduce the Company's estimated full year 2020 sales by approximately 1.0% on a year-over-year basis. Any future strengthening of theU.S. dollar against major currencies would adversely impact the Company's sales and results of operations for the remainder of the year, and any weakening of theU.S. dollar against major currencies would positively impact the Company's sales and results of operations for the remainder of the year.UK's Exit From the EU ("Brexit") TheUK formally withdrew from the EU onJanuary 31, 2020 with a transition period throughDecember 31, 2020 . During the transition period, theUK continues to follow EU law and is negotiating with the EU on the terms of its relationship post-2020. Failure to complete negotiations by the implementation deadline ofDecember 31, 2020 could result in theUK reverting to adverse trade agreements with the EU. The COVID-19 pandemic has created additional uncertainty regarding the likelihood that theUK and the EU will complete negotiations by theDecember 31, 2020 deadline. As a result, the nature of theUK's future relationship with the EU is still uncertain. The Company continues to monitor the status of Brexit and plan for potential impacts. To mitigate the potential impact of Brexit on the import of goods to theUK , the Company continues to strategically manage its inventory levels and logistical channels with respect to theUK . The ultimate impact of Brexit on the Company's financial results is uncertain. For additional information, refer to the "Item 1A-Risk Factors" section of the Company's 2019 Annual Report on Form 10-K filed onFebruary 21, 2020 . 35
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RESULTS OF OPERATIONS Non-GAAP Measures In this report, references to the non-GAAP measures of core sales (also referred to as core revenues or sales/revenues from existing businesses) and core sales including Cytiva refer to sales from continuing operations calculated according toU.S. GAAP, but excluding: • sales from acquired businesses (as defined below, as applicable); and
• the impact of currency translation.
References to sales or operating profit attributable to acquisitions or acquired
businesses refer to sales or operating profit, as applicable, from acquired
businesses recorded prior to the first anniversary of the acquisition less the
amount of sales and operating profit, as applicable, attributable to divested
product lines not considered discontinued operations; provided that in
calculating core sales including Cytiva, Cytiva's sales (net of the sales of the
Company product lines divested in 2020 to obtain regulatory approval to acquire
Cytiva, or the "divested product lines") ("Cytiva sales") are excluded from the
definition of sales attributable to acquisitions or acquired businesses. The
portion of revenue attributable to currency translation is calculated as the
difference between:
• the period-to-period change in revenue (excluding sales from acquired
businesses (as defined above, as applicable)); and
• the period-to-period change in revenue (excluding sales from acquired
businesses (as defined above, as applicable)) after applying current
period foreign exchange rates to the prior year period.
As noted above, beginning with results for the second quarter of 2020, the Company also presents core sales on a basis that includes Cytiva sales. Historically Danaher has calculated core sales solely on a basis that excludes sales from acquired businesses recorded prior to the first anniversary of the acquisition. However, given Cytiva's significant size and historical core sales growth rate, in each case compared to Danaher's existing businesses, management believes it is appropriate to also present core sales on a basis that includes Cytiva sales. Management believes this presentation provides useful information to investors by demonstrating the impact Cytiva has on the Company's current growth profile, rather than waiting to demonstrate such impact 12 months after the acquisition when Cytiva would normally have been included in Danaher's core sales calculation. Danaher calculates period-to-period core sales growth including Cytiva by adding to the baseline period sales Cytiva's historical sales from such period (when it was owned byGE ), net of the sales of the divested product lines and also adding the Cytiva sales to the current period. Core sales growth (and the related measure of core sales including Cytiva) should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting these non-GAAP financial measures provides useful information to investors by helping identify underlying growth trends in Danaher's business and facilitating comparisons of Danaher's revenue performance with its performance in prior and future periods and to Danaher's peers. Management also uses these non-GAAP financial measures to measure the Company's operating and financial performance and uses core sales growth as one of the performance measures in the Company's executive short-term cash incentive program. The Company excludes the effect of currency translation from these measures because currency translation is not under management's control, is subject to volatility and can obscure underlying business trends, and excludes the effect of acquisitions (other than Cytiva, in the case of core growth including Cytiva) and divestiture-related items because the nature, size, timing and number of acquisitions and divestitures can vary dramatically from period-to-period and between the Company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult. Throughout this discussion, references to sales volume refer to the impact of both price and unit sales and references to productivity improvements generally refer to improved cost-efficiencies resulting from the ongoing application of the Danaher Business System. 36
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Core Sales Growth and Core Sales Growth Including Cytiva
% Change % Change Six-
Three-Month Month Period
Period Ended July Ended July 3,
3, 2020 vs. 2020 vs.
Comparable 2019 Comparable 2019
Period Period
Total sales growth (GAAP) 19.0 % 11.5 %
Impact of:
Acquisitions/divestitures (21.5 )% (11.0 )%
Currency exchange rates 2.0 % 1.5 %
Core sales growth (decline) (non-GAAP) (0.5 )% 2.0 %
Impact of Cytiva sales growth (net of divested
product lines) 4.0 % 2.0 %
Core sales growth including Cytiva (non-GAAP) 3.5 % 4.0 %
Operating Profit Performance Operating profit margins decreased 240 basis points from 18.3% during the three-month period endedJune 28, 2019 to 15.9% for the three-month period endedJuly 3, 2020 . Second quarter 2020 vs. second quarter 2019 operating profit margin comparisons were favorably impacted by: • The incremental net accretive effect in 2020 of acquired businesses and
product line dispositions which did not qualify as discontinued operations
- 240 basis points
Second quarter 2020 vs. second quarter 2019 operating profit margin comparisons were unfavorably impacted by: • Lower 2020 core sales volumes, incremental year-over-year costs associated
with various new product development and sales, service and marketing
growth investments and the impact of foreign currency exchange rates in
the second quarter of 2020, net of incremental year-over-year cost savings
associated with continuing productivity improvement initiatives taken in
2020 and 2019 - 80 basis points
• Acquisition-related fair value adjustments to inventory and deferred
revenue and incremental transaction costs related to the Cytiva
Acquisition - 400 basis points
Operating profit margins decreased 170 basis points from 17.7% during the six-month period endedJune 28, 2019 to 16.0% for the six-month period endedJuly 3, 2020 . Year-to-date 2020 vs. year-to-date 2019 operating profit margin comparisons were favorably impacted by: • The incremental net accretive effect in 2020 of acquired businesses and
product line dispositions which did not qualify as discontinued operations
- 140 basis points
Year-to-date 2020 vs. year-to-date 2019 operating profit margin comparisons were
unfavorably impacted by:
• Incremental year-over-year costs associated with various new product
development and sales, service and marketing growth investments and the
impact of foreign currency exchange rates in the first half of 2020, net
of the impact of higher 2020 core sales volumes and incremental
year-over-year cost savings associated with continuing productivity
improvement initiatives taken in 2020 and 2019 - 35 basis points
• Acquisition-related fair value adjustments to inventory and deferred
revenue and incremental transaction costs related to the Cytiva
Acquisition - 265 basis points
• Impairment charges related to certain long-lived assets in the Diagnostics
and Environmental & Applied Solutions segments incurred in the first
quarter of 2020 - 10 basis points
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Business Segments
Sales by business segment for each of the periods indicated were as follows ($
in millions):
Three-Month Period Ended Six-Month Period Ended
July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019
Life Sciences $ 2,642.4 $ 1,712.6 $ 4,292.8 $ 3,339.5
Diagnostics 1,660.2 1,618.3 3,287.2 3,155.1
Environmental & Applied Solutions 994.8 1,113.6 2,060.5 2,170.1
Total $ 5,297.4 $ 4,444.5 $ 9,640.5 $ 8,664.7
For information regarding the Company's sales by geographical region during the
three and six-month periods ended July 3, 2020 and June 28, 2019 , refer to Note
2 to the accompanying Consolidated Condensed Financial Statements.
LIFE SCIENCES
The Company's Life Sciences segment offers a broad range of scientific tools
that researchers use to study the basic building blocks of life, including
genes, proteins, cells, tissues and metabolites in order to understand the
causes of disease, identify new therapies and test new drugs and vaccines. The
segment also offers the necessary tools and consumables to manufacture new life
saving drugs and is a leading provider of filtration, separation and
purification technologies to the biopharmaceutical, food and beverage, medical,
aerospace, microelectronics and general industrial sectors.
Life Sciences Selected Financial Data
Three-Month Period Ended Six-Month Period Ended
($ in millions) July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019
Sales $ 2,642.4 $ 1,712.6 $ 4,292.8 $ 3,339.5
Operating profit 412.4 344.0 738.0 653.0
Depreciation 48.2 32.8 81.4 65.1
Amortization 247.9 89.1 337.5 178.7
Operating profit as a % of sales 15.6 % 20.1 % 17.2 % 19.6 %
Depreciation as a % of sales 1.8 % 1.9 % 1.9 % 1.9 %
Amortization as a % of sales 9.4 % 5.2 % 7.9 % 5.4 %
Core Sales Growth and Core Sales Growth Including Cytiva
% Change % Change Six-
Three-Month Month Period
Period Ended July Ended July 3,
3, 2020 vs. 2020 vs.
Comparable 2019 Comparable 2019
Period Period
Total sales growth (GAAP) 54.5 % 28.5 %
Impact of:
Acquisitions/divestitures (55.5 )% (28.5 )%
Currency exchange rates 1.0 % 1.0 %
Core sales growth (non-GAAP) - % 1.0 %
Impact of Cytiva sales growth (net of divested
product lines) 8.0 % 5.0 %
Core sales growth including Cytiva (non-GAAP) 8.0 % 6.0 %
Price increases in the segment contributed 1.0% and 0.5% to sales growth on a year-over-year basis during the three and six-month periods endedJuly 3, 2020 , respectively, and are reflected as a component of core sales growth (or core sales growth including Cytiva, as applicable). In the first half of 2020, increased demand for instruments and consumables used in the bioprocessing end-market was partially offset by lower demand related to non-COVID-19 applications as a result of the COVID-19 pandemic. The Company saw 38
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lower demand for equipment late in the first quarter and in the second quarter as the pandemic spread around the world and customers deferred purchases of larger instruments as academic research labs closed late in the first quarter of 2020. Later in the second quarter of 2020, the Company began seeing the gradual reopening of certain research labs, led byChina . Core sales for filtration, separation and purification technologies increased across most major geographies for both the three and six-month periods in 2020 versus the comparable periods in 2019, led byChina in the three-month period and led byWestern Europe andNorth America in the six-month period. Demand for filtration, separation and purification technologies was led by the biopharmaceutical end-market and partially offset by weaker demand in the fluid technology and asset protection end-markets. Core sales of microscopy products declined during both the three and six-month periods across all major product lines, primarily due to lower demand in the life science research, industrial, and medical end-markets. Geographically, demand decreased in both periods across most major geographies, led byNorth America andWestern Europe , as shutdown measures to curb COVID-19 reduced demand for equipment in particular. Demand for the business' flow cytometry and particle counting products increased across most major geographies in both the three and six-month periods, partially offset by lower demand inNorth America in the three-month period. Core sales for the business' flow cytometry and particle counting products was driven by demand for genomic testing and automation products. Core sales in the mass spectrometry business declined during both the three and six-month periods, driven by lower demand inNorth America ,China andWestern Europe , primarily due to lower demand in the clinical and pharmaceutical end-markets. Core sales in the genomics consumables business increased during both the three and six-month periods across all major geographies, driven in part by demand for primer and probes related to COVID-19 testing. The acquisition of Cytiva onMarch 31, 2020 is expected to provide additional sales and earnings growth opportunities for the Company's Life Sciences segment by expanding the business' geographic and product line diversity, including new product and service offerings that complement the Company's current biologics workflow solutions. Due to the proximity of the acquisition date to the end of the first quarter, there are no results of operations for Cytiva included in the Life Sciences segment in the first quarter of 2020. Beginning in the second quarter of 2020, Cytiva is included in the Life Sciences segment results. In the second quarter of 2020, Cytiva experienced increased demand across all major geographies and all major end-markets, driven significantly by demand for instruments and consumables used in the research and development of COVID-19-related treatments and vaccines. Depreciation and amortization increased during both the three and six-month periods endedJuly 3, 2020 as compared to the comparable periods of 2019 due primarily to the impact of Cytiva. Operating Profit Performance Operating profit margins decreased 450 basis points during the three-month period endedJuly 3, 2020 as compared to the comparable period of 2019. Second quarter 2020 vs. second quarter 2019 operating profit margin comparisons were favorably impacted by: • Higher 2020 core sales volumes, incremental year-over-year cost savings
associated with the continuing productivity improvement initiatives taken
in 2020 and 2019 and the impact of foreign currency exchange rates in the
second quarter of 2020, net of incremental year-over-year costs associated
with various new product development and sales and marketing growth
investments - 30 basis points
• The incremental net accretive effect in 2020 of acquired businesses and
product line dispositions which did not qualify as discontinued operations
- 385 basis points
Second quarter 2020 vs. second quarter 2019 operating profit margin comparisons were unfavorably impacted by: • Acquisition-related fair value adjustments to inventory and deferred
revenue and incremental transaction costs related to the Cytiva
Acquisition - 865 basis points
Operating profit margins decreased 240 basis points during the six-month period endedJuly 3, 2020 as compared to the comparable period of 2019. Year-to-date 2020 vs. year-to-date 2019 operating profit margin comparisons were favorably impacted by: • Higher 2020 core sales volumes, incremental year-over-year cost savings
associated with the continuing productivity improvement initiatives taken
in 2020 and 2019 and the impact of foreign currency exchange rates in the
first half of 2020, net of incremental year-over-year costs associated
with various new product development and sales and marketing growth
investments - 60 basis points
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• The incremental net accretive effect in 2020 of acquired businesses and
product line dispositions which did not qualify as discontinued operations
- 235 basis points
Year-to-date 2020 vs. year-to-date 2019 operating profit margin comparisons were
unfavorably impacted by:
• Transaction costs, integration preparation costs and fair value
adjustments to acquired inventory and deferred revenue related to the
Cytiva Acquisition - 535 basis points
DIAGNOSTICS
The Company's Diagnostics segment offers analytical instruments, reagents,
consumables, software and services that hospitals, physicians' offices,
reference laboratories and other critical care settings use to diagnose disease
and make treatment decisions.
Diagnostics Selected Financial Data
Three-Month Period Ended Six-Month Period Ended
($ in millions) July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019
Sales $ 1,660.2 $ 1,618.3 $ 3,287.2 $ 3,155.1
Operating profit 293.2 282.9 544.4 516.0
Depreciation 100.8 94.2 194.9 185.8
Amortization 51.3 51.8 102.7 103.8
Operating profit as a % of sales 17.7 % 17.5 % 16.6 % 16.4 %
Depreciation as a % of sales 6.1 % 5.8 % 5.9 % 5.9 %
Amortization as a % of sales 3.1 % 3.2 % 3.1 % 3.3 %
Core Sales Growth
% Change % Change Six-
Three-Month Month Period
Period Ended Ended July 3,
July 3, 2020 vs. 2020 vs.
Comparable 2019 Comparable 2019
Period Period
Total sales growth (GAAP) 2.5 % 4.0 %
Impact of:
Currency exchange rates 2.5 % 2.0 %
Core sales growth (non-GAAP) 5.0 % 6.0 %
Pricing in the segment negatively impacted sales growth by 0.5% on a
year-over-year basis during the three-month period ended July 3, 2020 and did
not have a significant impact on sales growth on a year-over-year basis during
the six-month period.
In the first half of 2020, increased demand for molecular diagnostics and acute
care instruments and consumables to support the response to the COVID-19
pandemic was partially offset by lower demand for equipment and consumables in
the clinical lab and pathology businesses as a result of shut-downs and
restrictions relating to the COVID-19 pandemic. Core sales in the segment's
clinical lab business decreased on a year-over-year basis for both the three and
six-month periods ended July 3, 2020 , driven by lower demand across all major
product lines. Geographically, demand declined in both periods across all major
geographies as shutdown measures to curb COVID-19 reduced core laboratory
testing volumes. During both the three and six-month periods, core sales
increased in the molecular diagnostics business on a year-over-year basis in
both developed and high-growth markets, which contributed significantly to
overall segment core growth. The business experienced particularly strong growth
in sales of instruments and consumables in the infectious disease product line
in both the three and six-month periods ended July 3, 2020 , driven by the
development and commercialization of test solutions for COVID-19. Core sales in
the acute care diagnostic business increased year-over-year across all major
geographies and product lines in both the three and six-month periods, with
continued strong demand for blood gas instruments and consumables driven in part
by increased hospitalizations from the COVID-19 pandemic. Core sales in the
pathology business declined year-over-year in both the three and six-month
periods ended July 3, 2020 , driven by reduced demand for advanced staining and
core histology products as a result of the COVID-19 pandemic in North America
and Western Europe during the three-month period as well as in China during the
six-month period. The reduced demand for advanced staining and core histology
products was partially offset by increased demand for pathology imaging products
in both the three and six-month periods, primarily in North America .
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Operating Profit Performance Operating profit margins increased 20 basis points during the three-month period endedJuly 3, 2020 as compared to the comparable period of 2019. Year-over-year operating profit margin comparisons were favorably impacted by higher 2020 core sales volumes and incremental year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020 and 2019, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments, unfavorable product mix and the impact of foreign currency exchange rates in the second quarter of 2020. Operating profit margins increased 20 basis points during the six-month period endedJuly 3, 2020 as compared to the comparable period of 2019. Year-to-date 2020 vs. year-to-date 2019 operating profit margin comparisons were favorably impacted by: • Higher 2020 core sales volumes and incremental year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020 and 2019, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth
investments, unfavorable product mix and the impact of foreign currency
exchange rates in the first half of 2020 - 35 basis points
Year-to-date 2020 vs. year-to-date 2019 operating profit margin comparisons were
unfavorably impacted by:
• Impairment charges related to a facility incurred in the first quarter of
2020 - 15 basis points
ENVIRONMENTAL & APPLIED SOLUTIONS
The Company's Environmental & Applied Solutions segment offers products and
services that help protect important resources and keep global food and water
supplies safe. The Company's water quality business provides instrumentation,
consumables, software, services and disinfection systems to help analyze, treat
and manage the quality of ultra-pure, potable, industrial, waste, ground, source
and ocean water in residential, commercial, municipal, industrial and natural
resource applications. The Company's product identification business provides
equipment, software, services and consumables for various color and appearance
management, packaging design and quality management, packaging converting,
printing, marking, coding and traceability applications on consumer,
pharmaceutical and industrial products.
Environmental & Applied Solutions Selected Financial Data
Three-Month Period Ended Six-Month Period Ended
($ in millions) July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019
Sales $ 994.8 $ 1,113.6 $ 2,060.5 $ 2,170.1
Operating profit 222.0 260.2 461.9 504.8
Depreciation 11.4 12.6 23.3 25.0
Amortization 14.9 15.4 30.3 31.2
Operating profit as a % of sales 22.3 % 23.4 % 22.4 % 23.3 %
Depreciation as a % of sales 1.1 % 1.1 % 1.1 % 1.2 %
Amortization as a % of sales 1.5 % 1.4 % 1.5 % 1.4 %
Core Sales Growth
% Change % Change Six-
Three-Month Month Period
Period Ended July Ended July 3,
3, 2020 vs. 2020 vs.
Comparable 2019 Comparable 2019
Period Period
Total sales growth (decline) (GAAP) (10.5 )% (5.0 )%
Impact of:
Currency exchange rates 2.0 % 1.5 %
Core sales growth (decline) (non-GAAP) (8.5 )% (3.5 )%
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Price increases in the segment contributed 1.5% to sales growth on a year-over-year basis during both the three and six-month periods endedJuly 3, 2020 and are reflected as a component of core revenue growth (decline). Core sales in the segment's water quality business decreased at a mid-single digit rate during the three-month period endedJuly 3, 2020 compared to the comparable period of 2019 as a result of lower demand for equipment primarily from shutdowns and restrictions related to the COVID-19 pandemic inNorth America andWestern Europe . On an overall basis, the water quality business grew slightly during the six-month period endedJuly 3, 2020 compared to the comparable period of 2019 as strong demand for consumables in the first quarter offset the weakness experienced in the second quarter. Year-over-year core sales in the analytical instrumentation product line decreased in both the three and six-month periods, driven by decreased demand inNorth America during both periods and inWestern Europe during the three-month period. These declines were partially offset by increased demand inChina during both periods. Core sales in the business' chemical treatment solutions product line decreased during the three-month period and increased during the six-month period. Core sales were negatively impacted in both periods by lower demand in the oil and gas, primary metals and transportation end-markets, partially offset in the six-month period by increased demand in the food and beverage, consumer and industrial, and power end-markets. Geographically, year-over-year core sales for chemical treatment solutions decreased inNorth America during the three-month period and increased during the six-month period while core sales inLatin America decreased in both the three and six-month periods. Core sales in the business' ultraviolet water disinfection product line decreased during both the three and six-month periods, as weaker demand inChina offset increased demand inNorth America . Core sales in the segment's product identification businesses decreased at a double-digit rate during the three-month period and at a high-single digit rate during the six-month period endedJuly 3, 2020 compared to the comparable periods of 2019 driven by lower demand for equipment as a result of the COVID-19 pandemic. Core sales in the marking and coding business decreased during the both the three and six-month periods driven by lower demand for equipment in both the three and six-month periods. Demand for the marking and coding business in the second quarter decreased overall in equipment across end-markets, offset by growth in consumables in food, consumer goods and medical product end-markets. Geographically, weaker demand inWestern Europe and the high-growth markets was partially offset by increased demand inNorth America in both periods. For packaging and color solutions products and services, core sales decreased in both the three and six-month periods, driven by lower demand for equipment inWestern Europe ,North America and the high-growth markets. Operating Profit Performance Operating profit margins decreased 110 basis points during the three-month period endedJuly 3, 2020 as compared to the comparable period of 2019. Year-over-year operating profit margin comparisons were unfavorably impacted by lower 2020 core sales volumes and incremental year-over-year costs associated with sales, service and marketing growth investments, net of incremental year-over-year cost savings associated with continuing productivity improvement initiatives taken in 2020 and 2019 and the impact of foreign currency exchange rates in the second quarter of 2020. Operating profit margins decreased 90 basis points during the six-month period endedJuly 3, 2020 as compared to the comparable period of 2019. Year-over-year operating profit margin comparisons were unfavorably impacted by: • Lower 2020 core sales volumes, incremental year-over-year costs associated
with sales, service and marketing growth investments, net of incremental
year-over-year cost savings associated with continuing productivity
improvement initiatives taken in 2020 and 2019 - 70 basis points
• Impairment charges related to a trade name and other intangible assets
incurred in the first quarter of 2020 - 20 basis points
COST OF SALES AND GROSS PROFIT
Three-Month Period Ended Six-Month Period Ended
($ in millions) July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019
Sales $ 5,297.4 $ 4,444.5 $ 9,640.5 $ 8,664.7
Cost of sales (2,444.8 ) (1,960.7 ) (4,345.1 ) (3,826.0 )
Gross profit $ 2,852.6 $ 2,483.8 $ 5,295.4 $ 4,838.7
Gross profit margin 53.8 % 55.9 % 54.9 % 55.8 %
The year-over-year increase in cost of sales during both the three and six-month
periods ended July 3, 2020 as compared to the comparable periods in 2019, was
due primarily to the impact of higher year-over-year sales volumes, including
sales volumes from recently acquired businesses, and 2020 acquisition-related
charges associated with fair value adjustments to inventory in
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connection with the Cytiva Acquisition, which increased cost of sales by$197 million during both the three and six-month periods endedJuly 3, 2020 . The year-over-year decrease in gross profit margins during both the three and six-month periods endedJuly 3, 2020 as compared to the comparable periods in 2019, was due primarily to 2020 acquisition-related charges associated with fair value adjustments to inventory and deferred revenue in connection with the acquisition of Cytiva, which adversely impacted gross profit margin comparisons by approximately 400 basis points and 220 basis points during the three and six-month periods endedJuly 3, 2020 , respectively. The impact of higher year-over-year sales volumes, including sales volumes from recently acquired businesses, and higher gross profit margins of recently acquired businesses partially offset this negative factor.
OPERATING EXPENSES
Three-Month Period Ended Six-Month Period Ended
($ in millions) July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019
Sales $ 5,297.4 $ 4,444.5 $ 9,640.5 $ 8,664.7
Selling, general and administrative
("SG&A") expenses 1,685.4 1,390.0 3,143.7 2,757.7
Research and development ("R&D")
expenses 322.6 282.1 609.6 549.6
SG&A as a % of sales 31.8 % 31.3 % 32.6 % 31.8 %
R&D as a % of sales 6.1 % 6.3 % 6.3 % 6.3 %
The year-over-year increase in SG&A expenses as a percentage of sales for both
the three and six-month periods ended July 3, 2020 as compared to the comparable
periods in 2019, was driven by incremental year-over-year amortization charges,
primarily related to the Cytiva Acquisition, which adversely impacted SG&A as a
percentage of sales by approximately 240 basis points and 125 basis points in
the three and six-month periods, respectively, as well as continued investments
in sales and marketing growth initiatives. Impairment charges related to a
facility in the Diagnostics segment and a trade name and other intangible assets
in the Environmental & Applied solutions segment incurred in the first quarter
of 2020 and the incremental year-over-year transaction costs related to the
Cytiva Acquisition also increased SG&A as a percentage of sales in the six-month
period. These increases were partially offset in both the three and six-month
periods by the benefit of increased leverage of the Company's general and
administrative cost base resulting from higher 2020 sales volumes, including
sales volumes from recently acquired companies, incremental year-over-year cost
savings associated with the continuing productivity improvement initiatives
taken in 2020 and 2019 and lower travel expenses. Lower year-over-year
transaction costs related to the Cytiva Acquisition also benefited SG&A as a
percentage of sales during the three-month period.
R&D expenses (consisting principally of internal and contract engineering
personnel costs) as a percentage of sales declined 20 basis points during the
three-month period and were flat during the six-month period ended July 3, 2020
as compared to the comparable periods of 2019. The decline during the
three-month period was primarily due to lower R&D expenses as a percentage of
sales in businesses recently acquired as well as year-over-year differences in
the timing of investments in the Company's new product development initiatives.
OTHER (EXPENSE) INCOME, NET
The Company disaggregates the service cost component of net periodic benefit
costs of the noncontributory defined benefit pension plans and other
postretirement employee benefit plans and presents the other components of net
periodic benefit cost in other (expense) income, net. These other components
include the assumed rate of return on plan assets, partially offset by
amortization of actuarial losses and interest and aggregated to a gain of $5
million and $10 million for the three and six-month periods ended July 3, 2020 ,
respectively, compared to a gain of $5 million and $10 million for the three and
six-month periods ended June 28, 2019 .
The Company estimates the fair value of investments in equity securities using
the Fair Value Alternative and records adjustments to fair value within net
earnings. Additionally, the Company is a limited partner in a partnership that
invests in early stage companies. While the partnership records these
investments at fair value, the Company's investment in the partnership is
accounted for under the equity method of accounting. During the three and
six-month periods ended July 3, 2020 , the Company recorded a $6 million
unrealized loss ($0.01 per diluted common share) and $13 million unrealized loss
($0.02 per diluted common share), respectively, related to a reduction in the
fair value of these investments. No significant realized gains or losses were
recorded in the three and six-month periods ended June 28, 2019 with respect to
these investments.
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GAIN ON SALE OF PRODUCT LINES As a condition to obtaining certain regulatory approvals for the closing of the Cytiva Acquisition, the Company was required to divest certain of its existing product lines in the Life Sciences segment that in the aggregate generated revenues of approximately$170 million in 2019. OnApril 30, 2020 , the Company completed the sale of the majority of these product lines for a cash purchase price, net of cash transferred and transaction costs, of$810 million and recognized a pretax gain on sale of$455 million ($305 million after-tax or$0.42 per diluted common share) in the second quarter of 2020. The divestiture of these product lines did not represent a strategic shift with a major effect on the Company's operations and financial results and therefore is not reported as a discontinued operation. INTEREST COSTS AND FINANCING For a discussion of the Company's outstanding indebtedness, refer to Note 7 to the accompanying Consolidated Condensed Financial Statements. Interest expense of$79 million and$126 million for the three and six-month periods endedJuly 3, 2020 , respectively, was$59 million higher and$86 million higher than the comparable periods of 2019, due primarily to the higher average debt balances as a result of the issuances of debt inSeptember 2019 ,November 2019 ,March 2020 andApril 2020 , higherU.S. -dollar denominated commercial paper borrowings in 2020, compared to the comparable periods of 2019, 2020 borrowings under the Five-Year Facility and 2020 borrowings under the Superseded 364-Day Facility. Interest income of$1 million for the three-month period endedJuly 3, 2020 was$25 million lower than the comparable period of 2019, due primarily to lower rates on cash deposits. Interest income of$64 million for the six-month period endedJuly 3, 2020 was$22 million higher than the comparable period of 2019, due primarily to higher average cash balances during the first quarter of 2020 attributable to the cash raised to fund the Cytiva Acquisition, partially offset by lower rates on cash deposits. INCOME TAXES The following table summarizes the Company's effective tax rate: Three-Month Period Ended Six-Month Period
Ended
July 3, 2020 June 28, 2019 July 3, 2020 June 28, 2019
Effective tax rate 24.0 % 17.8 % 21.2 % 34.6 %
The effective tax rate for the three-month period ended July 3, 2020 differs
from the U.S. federal statutory rate of 21.0% principally due to a higher tax
rate associated with the gain on the divestiture of certain product lines in the
Life Sciences segment and changes in estimates associated with prior period
uncertain tax positions, partially offset by excess tax benefits from
stock-based compensation and other items. These items increased the reported tax
rate on a net basis by 4.5%.
The effective tax rate for the six-month period ended July 3, 2020 differs from
the U.S. federal statutory rate of 21.0% principally due to a higher tax rate
associated with the gain on the divestiture of certain product lines in the Life
Sciences segment and changes in estimates associated with prior period uncertain
tax positions, partially offset by excess tax benefits from stock-based
compensation, the release of reserves for uncertain tax positions due to the
expiration of statutes of limitation and other items. These items increased the
reported tax rate on a net basis by 1.7%.
The effective tax rate for the three-month period ended June 28, 2019 differs
from the U.S. federal statutory rate of 21.0% principally due to the impact of
earnings outside the United States which are generally taxed at rates lower than
the U.S. federal rate. The effective tax rate for the three-month period ended
June 28, 2019 also included net discrete benefits of $18 million ($0.02 per
diluted common share) from the release of reserves for uncertain tax positions
due to the expiration of statutes of limitation, benefits from changes in tax
law in a certain foreign jurisdiction and excess tax benefits from stock-based
compensation, partially offset by charges from audit settlements. These discrete
tax benefits decreased the reported tax rate by 2.2%.
The effective tax rate for the six-month period ended June 28, 2019 differs from
the U.S. federal statutory rate of 21.0% principally due to the impact of net
discrete charges of $227 million ($0.31 per diluted common share) related
primarily to changes in estimates associated with prior period uncertain tax
positions and audit settlements, net of the release of reserves for uncertain
tax positions due to the expiration of statutes of limitation, release of
valuation allowances associated with certain foreign tax credits, tax benefits
resulting from changes in tax law and excess tax benefits from stock-based
compensation. These net discrete income tax charges increased the reported tax
rate by 14.7%.
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The Company conducts business globally, and files numerous consolidated and separate income tax returns in federal, state and foreign jurisdictions. Non-U.S. countries in which the Company has a significant presence includeChina ,Denmark ,Germany ,Singapore ,Sweden ,Switzerland and theUK . The Company believes that a change in the statutory tax rate of any individual foreign country would not have a material impact on the on-going effective tax rate of the Company given the geographical dispersion of the Company's taxable income. The Company and its subsidiaries are routinely examined by various domestic and international taxing authorities. The Internal Revenue Service ("IRS") has completed the examinations of substantially all of the Company's federal income tax returns through 2011 and is currently examining certain of the Company's federal income tax returns for 2012 through 2018. In addition, the Company has subsidiaries inAustria ,Belgium ,Canada ,China ,Denmark ,France ,Germany ,India ,Japan ,Korea ,Switzerland , theUK and various other countries, states and provinces that are currently under audit for years ranging from 2004 through 2018. In the fourth quarter of 2018 and in the first quarter of 2019, theIRS proposed significant adjustments to the Company's taxable income for the years 2012 through 2015 with respect to the deferral of tax on certain premium income related to the Company's self-insurance programs. For income tax purposes, the recognition of premium income has been deferred in accordance withU.S. tax laws related to insurance. TheIRS challenged the deferral of premiums for certain types of the Company's self-insurance policies. These proposed adjustments would increase the Company's taxable income over the 2012 through 2015 period by approximately$2.7 billion . Management believes the positions the Company has taken in itsU.S. tax returns are in accordance with the relevant tax laws and is vigorously defending these positions. Due to the enactment of the Tax Cuts and Jobs Act in 2017 and the resulting reduction in theU.S. corporate tax rate for years after 2017, the Company revalued its deferred tax liabilities related to the temporary differences associated with this deferred premium income from 35.0% to 21.0%. If the Company is not successful in defending these assessments, the taxes owed to theIRS may be computed under the previous 35.0% statutory tax rate and the Company may be required to revalue the related deferred tax liabilities from 21.0% to 35.0%, which in addition to any interest due on the amounts assessed, would require a charge to future earnings. The ultimate resolution of this matter is uncertain, could take years and could result in a material adverse impact to the Company's financial statements, including its cash flows and effective tax rate. Tax authorities inDenmark have raised significant issues related to interest accrued by certain of the Company's subsidiaries. OnDecember 10, 2013 , the Company received assessments from the Danish tax authority ("SKAT") of approximatelyDKK 1.8 billion including interest (approximately$277 million based on the exchange rate as ofJuly 3, 2020 ), imposing withholding tax relating to interest accrued inDenmark on borrowings from certain of the Company's subsidiaries for the years 2004-2009. The Company appealed these assessments to theDanish National Tax Tribunal in 2014. The appeal is pending, awaiting the final outcome of other, preceding withholding tax cases that were appealed to the Danish Courts and subsequently to theCourt of Justice of theEuropean Union ("CJEU"). InFebruary 2019 , the CJEU decided several of these cases and ruled that the exemption of interest payments from withholding taxes provided in the applicable EU directive should be denied where taxpayers use the directive for abusive or fraudulent purposes, and that it is up to the national courts to make this determination. This decision of the CJEU now awaits application by theDanish High Court in the other, preceding withholding tax cases. SKAT has maintained a similar position related to withholding tax on interest accrued inDenmark on borrowings from certain of the Company's subsidiaries with respect to tax years 2010-2012 and 2013-2015. OnAugust 27, 2019 andDecember 16, 2019 , the Company received assessments for these matters of approximatelyDKK 1.1 billion including interest (approximately$162 million based on the exchange rate as ofJuly 3, 2020 ) for tax years 2010-2012 andDKK 753 million including interest (approximately$114 million based on the exchange rate as ofJuly 3, 2020 ) for tax years 2013-2015, respectively. The Company is appealing these assessments as well. Management believes the positions the Company has taken inDenmark are in accordance with the relevant tax laws and is vigorously defending its positions. The Company intends on pursuing this matter through theDanish High Court should the appeal to theDanish National Tax Tribunal be unsuccessful. The Company will continue to monitor decisions of both the Danish courts and the CJEU and evaluate the impact of these court rulings on the Company's tax positions inDenmark . The ultimate resolution of this matter is uncertain, could take many years, and could result in a material adverse impact to the Company's financial statements, including its cash flow and effective tax rate. OnJune 24, 2020 , SKAT issued a press release to announce that it has misappliedDenmark's interest rules in some assessments concerning withholding tax. The Company's subsidiaries inDenmark have been notified that they may be one of the companies potentially overcharged interest but a determination of the impact on the above assessments has not been received. The Company expects its effective tax rate for the remainder of 2020 to be approximately 19.5%. The Company's effective tax rate could vary as a result of many factors, including but not limited to the following: 45
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• The expected rate for the remainder of 2020 includes the anticipated
discrete income tax benefits from excess tax deductions related to the
Company's stock compensation programs, which are reflected as a reduction
in tax expense, though the actual benefits (if any) will depend on the
Company's stock price and stock option exercise patterns.
• The actual mix of earnings by jurisdiction could fluctuate from theCompany's projection, particularly given the uncertainties related to the
COVID-19 pandemic.
• The tax effects of other discrete items, including accruals related to tax
contingencies, the resolution of worldwide tax matters, tax audit
settlements, statute of limitations expirations and changes in tax
regulations.
• Any future legislative changes or potential tax reform, the impact offuture regulations and guidance implementing the Tax Cuts and Jobs Act and
any related additional tax planning efforts to address these changes.
As a result of the uncertainty in predicting these items, it is reasonably possible that the actual effective tax rate used for financial reporting purposes will change in future periods.
COMPREHENSIVE INCOME For the three and six-month periods endedJuly 3, 2020 , comprehensive income attributable to Danaher increased approximately$1.2 billion and approximately$1.7 billion , respectively, as compared to the comparable periods of 2019, primarily driven by gains from foreign currency translation adjustments and higher net earnings in both the three and six-month periods and gains from cash flow hedge adjustments in the six-month period. The Company recorded a loss of$157 million and a gain of$265 million from cash flow hedge adjustments related to the Company's cross-currency swap derivative contracts for the three and six-month periods endedJuly 3, 2020 , respectively. The Company recorded foreign currency translation gains of$1.1 billion and$923 million for the three and six-month periods endedJuly 3, 2020 , respectively, as compared to foreign currency translation losses of$47 million and$57 million for the three and six-month periods endedJune 28, 2019 , respectively.
INFLATION
The effect of inflation on the Company's revenues and net earnings was not
significant in the three and six-month periods ended
LIQUIDITY AND CAPITAL RESOURCES Management assesses the Company's liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company continues to generate substantial cash from operating activities and believes that its operating cash flows, cash on hand and other available sources of liquidity will be sufficient to allow it to continue investing in existing businesses, consummating strategic acquisitions and investments, paying interest and servicing debt, funding restructuring activities and managing its capital structure on a short-term and long-term basis. Notwithstanding the foregoing, the Company continues to monitor the impact of the COVID-19 pandemic on the Company's liquidity and capital resources and take actions intended to mitigate adverse impacts. Historically, the Company has generally relied on borrowings under its commercial paper program to address liquidity requirements that exceed the capacity provided by its operating cash flows and cash on hand, while also accessing the capital markets from time to time to secure financing for more significant acquisitions. The COVID-19 pandemic has adversely affected the availability of new borrowings in the commercial paper markets. Therefore, in March andApril 2020 , the Company borrowed an aggregate of$2.5 billion under the Five-Year Facility and$2.5 billion under the Superseded 364-Day Facility for general corporate purposes (including payment of a portion of the purchase price for the Cytiva Acquisition and repayment of certain commercial paper obligations as they mature), and also issued approximately €2.5 billion (approximately$2.7 billion based on currency exchange rates as of the respective dates of the pricing of the notes) aggregate principal amount of euro-denominated long-term debt, the proceeds of which are also being used for general corporate purposes (including repayment of the borrowings under the Superseded 364-Day Facility, repayment of$1.25 billion of the borrowings under the Five-Year Facility inMay 2020 and repayment of certain commercial paper obligations as they mature). Additionally, inMay 2020 , the Company completed the 2020 Common Stock Offering and 2020 MCPS Offering and received net proceeds of approximately$1.73 billion and$1.67 billion , respectively. Finally, onJune 5, 2020 , the Company entered into a new$2.5 billion 364-Day Facility with a syndicate of banks that expires onJune 4, 2021 to replace the Superseded 364-Day Facility. As a result of the replacement of commercial paper borrowings with other borrowings as described above, the Company's interest expense in future periods is expected to be higher than the historical interest expense paid on commercial paper borrowings. As ofJuly 3, 2020 , the Company had availability under its 46
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Credit Facilities of approximately
Six-Month Period Ended
($ in millions) July 3, 2020 Cash paid for acquisitions$ (20,735.6 ) $ (326.6 ) Payments for additions to property, plant and equipment (287.9 ) (294.4 ) Proceeds from sales of property, plant and equipment 0.8
11.7
Payments for purchases of investments (127.8 ) (92.3 ) Proceeds from sale of product lines 809.8 - All other investing activities 11.4
16.1
Total investing cash used in continuing operations
Proceeds from the issuance of common stock in connection with stock-based compensation
$ 69.1
$ 83.0 Proceeds from the sale of common stock, net of issuance costs
1,728.5 1,443.2
Proceeds from the sale of preferred stock, net of issuance costs
1,668.1 1,599.6
Payment of dividends (283.1 )
(233.9 ) Net (repayments of) proceeds from borrowings (maturities of 90 days or less)
(3,377.1 ) 599.6
Net proceeds from borrowings (maturities longer than 90 days)
7,691.3 -
Net repayments of borrowings (maturities longer than 90 days)
(3,750.0 ) (3.9 )
All other financing activities (1.3 )
(4.8 )
Net operating cash provided by financing activities
• Operating cash flows from continuing operations increased
approximately 28%, during the six-month period ended
compared to the comparable period of 2019, due to higher net earnings
(after excluding noncash impairment charges and fair value adjustments
related to certain long-lived assets in 2020, noncash charges for
depreciation, amortization and stock compensation in both periods, and
noncash discrete tax charges in 2019), higher cash provided by trade
accounts receivables and lower cash used for inventories during the 2020
period compared to the prior year, partially offset by higher cash usedfor payments for transaction costs incurred in connection with the Cytiva
Acquisition, various employee-related liabilities, income taxes and
accrued expenses in 2020 compared to the prior year.
• Net cash used in investing activities consisted primarily of cash paid for
acquisitions. The Company acquired Cytiva during the six-month period
ended
billion. Refer to Note 3 to the accompanying Consolidated Condensed
Financial Statements for additional information on the funding of the
Cytiva Acquisition.
• On
the Five-Year Facility and on April 7, 2020 , the Company borrowed
approximately $2.5 billion under the Superseded 364-Day Facility. The
Company repaid $1.25 billion of the borrowings under the Five-YearFacility and all of the borrowings under the Superseded 364-Day Facility
in
senior unsecured Euronotes and received net proceeds of approximately €1.7
billion (approximately
the date of the pricing of the notes) and approximately €754 million
(approximately $816 million based on currency exchange rates as of the
date of the pricing of the notes), respectively.
• In
2020 MCPS offering, resulting in net proceeds of approximately
billion, after deducting expenses and the underwriters' discount of
million and approximately
underwriters' discount of $49 million , respectively.
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• As ofJuly 3, 2020 , the Company held approximately$5.5 billion of cash and cash equivalents. Operating Activities Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impact reported cash flows. Operating cash flows from continuing operations were approximately$2.3 billion for the first six months of 2020, an increase of$502 million , or approximately 28.4%, as compared to the comparable period of 2019. The year-over-year change in operating cash flows from 2019 to 2020 was primarily attributable to the following factors: • 2020 operating cash flows reflected an increase of$514 million in net earnings from continuing operations for the first six months of 2020 as
compared to the comparable period in 2019. Partially offsetting the impact
of this increase is the fact that 2019 net earnings from continuing
operations include
compared to a net discrete noncash tax benefit of
addition, net earnings from continuing operations in 2020 included
million in aggregate of noncash impairment charges and fair value
adjustments related to certain long-lived assets. Each of these noncash
charges and adjustments decreased earnings without a corresponding impact
to operating cash flows.
• Net earnings for the first six months of 2020 also reflected an increase
of
expense as compared to the comparable period of 2019. Amortization expense
primarily relates to the amortization of intangible assets acquired in
connection with acquisitions. Depreciation expense relates to both the
Company's manufacturing and operating facilities as well asinstrumentation leased to customers under OTL arrangements. Depreciation,
amortization and stock compensation are noncash expenses that decrease
earnings without a corresponding impact to operating cash flows.
• The aggregate of trade accounts receivable, inventories and trade accounts
payable provided
months of 2020, compared to
the comparable period of 2019. The amount of cash flow generated from or
used by the aggregate of trade accounts receivable, inventories and trade
accounts payable depends upon how effectively the Company manages the cash
conversion cycle, which effectively represents the number of days that
elapse from the day it pays for the purchase of raw materials and
components to the collection of cash from its customers and can be
significantly impacted by the timing of collections and payments in a
period.
• The aggregate of prepaid expenses and other assets and accrued expenses
and other liabilities provided
the first six months of 2020, compared to
flows provided in the comparable period of 2019. The noncash discrete tax
items noted above, the timing of cash payments for transaction costs
incurred in connection with the Cytiva Acquisition and various
employee-related liabilities, partially offset by customer funding and
changes in accrued expenses, drove the majority of this change.
The continuing impact of the COVID-19 pandemic may have an adverse impact on the
Company's operating cash flow if the measures to contain and mitigate the spread
of COVID-19 adversely impact the Company's sales and earnings, the collections
of accounts receivable, including delays in collections and increases in
uncollectible receivables, and/or adversely impact our supply chain and
inventory levels. The future impact from the COVID-19 pandemic on the Company's
operating cash flow is highly uncertain but may be material.
Investing Activities
Cash flows relating to investing activities consist of cash used for
acquisitions and capital expenditures, including instruments leased to
customers, cash used for investments and cash proceeds from divestitures of
businesses or assets.
Net cash used in investing activities increased approximately $19.6 billion in
the six-month period ended July 3, 2020 compared to the comparable period of
2019, primarily as a result of the Company's acquisition of Cytiva in the first
quarter of 2020. For a discussion of the Company's acquisitions during the first
six months of 2020 refer to "-Overview".
Capital expenditures are made primarily for increasing capacity, replacing
equipment, supporting new product development, improving information technology
systems and the manufacture of instruments that are used in OTL arrangements
that certain of the Company's businesses enter into with customers. Capital
expenditures decreased $7 million on a year-over-year basis for the six-month
period ended July 3, 2020 compared to the comparable period in 2019, due to the
completion of projects related to new facilities and operating assets across the
Company, partially offset by spending at Cytiva. For the full year 2020, the
Company forecasts capital spending to be approximately $800 million , though
actual expenditures will ultimately depend
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on business conditions. The Company anticipates declines in expenditures for instruments used in OTL arrangements due to the COVID-19 pandemic to be offset by increased capital expenditures to support production of products related to testing, treatment and vaccines for COVID-19 and increases in capital expenditures as a result of the Cytiva Acquisition. Financing Activities and Indebtedness Cash flows relating to financing activities typically consist primarily of cash flows associated with the issuance and repayments of commercial paper, issuance and repayment of notes payable and long-term debt, borrowings under committed credit facilities, issuance and repurchases of common stock, issuance of preferred stock and payments of cash dividends to shareholders. Financing activities provided cash of approximately$3.7 billion during the six-month period endedJuly 3, 2020 of 2020 compared to approximately$3.5 billion of cash provided in the comparable period of 2019. The year-over-year increase in cash provided by financing activities was due primarily to borrowings under the 5-Year Facility and Superseded 364-Day Facility, the issuance of euro-denominated long-term notes, and the issuance of common stock and preferred stock inMay 2020 partially offset by the repayment of commercial paper, the repayment of borrowings under the 5-Year Facility and Superseded 364-Day Facility, and the issuance of common stock and preferred stock inMarch 2019 . For a description of the Company's financing activities in the first half of 2020, the Company's outstanding debt as ofJuly 3, 2020 and the Company's commercial paper programs and credit facilities, refer to Note 7 to the accompanying Consolidated Condensed Financial Statements. As ofJuly 3, 2020 , the Company was in compliance with all of its respective debt covenants. Effective as ofJune 5, 2020 , credit support for the Company's commercial paper program is provided by the Five-Year Facility and the 364-Day Facility. For a description of the Company's financing of the Cytiva Acquisition, refer to Note 3 to the accompanying Consolidated Condensed Financial Statements. Stock Repurchase Program For information regarding the Company's stock repurchase program, refer to Part II-Item 2, "Unregistered Sales ofEquity Securities and Use of Proceeds".
Dividends
Aggregate cash payments for dividends on Company common stock during the six-month period endedJuly 3, 2020 were$244 million and aggregate cash payments for dividends on the Company's MCPS Shares during the six-month period endedJuly 3, 2020 were$39 million . The increase in dividend payments over the comparable period of 2019 primarily relates to dividends paid on the MCPS Series A, which were issuedMarch 1, 2019 , as well as an increase in the dividend rate for common stock beginning with respect to the dividend paid in the second quarter of 2019. In the second quarter of 2020, the Company declared a regular quarterly dividend of$0.18 per share of Company common stock payable onJuly 31, 2020 to holders of record as ofJune 26, 2020 . In addition, the Company declared a quarterly cash dividend of$11.875 per MCPS Series A that was paid onJuly 15, 2020 to holders of record as ofJune 30, 2020 and a quarterly cash dividend of$8.75 per MCPS Series B that was paid onJuly 15, 2020 to holders of record as ofJune 30, 2020 . Cash and Cash Requirements As ofJuly 3, 2020 , the Company held approximately$5.5 billion of cash and cash equivalents that were held on deposit with financial institutions or invested in highly liquid investment-grade debt instruments with a maturity of 90 days or less. The Company expects interest income earned on cash in future periods to decline compared to prior periods, as the interest income earned in prior periods was driven by the funds raised to finance the Cytiva Acquisition. Of the cash and cash equivalents, approximately$3.4 billion was held withinthe United States and approximately$2.1 billion was held outside ofthe United States . The Company will continue to have cash requirements to support general corporate purposes, which may include working capital needs, capital expenditures and acquisitions, paying interest and servicing debt, paying taxes and any related interest or penalties, funding its restructuring activities and pension plans as required, paying dividends to shareholders, repurchasing shares of the Company's common stock and supporting other business needs. The Company generally intends to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, the Company may also borrow under its commercial paper programs (if available) or the Credit Facilities, enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under its commercial paper programs (if available) and/or access the capital markets (if available). The Company also may from time to time seek to access the capital markets to take advantage of favorable interest 49
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rate environments or other market conditions. With respect to the commercial paper scheduled to mature during the remainder of 2020, the Company expects to repay the principal amounts when due using available cash, proceeds from new issuances of commercial paper (if available), drawing on its Credit Facilities and/or proceeds from other debt issuances. While repatriation of some cash held outsidethe United States may be restricted by local laws, most of the Company's foreign cash could be repatriated tothe United States . Following enactment of the Tax Cuts and Jobs Act and the associated Transition Tax, in general, repatriation of cash tothe United States can be completed with no incrementalU.S. tax; however, repatriation of cash could subject the Company to non-U.S. taxes on distributions. The cash that the Company's non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes, if any, applicable to such earnings including basis differences in our foreign subsidiaries are not readily determinable. As ofJuly 3, 2020 , management believes that it has sufficient sources of liquidity to satisfy its cash needs, including its cash needs inthe United States . During 2020, the Company's cash contribution requirements for itsU.S. and non-U.S. defined benefit pension plans are forecasted to be approximately$85 million and$45 million , respectively. The ultimate amounts to be contributed depend upon, among other things, legal requirements, underlying asset returns, the plan's funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates and other factors. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law and includes a provision that allows employers to defer payment of contributions toU.S. defined benefit pension plans due in 2020 untilJanuary 1, 2021 . The Company is still evaluating whether it will defer any 2020 contributions to itsU.S. defined benefit pension plans pursuant to this provision. CRITICAL ACCOUNTING ESTIMATES There were no material changes to the Company's critical accounting estimates described in the 2019 Annual Report that have a material impact on the Company's Consolidated Condensed Financial Statements and the related Notes.
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