DANAHER CORPORATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide material information relevant to an
assessment of Danaher's financial condition and results of operations, including
an evaluation of the amounts and certainty of cash flows from operations and
from outside sources. The MD&A is designed to focus specifically on material
events and uncertainties known to management that are reasonably likely to cause
reported financial information not to be necessarily indicative of future
operating results or of future financial condition. This includes descriptions
and amounts of matters that have had a material impact on reported operations,
as well as matters that are reasonably likely based on management's assessment
to have a material impact on future operations. The Company's MD&A is divided
into five sections:
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
•New Accounting Standards
This discussion and analysis should be read together with Danaher's audited financial statements and related Notes thereto as ofDecember 31, 2021 and 2020 and for each of the three years in the period endedDecember 31, 2021 included in this Annual Report. Management's discussion and analysis of financial condition and results of operations for 2019 is included in Item 7 of the Company's Annual Report on Form 10-K with respect to the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission and should be referred to for information regarding this period.
Unless otherwise indicated, all financial results in this report refer to continuing operations.
OVERVIEW General Refer to "Item 1. Business-General" for a discussion of Danaher's strategic objectives and methodologies for delivering long-term shareholder value. Danaher is a multinational business with global operations. During 2021, approximately 62% of Danaher's sales were derived from customers outsidethe United States . As a diversified, global business, Danaher's operations are affected by worldwide, regional and industry-specific economic and political factors. Danaher's geographic and industry diversity, as well as the range of its products and services, help limit the impact of any one industry or the economy of any single country on its consolidated operating results. The Company's individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future. 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 and identify and consummate appropriate investments and strategic partnerships, 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 global environment. The Company is making significant investments, organically and through acquisitions and investments, 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.
Business Performance
Consolidated revenues for the year endedDecember 31, 2021 increased 32.0% as compared to 2020. Foreign currency exchange rates contributed 1.5% and acquisitions contributed 7.5% to the increase in revenues in 2021. Core sales increased 23.0% in 2021 compared to 2020 and core sales including Cytiva increased 25.0% in 2021 compared to 2020 (for the definition of "core sales" and "core sales including Cytiva" refer to "-Results of Operations" below). While differences exist among the 37
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Company's businesses, on an overall basis, demand for the Company's products and services increased on a year-over-year basis in 2021 as compared to 2020, and together with the Company's continued investments in sales growth initiatives and the other business-specific factors contributed to the core sales growth discussed below. As the conditions related to the pandemic improved in many geographies in 2021 compared to 2020, the Company generally experienced increased demand in the end-markets it serves. In addition to the improving pandemic conditions, development and production related to COVID-19 vaccines and therapeutics among biotechnology and pharmaceutical customers continued to generate strong demand for bioprocessing and genomic products in the Company's Life Sciences segment and COVID-19 related testing generated strong demand primarily in the Company's molecular diagnostics testing business in the Diagnostics segment and in the Company's flow cytometry, genomics, lab automation, centrifugation, particle counting and characterization business and the genomics consumables business in the Life Sciences segment. Geographically, both high-growth and developed markets contributed to year-over-year core sales growth during 2021. Core sales in developed markets grew more than 20% in 2021 as compared to 2020 and were driven byNorth America andWestern Europe . Core sales in high-growth markets grew approximately 30% in 2021 as compared to 2020, with broad-based growth across these markets, led by growth inChina . High-growth markets represented approximately 31% of the Company's total sales in 2021. The Company's net earnings from continuing operations for the year endedDecember 31, 2021 totaled approximately$6.3 billion , compared to approximately$3.6 billion for the year endedDecember 31, 2020 . Net earnings attributable to common stockholders for the year endedDecember 31, 2021 totaled approximately$6.3 billion or$8.61 per diluted common share compared to approximately$3.5 billion or$4.89 per diluted common share for the year endedDecember 31, 2020 . The increase in net earnings in 2021 as compared to 2020 was driven by increased sales in the Company's existing businesses and sales from acquired businesses, partially offset by the impact of the modification and partial termination of a prior commercial arrangement and resolution of the associated litigation. Refer to "-Results of Operations" for further discussion of the year-over-year changes in net earnings and diluted net earnings per common share for the year endedDecember 31, 2021 .
For a discussion of the impact of supply chain disruptions, labor availability constraints and increased labor costs on our businesses in 2021, please see "Item 1. Business - Materials."
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, including the current spread of certain variants of the virus, and has taken and intends to continue taking steps to identify and seek to 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, 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 and is implementing return-to-workplace protocols designed to help ensure the health and safety of its employees, customers and business partners, for its businesses to apply as appropriate. Given that the prevalence of COVID-19 and the nature of the response thereto (including the degree to which restrictions are being relaxed or re-imposed) varies significantly by geography, the impact of the pandemic on the Company's different business locations around the world at any given time also varies significantly.
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 diagnostic tests for the rapid detection of COVID-19. In addition, our businesses are providing critical support to firms that are developing and producing vaccines and therapies for COVID-19, among other support.
While we expect overall demand for the Company's COVID-19 related products to
moderate as and to the extent the pandemic subsides, as the pandemic evolves
toward endemic status we believe a level of demand for the Company's products
that support COVID-19 related vaccines and therapeutics (including initiatives
that seek to prevent or mitigate similar, future pandemics) and COVID-19 testing
will continue. However, on a relative basis, we expect the level of ongoing
demand for products supporting COVID-19 testing will be subject to more
fluctuations in demand than the level of demand for products supporting COVID-19
related vaccines and therapeutics. The Company's ability to satisfy COVID-19
related demand will also depend in part upon the expansion of our production
capacity in these areas.
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
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business remains highly uncertain, but may be materially negative to certain elements of our business. The potential negative impact will depend on future developments including but not limited to:
•the degree of spread and severity of COVID-19 variants such as Omicron; and
•the timing and durability of continued recovery in the global demand for our non-COVID-19 related products and services.
For additional information on the risks of COVID-19 to the Company's operations, refer to the "Item 1A. Risk Factors" section of this Annual Report.
Acquisitions
OnAugust 30, 2021 , the Company acquiredAldevron, L.L.C. ("Aldevron") for a cash purchase price of approximately$9.6 billion (the "Aldevron Acquisition").Aldevron manufactures high-quality plasmid DNA, mRNA and proteins, serving biotechnology and pharmaceutical customers across research, clinical and commercial applications, and is now part of the Company's Life Sciences segment.Aldevron generated revenues of approximately$300 million in 2020. The acquisition ofAldevron is expected to provide additional sales and earnings opportunities for the Company by expanding product line diversity, including new product offerings supporting genomic medicine. The Company financed theAldevron Acquisition using cash on hand and proceeds from the issuance of commercial paper. In addition to the Aldevron Acquisition, during 2021 the Company acquired 13 other businesses for total consideration of approximately$1.4 billion in cash, net of cash acquired. The businesses acquired complement existing units of each of the Company's three segments. The aggregate annual sales of the 13 other businesses acquired in 2021 at the time of their acquisition, in each case based on the company's revenues for its last completed fiscal year prior to the acquisition, were approximately$100 million .
Refer to Note 2 to the Consolidated Financial Statements for discussion regarding the Company's acquisitions.
RESULTS OF OPERATIONS
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 to generally accepted accounting principles inthe United States ("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 any
sales and operating profit, during the applicable period, 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. Prior to
the acquisition of Cytiva, Danaher calculated core sales solely on a basis that
excluded 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 beginning immediately after the
acquisition Cytiva's impact on the Company's growth profile, rather than waiting
to demonstrate such impact until 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 Cytiva
sales to core sales for both the baseline and current periods. Beginning in the
second quarter
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of 2021, Cytiva sales are included in core sales, and therefore the measure "core sales including Cytiva" is no longer provided for quarterly periods beginning with the second quarter of 2021.
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 sales, in the case of core sales 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 growth or decline 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 DBS.
The Company deems acquisition-related transaction costs incurred in a given period to be significant (generally relating to the Company's larger acquisitions) if it determines that such costs exceed the range of acquisition-related transaction costs typical for Danaher in a given period.
Core Sales Growth and Core Sales Growth Including Cytiva
2021 vs. 2020 2020 vs. 2019
Total sales growth (GAAP) 32.0 % 24.5 %
Impact of:
Acquisitions/divestitures (7.5) % (18.0) %
Currency exchange rates (1.5) % - %
Core sales growth (non-GAAP) 23.0 % 6.5 %
Impact of Cytiva sales growth (net of divested product lines) 2.0 % 3.0 %
Core sales growth including Cytiva (non-GAAP) 25.0 % 9.5 %
2021 Sales Compared to 2020
Total sales increased 32.0% on a year-over-year basis in 2021 primarily as a
result of an increase in core sales resulting from the factors discussed below
by segment as well as an increase in sales from acquired businesses, net of
divestitures, primarily due to the acquisition of Cytiva. The impact of currency
translation increased reported sales by 1.5% on a year-over-year basis in 2021
primarily due to the favorable impact of the weakening of the U.S. dollar
against most other major currencies in 2021.
Operating Profit Performance
Operating profit margins were 25.3% for the year ended
2021 vs. 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher
margin product lines, incremental year-over-year cost savings associated with
continuing productivity improvement initiatives and the impact of foreign
currency exchange rates in 2021, net of incremental year-over-year costs
associated with various new product development and sales, service and marketing
growth investments and incremental year-over-year material and labor costs - 560
basis points
•2020 acquisition-related fair value adjustments to inventory and deferred
revenue, transaction costs deemed significant and integration preparation costs,
net of 2021 acquisition-related fair value adjustments to inventory and deferred
revenue in each case related to the acquisition of Cytiva - 210 basis points.
•The incremental accretive effect in 2021 of acquired businesses, net of product
line dispositions which did not qualify as discontinued operations - 60 basis
points
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•First quarter 2020 impairment charges related to a facility in the Diagnostics segment and a trade name and other intangible assets in the Environmental & Applied Solutions segment and a third quarter 2020 impairment charge related to trade names in the Environmental & Applied Solutions segment, net of a first quarter 2021 impairment charge related to a trade name in the Diagnostics segment - 5 basis points
2021 vs. 2020 operating profit margin comparisons were unfavorably impacted by:
•Third quarter 2021 impact of the modification and partial termination of a prior commercial arrangement and resolution of the associated litigation - 185 basis points •Full year 2021 acquisition-related fair value adjustments to inventory and transaction costs deemed significant, in each case related to the acquisition ofAldevron - 20 basis points Business Segments Sales by business segment for the years endedDecember 31 are as follows ($ in millions): 2021 2020 2019 Life Sciences$ 14,958 $ 10,576 $ 6,951 Diagnostics 9,844 7,403 6,561
Environmental & Applied Solutions 4,651 4,305 4,399 Total
$ 29,453 $ 22,284 $ 17,911
For information regarding the Company's sales by geographical region, refer to Note 5 to the Consolidated Financial Statements.
LIFE SCIENCES
The Life Sciences segment offers a broad range of instruments and consumables that are primarily used by customers to study the basic building blocks of life, including genes, proteins, metabolites and cells, in order to understand the causes of disease, identify new therapies, and test and manufacture new drugs and vaccines.
Life Sciences Selected Financial Data
Year Ended December 31
($ in millions) 2021 2020 2019
Sales $ 14,958 $ 10,576 $ 6,951
Operating profit 4,367 2,054 1,401
Depreciation 258 183 130
Amortization of intangible assets 1,183 870 357
Operating profit as a % of sales 29.2 % 19.4 % 20.2 %
Depreciation as a % of sales 1.7 % 1.7 % 1.9 %
Amortization as a % of sales 7.9 % 8.2 % 5.1 %
Core Sales Growth and Core Sales Growth Including Cytiva
2021 vs. 2020 2020 vs. 2019
Total sales growth (GAAP) 41.5 % 52.0 %
Impact of:
Acquisitions/divestitures (16.5) % (46.5) %
Currency exchange rates (2.0) % - %
Core sales growth (non-GAAP) 23.0 % 5.5 %
Impact of Cytiva sales growth (net of divested product lines) 4.5 % 7.5 %
Core sales growth including Cytiva (non-GAAP) 27.5 % 13.0 %
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2021 Sales Compared to 2020
Price increases in the segment contributed 2.0% to sales growth on a year-over-year basis during 2021 as compared with 2020 and are reflected as a component of the change in core revenue growth.
During 2021, total Life Sciences segment sales increased 41.5% primarily as a result of increased core sales resulting from the factors discussed below and increased sales from acquisitions. In addition, the impact of currency translation increased reported sales by 2.0% in 2021 compared to 2020, primarily due to the favorable impact of the weakening of theU.S. dollar in 2021 compared to 2020. On an overall basis, in 2021 the Life Sciences segment saw continued strong demand for products supporting customers in the pursuit and production of COVID-19-related vaccines and therapeutics as well as broad strength across its other product lines. In 2021, core sales for the filtration, separation and purification technologies business increased compared to 2020 due to strong demand for these products led by the biopharmaceutical and the microelectronics end-markets, partially offset by weaker demand in the aerospace end-market. Geographically, core sales for the business were led byNorth America ,Western Europe andChina . Core sales for the Company's flow cytometry, genomics, lab automation, centrifugation, particle counting and characterization business increased in 2021 across all major geographies, led byNorth America andWestern Europe . Core sales for the business were driven by demand earlier in the year for genomic sample preparation consumables related to COVID-19 as well as demand for flow cytometry products. Core sales in the mass spectrometry business increased in 2021 across all major end-markets driven in part by demand for new products. Geographically, demand for these products increased across all major geographies, led byNorth America ,Western Europe andChina . The acquisitions of Cytiva onMarch 31, 2020 (the "Cytiva Acquisition") andAldevron onAugust 30, 2021 have provided, and are expected to continue 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 bioprocessing workflow and genomic medicine solutions. In 2021, Cytiva experienced significant increased year-over-year demand across all major geographies, driven by continued strong demand for instruments and consumables used in the research and development and production of COVID-19 related treatments and vaccines and increased demand for non-COVID 19 related products as well as by the completion of a major project inChina . Since acquisition,Aldevron has seen sales growth in all major product lines compared to the prior year period. Operating Profit Performance
Operating profit margins increased 980 basis points during 2021 as compared to 2020. The following factors impacted year-over-year operating profit margin comparisons.
2021 vs. 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, incremental year-over-year cost savings associated with continuing productivity improvement initiatives and the impact of foreign currency exchange rates in 2021, net of incremental year-over-year costs associated with various new product development and sales and marketing growth investments and incremental year-over-year material and labor costs - 500 basis points •2020 acquisition-related fair value adjustments to inventory and deferred revenue, transaction costs deemed significant and integration preparation costs, net of 2021 acquisition-related fair value adjustments to inventory and deferred revenue in each case related to the acquisition of Cytiva - 440 basis points •The incremental accretive effect in 2021 of acquired businesses, net of product line dispositions which did not qualify as discontinued operations - 80 basis points
2021 vs. 2020 operating profit margin comparisons were unfavorably impacted by:
•Full year 2021 acquisition-related fair value adjustments to inventory and transaction costs deemed significant, in each case related to the acquisition ofAldevron - 40 basis points
Depreciation and amortization of intangible assets as a percentage of sales were relatively consistent in 2021 as compared with 2020.
DIAGNOSTICS
The Diagnostics segment offers clinical 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.
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Diagnostics Selected Financial Data
Year Ended December 31
($ in millions) 2021 2020 2019
Sales $ 9,844 $ 7,403 $ 6,561
Operating profit 2,313 1,538 1,134
Depreciation 409 397 376
Amortization of intangible assets 205 205 206
Operating profit as a % of sales 23.5 % 20.8 % 17.3 %
Depreciation as a % of sales 4.2 % 5.4 % 5.7 %
Amortization as a % of sales 2.1 % 2.8 % 3.1 %
Core Sales Growth
2021 vs. 2020 2020 vs. 2019
Total sales growth (GAAP) 33.0 % 13.0 %
Impact of:
Acquisitions/divestitures (0.5) % - %
Currency exchange rates (1.5) % 0.5 %
Core sales growth (non-GAAP) 31.0 % 13.5 %
2021 Sales Compared to 2020
Price increases in the segment contributed 0.5% to sales growth on a year-over-year basis during 2021 as compared with 2020 and are reflected as a component of the change in core sales growth.
During 2021, total Diagnostics segment sales increased 33.0% primarily as a result of increased core sales resulting from the factors discussed below. In addition, the impact of currency translation increased reported sales by 1.5%, primarily due to the favorable impact of the weakening of theU.S. dollar in 2021 compared to 2020, and the impact of sales from acquisitions increased reported sales by 0.5% in 2021. During 2021, the Diagnostics segment experienced higher year-over-year sales for molecular diagnostics tests for COVID-19. Demand across the other Diagnostics segment businesses also increased with non-COVID product lines testing volumes improving as individuals resumed visits to healthcare providers following the easing of shutdowns and restrictions related to the pandemic. In 2021, core sales in the segment's clinical lab business increased on a year-over-year basis across all major geographies driven primarily by continued increased demand in the chemistry and immunoassay product lines. During 2021, core sales in the molecular diagnostics business grew on a year-over-year basis in both developed and high-growth markets, which contributed significantly to overall segment core sales growth. The business continued to experience strong growth in sales of consumables, driven primarily by increased sales of diagnostic test solutions for COVID-19, as increased production capacity allowed the business to produce more diagnostic tests in response to continued market growth, and higher year-over-year demand for testing for non-respiratory diseases. Core sales in the acute care diagnostic business increased year-over-year due to continued strong demand for blood gas consumables and immunoassay products, partially offset by lower year-over-year instrument sales largely due to strong COVID-19 related demand for blood gas instruments in 2020. Geographically, demand was strong across most major geographies. Core sales in the pathology business grew year-over-year across all major geographies, driven by increased demand for core histology, advanced staining and pathology imaging products.
Operating Profit Performance
Operating profit margins increased 270 basis points during 2021 as compared to 2020. The following factors impacted year-over-year operating profit margin comparisons.
2021 vs. 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, incremental year-over-year cost savings associated with continuing productivity improvement initiatives and the impact of foreign currency exchange rates in 2021, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments and incremental year-over-year material and labor costs - 810 basis points
•The incremental accretive effect in 2021 of acquired businesses - 20 basis points
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2021 vs. 2020 operating profit margin comparisons were unfavorably impacted by:
•Third quarter 2021 impact of the modification and partial termination of a prior commercial arrangement and resolution of the associated litigation - 555 basis points
•First quarter 2021 impairment charge related to a trade name, net of a first quarter 2020 impairment charge related to a facility - 5 basis points
Depreciation and amortization of intangible assets both decreased as a percentage of sales during 2021 as compared with 2020, primarily as a result of the increase in sales.
ENVIRONMENTAL & APPLIED SOLUTIONS
The Environmental & Applied Solutions segment offers products and services that help protect precious 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 instruments, software, services and consumables for various color and appearance management, packaging design and quality management, packaging converting, printing, marking, coding and traceability applications for consumer, pharmaceutical and industrial products.
Environmental & Applied Solutions Selected Financial Data
Year Ended December 31
($ in millions) 2021 2020 2019
Sales $ 4,651 $ 4,305 $ 4,399
Operating profit 1,054 979 1,052
Depreciation 44 47 49
Amortization of intangible assets 62 63 62
Operating profit as a % of sales 22.7 % 22.7 % 23.9 %
Depreciation as a % of sales 0.9 % 1.1 % 1.1 %
Amortization as a % of sales 1.3 % 1.5 % 1.4 %
Core Sales Growth (Decline)
2021 vs. 2020 2020 vs. 2019
Total sales growth (decline) (GAAP) 8.0 % (2.0) %
Impact of:
Acquisitions/divestitures 1.5 % - %
Currency exchange rates (1.5) % 0.5 %
Core sales growth (decline) (non-GAAP) 8.0 % (1.5) %
2021 Sales Compared to 2020
Price increases in the segment contributed 1.5% to sales growth on a year-over-year basis during 2021 as compared with 2020 and are reflected as a component of the change in core revenue growth.
In 2021, total Environmental & Applied Solutions segment sales increased 8.0%, primarily as a result of core sales growth driven by the factors discussed below. The impact of currency translation increased reported sales 1.5% in 2021, primarily due to the favorable impact of the weakening of theU.S. dollar in 2021 compared to 2020. Divestitures, net of acquisitions, decreased reported sales by 1.5% in 2021. On an overall basis, in 2021 the segment's water quality businesses increased at a mid-single digit rate due to continuing demand for consumables and increased demand for equipment on a year-over-year basis, driven in part by the recovery from the decline in equipment demand in 2020 as a result of the COVID-19 pandemic. Year-over-year core sales in the analytical instrumentation product line increased driven by demand inNorth America ,Western Europe andChina and by demand in the municipal and industrial end-markets. Core sales in the chemical treatment solutions product line increased as a result of demand in the chemical, commercial and industry and food and beverage end-markets, driven byNorth America . 44
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The segment's product identification businesses grew at a low-double digit rate due to continued demand for consumables along with an increase in demand for equipment, driven in part by the recovery from lower equipment volumes in 2020 resulting from the COVID-19 pandemic. Core sales in the marking and coding business increased across all major geographies and most major end-markets. Year-over-year core sales in the packaging and color solutions products and services business increased across most major geographies.
Operating Profit Performance
Operating profit margins were flat during 2021 as compared to 2020. The following factors impacted year-over-year operating profit margin comparisons.
2021 vs. 2020 operating profit margin comparisons were favorably impacted by:
•Impairment charges related to a trade name and other intangible assets in the first quarter of 2020 and a trade name in the third quarter of 2020 - 45 basis points
2021 vs. 2020 operating profit margin comparisons were unfavorably impacted by:
•Incremental year-over-year costs associated with sales, service and marketing growth investments and incremental year-over-year material and labor costs, net of higher 2021 core sales volumes, incremental year-over-year cost savings associated with continuing productivity improvement initiatives and the impact of foreign currency exchange rates in 2021 - 45 basis points
COST OF SALES AND GROSS PROFIT
Year Ended December 31
($ in millions) 2021 2020 2019
Sales $ 29,453 $ 22,284 $ 17,911
Cost of sales (11,501) (9,809) (7,927)
Gross profit $ 17,952 $ 12,475 $ 9,984
Gross profit margin 61.0 % 56.0 % 55.7 %
The year-over-year increase in cost of sales during 2021 as compared with 2020
was due primarily to the impact of higher year-over-year sales volumes,
including sales volumes from recently acquired businesses and incremental
year-over-year material and labor costs. This increase was partially offset by
lower incremental year-over-year acquisition-related charges associated with
fair value adjustments to inventory in connection with acquisitions (the
acquisition of Aldevron in 2021 and Cytiva in 2020), which increased cost of
sales by $59 million in 2021 and $457 million in 2020.
The year-over-year increase in gross profit margin during 2021 as compared with
2020 was due primarily to higher year-over-year sales volumes, including sales
volumes from recently acquired businesses and the impact of the change in mix of
sales to higher margin product lines. The acquisition-related charges of $76
million incurred in 2021 associated with fair value adjustments to deferred
revenue related to the Cytiva Acquisition and fair value adjustments to
inventory in connection with the acquisitions of both Aldevron and Cytiva, were
lower than the $509 million of fair value adjustments to deferred revenue and
inventory recorded in 2020 related to the Cytiva Acquisition, which also
contributed to the increased gross profit margin in 2021. Gross profit margin
also benefited in 2021 from the inclusion of a full year of Cytiva sales
compared to only nine months in 2020.
OPERATING EXPENSES
Year Ended December 31
($ in millions) 2021 2020 2019
Sales $ 29,453 $ 22,284 $ 17,911
Selling, general and administrative ("SG&A") expenses (8,198) (6,896) (5,589)
Research and development ("R&D") expenses (1,742) (1,348) (1,126)
Other operating expenses (547) - -
SG&A as a % of sales 27.8 % 30.9 % 31.2 %
R&D as a % of sales 5.9 % 6.0 % 6.3 %
Other operating expenses as a % of sales 1.9 % - % - %
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SG&A expenses as a percentage of sales declined 310 basis points on a year-over-year basis for 2021 compared with 2020. The decline was driven by the benefit of increased leverage of the Company's general and administrative cost base, including amortization expense, resulting from higher 2021 sales volumes, including sales volumes from recently acquired businesses, incremental year-over-year cost savings associated with continuing productivity improvement initiatives and lower year-over-year impairment charges related to a facility, a trade name and other intangible assets incurred in 2020, net of impairment charges related to a trade name in 2021. The Company's 2021 transaction costs for the acquisition ofAldevron were lower than 2020 transaction costs for the acquisition of Cytiva, which also benefited SG&A as a percentage of sales during 2021. These decreases were partially offset by continued investments in sales and marketing growth initiatives in 2021. R&D expenses (consisting principally of internal and contract engineering personnel costs) as a percentage of sales declined slightly in 2021 as compared with 2020, primarily due to the sales growth rate exceeding the spending growth related to new product development initiatives. Other operating expenses and other operating expenses as a percentage of sales increased in 2021 compared with 2020 as a result of the contract settlement expense related to the modification and partial termination of a prior commercial arrangement and resolution of the associated litigation during 2021. Refer to Note 8 to the accompanying Consolidated Financial Statements.
NONOPERATING INCOME (EXPENSE)
Nonoperating income (expense) consists primarily of net unrealized and realized gains/losses resulting from changes in the fair value of the Company's investments in equity securities and investments in partnerships, the non-service cost components of net periodic benefit costs and gains on the sale of product lines. Refer to Note 9 in the Consolidated Financial Statements.
LOSS ON EARLY EXTINGUISHMENT OF BORROWINGS
In the fourth quarter of 2021, the Company redeemed the €800 million aggregate principal amount of 2.5% senior unsecured notes due 2025 at a redemption price equal to the outstanding principal amount and a make-whole premium as specified in the applicable indenture, plus accrued and unpaid interest. The Company recorded a loss on early extinguishment of these borrowings related to the payment of the make-whole premiums and deferred costs in connection with the redemption of$96 million ($73 million after-tax). The Company funded the redemption using available cash balances, including proceeds from the fourth quarter 2021 issuance of the$1.0 billion aggregate principal amount of 2.8% senior unsecured notes due 2051. In the fourth quarter of 2020, the Company redeemed the €800 million aggregate principal amount of 1.7% senior unsecured notes due 2022 at a redemption price equal to the outstanding principal amount and a make-whole premium as specified in the applicable indenture, plus accrued and unpaid interest. The Company recorded a loss on early extinguishment of these borrowings of$26 million ($20 million after-tax) related to the payment of make-whole premiums in connection with the redemption. The Company funded the redemption using available cash balances, including proceeds from the fourth quarter 2020 issuance of the$1.0 billion aggregate principal amount of 2.6% senior unsecured notes due 2050.
INTEREST COSTS
Interest expense of$238 million for 2021 was$37 million lower than in 2020, due primarily to lower average debt balances in 2021 compared to 2020, partially offset by the impact of the weakerU.S. dollar in 2021 on the interest expense for the Company's foreign currency denominated debt (andU.S. dollar debt that has been effectively converted into foreign currency through cross-currency swap derivative contracts). Interest income of$11 million for 2021 was$60 million lower than in 2020, due primarily to lower average cash balances in 2021 as a result of the funding of the Cytiva Acquisition in 2020 and theAldevron Acquisition in 2021 and lower interest rates.
For a further description of the Company's debt and cross-currency swap
derivative contracts related to the debt as of
INCOME TAXES
General
Income tax expense and deferred tax assets and liabilities reflect management's
assessment of future taxes expected to be paid on items reflected in the
Company's Consolidated Financial Statements. The Company records the tax effect
of discrete items and items that are reported net of their tax effects in the
period in which they occur.
The Company's effective tax rate can be affected by changes in the mix of
earnings in countries with different statutory tax rates (including as a result
of business acquisitions and dispositions), changes in the valuation of deferred
tax assets and liabilities, accruals related to contingent tax liabilities and
period-to-period changes in such accruals, the results of audits and
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examinations of previously filed tax returns (as further discussed below), the expiration of statutes of limitations, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities, changes in tax laws and regulations, and legislative policy changes that may result from theOECD's initiative on Base Erosion and Profit Shifting. For a description of the tax treatment of earnings that are planned to be reinvested indefinitely outsidethe United States , refer to "-Liquidity and Capital Resources-Cash and Cash Requirements" below. The amount of income taxes the Company pays is subject to ongoing audits by federal, state and non-U.S. tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis. Based on these reviews, which take into account the results of discussions and resolutions of matters with certain tax authorities and the other factors referenced in the prior paragraph, reserves for contingent tax liabilities are accrued or adjusted as necessary. For a discussion of risks related to these and other tax matters, refer to "Item 1A. Risk Factors".
Year-Over-Year Changes in the Tax Provision and Effective Tax Rate
Year Ended
2021 2020 2019
Effective tax rate from continuing operations 16.5 %
18.9 % 26.4 %
The Company's effective tax rate for 2021 and 2020 differs from theU.S. federal statutory rate of 21.0%, due principally to net discrete benefits related primarily to the release of reserves for uncertain tax positions due to the expiration of statutes of limitation and audit settlements, excess tax benefits from stock-based compensation and the mix of earnings between theU.S. and certain jurisdictions with lower overall tax rates, net of changes in estimates associated with prior period uncertain tax positions. Refer to Note 7 to the Consolidated Financial Statements for a discussion of the Company's effective tax rate. The Company conducts business globally, and files numerous consolidated and separate income tax returns in theU.S. federal, state and non-U.S. jurisdictions. The non-U.S. countries in which the Company has a significant presence includeChina ,Denmark ,Germany ,Singapore ,Sweden ,Switzerland and theUnited Kingdom . Excluding these jurisdictions, the Company believes that a change in the statutory tax rate of any individual non-U.S. country would not have a material effect on the Company's Consolidated Financial Statements given the geographic dispersion of the Company's taxable income. The Company and its subsidiaries are routinely examined by variousU.S. and non-U.S. taxing authorities. TheIRS has completed substantially all of the examinations of the Company's federal income tax returns through 2015 and is currently examining certain of the Company's federal income tax returns for 2016 through 2018. In addition, the Company has subsidiaries inAustria ,Belgium ,Canada ,China ,Denmark ,France ,Germany ,India ,Japan ,Korea ,Switzerland , theUnited Kingdom and various other countries, states and provinces that are currently under audit for years ranging from 2004 through 2020. During the year endedDecember 31, 2020 , the Company settled theIRS audits of its federal income tax returns for 2012 through 2015. In the audit, theIRS proposed significant adjustments to the Company's taxable income of approximately$2.7 billion related to the deferral of tax on certain premium income related to the Company's self-insurance programs. For income tax purposes, the recognition of certain premium income has been deferred in accordance withU.S. tax laws related to insurance. While the settlement of these matters was not material to the Company's financial statements, the settlement does not preclude theIRS from proposing similar adjustments in future audits and theIRS has continued to examine the deferral of premium income related to self-insurance programs in its examination of the Company's federal income tax returns for 2016 through 2018. The examination is ongoing and to date, theIRS has not proposed any adjustments related to the Company's self-insurance programs. Due to the enactment of the TCJA in 2017 and the resulting reduction in theU.S. corporate tax rate for years after 2017, the Company remeasured its deferred tax liabilities related to the temporary differences associated with this deferred premium income from 35.0% to 21.0%. If theIRS proposes adjustments related to the Company's self-insurance premiums with respect to years prior to the adoption of the TCJA and the Company is unsuccessful in defending its position, any taxes owed to theIRS may be computed under the previous 35.0% statutory tax rate and the Company may be required to remeasure 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. Management believes the positions the Company has taken in itsU.S. tax returns are in accordance with the relevant tax laws. Tax authorities inDenmark have issued tax assessments related to interest accrued by certain of the Company's subsidiaries for the years 2004 through 2015. During the first quarter of 2021, the Company received a notice from the Danish tax authorities that included a significant reduction in the interest amounts imposed on the original tax assessments. Taking into account the revised interest amounts, the assessments total approximatelyDKK 2.1 billion including interest accrued to date (approximately$317 million based on the exchange rate as ofDecember 31, 2021 ). The Company's appeal of the tax assessments with theDanish National Tax Tribunal has been put on hold awaiting the final outcome of other preceding withholding tax cases that have been brought before theDanish High Court . Management believes the positions the Company has taken inDenmark are 47
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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. While the ultimate resolution of this matter is uncertain and could take many years, as a result of the payments the Company has previously made related to these assessments in order to mitigate further interest accruals, the Company does not expect the resolution of this matter will have a future material adverse impact to the Company's financial statements, including its cash flow and effective tax rate. The Company expects its 2022 effective tax rate to be approximately 20.0% which is higher than the 2021 rate due primarily to the impact of net discrete tax benefits on the 2021 effective tax rate and the geographic mix of earnings anticipated for 2022. Any future legislative changes inthe United States and/or potential tax reform in other jurisdictions, could cause the Company's effective tax rate to differ from this estimate. Refer to Note 7 to the Consolidated Financial Statements for additional information related to income taxes.
DISCONTINUED OPERATIONS
OnJuly 2, 2016 , the Company completed the separation of its former Test & Measurement segment, Industrial Technologies segment (excluding the product identification businesses) and retail/commercial petroleum business by distributing to Danaher stockholders on a pro rata basis all of the issued and outstanding common stock of Fortive Corporation ("Fortive"), the entity the Company incorporated to hold such businesses. In 2021, the Company recorded an income tax benefit of$86 million related to the release of previously provided reserves associated with uncertain tax positions on certain of the Company's tax returns which were jointly filed with Fortive entities. These reserves were released due to the expiration of statutes of limitations for those returns. This income tax benefit is included in earnings from discontinued operations, net of income taxes in the Consolidated Statements of Earnings. OnDecember 18, 2019 , the Company completed its disposition of its remaining ownership of Envista and as a result, the results of Envista are reported as discontinued operations.
Refer to Note 3 to the Consolidated Financial Statements for additional information.
COMPREHENSIVE INCOME
Comprehensive income decreased by$572 million in 2021 as compared to 2020, primarily driven by the impact of losses from foreign currency translation adjustments in 2021 compared to gains in 2020, partially offset by higher net earnings and an increase in the income from pension and postretirement plan benefit adjustments and cash flow hedge adjustments in 2021 compared to 2020. The Company recorded a foreign currency translation loss of approximately$1.3 billion for 2021 compared to a gain of approximately$2.9 billion for 2020. The Company recorded a pension and postretirement plan benefit gain of$378 million for 2021 compared to a loss of$147 million for 2020. The Company recorded gains from cash flow hedge adjustments related to the Company's derivative contracts in 2021 of$247 million compared to losses of$72 million in 2020.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, equity prices and commodity prices as well as credit risk, each of which could impact its Consolidated Financial Statements. The Company generally addresses its exposure to these risks through its normal operating and financing activities. The Company also periodically uses derivative financial instruments to manage foreign exchange risks and interest rate risks. In addition, the Company's broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its financial statements as a whole.
Interest Rate Risk
The Company manages interest cost using a mixture of fixed-rate and variable-rate debt. A change in interest rates on fixed rate debt impacts the fair value of the debt but not the Company's earnings or cash flow because the interest on such debt is fixed. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. As ofDecember 31, 2021 , an increase of 100 basis points in interest rates would have decreased the fair value of the Company's fixed-rate long-term debt by approximately$1.7 billion . As ofDecember 31, 2021 , the Company's variable-rate debt obligations consisted primarily ofU.S. dollar and euro-based commercial paper borrowings (refer to Note 14 to the Consolidated Financial Statements for information regarding the Company's outstanding commercial paper balances as ofDecember 31, 2021 ). As a result, the Company's primary interest rate exposure results from changes in short-term interest rates. As these shorter duration obligations mature, the Company may issue additional short-term commercial paper obligations to refinance all or part of these borrowings, to the extent commercial paper markets are available. In 2021, the average annual interest rate associated with the Company's outstanding commercial 48
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paper borrowings was approximately negative 12 basis points. A hypothetical
increase of this average by 100 basis points would have increased the Company's
annual interest expense by approximately
Refer to "Results of Operations-Interest Costs" for discussion of the Company's cross-currency swap derivative contracts and interest rate swap agreements.
Currency Exchange Rate Risk
The Company faces transactional exchange rate risk from transactions with customers in countries outsidethe United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than Danaher's functional currency or the functional currency of its applicable subsidiary. The Company also faces translational exchange rate risk related to the translation of financial statements of its foreign operations intoU.S. dollars, Danaher's functional currency. Costs incurred and sales recorded by subsidiaries operating outside ofthe United States are translated intoU.S. dollars using exchange rates effective during the respective period. As a result, the Company is exposed to movements in the exchange rates of various currencies against theU.S. dollar. In particular, the Company has more sales in European currencies than it has expenses in those currencies. Therefore, when European currencies strengthen or weaken against theU.S. dollar, operating profits are increased or decreased, respectively. The effect of a change in currency exchange rates on the Company's net investment in non-U.S. subsidiaries is reflected in the accumulated other comprehensive income (loss) component of stockholders' equity. Currency exchange rates positively impacted 2021 reported sales on a year-over-year basis primarily due to the weakening of theU.S. dollar against most major currencies during the first nine months of 2021, slightly offset by the strengthening of theU.S. dollar during the fourth quarter of 2021. If the currency exchange rates in effect as ofDecember 31, 2021 were to prevail throughout 2022, currency exchange rates would decrease 2022 estimated sales relative to 2021 sales by approximately 1.0%. Strengthening of theU.S. dollar against other major currencies compared to the exchange rates in effect as ofDecember 31, 2021 would adversely impact the Company's sales and results of operations on an overall basis. Any weakening of theU.S. dollar against other major currencies compared to the exchange rates in effect as ofDecember 31, 2021 would positively impact the Company's sales and results of operations. The Company has generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this transactional exchange risk, although the Company has used foreign currency-denominated debt and cross-currency swaps to hedge a portion of its net investments in non-U.S. operations against adverse movements in exchange rates. Both positive and negative movements in currency exchange rates against theU.S. dollar will continue to affect the reported amount of sales and net earnings in the Company's Consolidated Financial Statements. In addition, the Company has assets and liabilities held in foreign currencies. A 10% depreciation in major currencies relative to theU.S. dollar as ofDecember 31, 2021 would have reduced foreign currency-denominated net assets and stockholders' equity by approximately$1.6 billion . Refer to Note 15 to the Consolidated Financial Statements for information regarding the Company's hedging of a portion of its net investment in non-U.S. operations.
Equity Price Risk
The Company's investment portfolio from time to time includes publicly-traded equity securities that are sensitive to fluctuations in market price. As ofDecember 31, 2021 , the Company held$88 million of publicly-traded equity securities. Additionally, the Company holds non-marketable equity investments in privately held companies that may be impacted by equity price risks. These non-marketable equity investments are accounted for under the Fair Value Alternative method with changes in fair value recorded in earnings. Volatility in the equity markets or other fair value considerations could affect the value of these investments and require charges or gains to be recognized in earnings.
Commodity Price Risk
For a discussion of risks relating to commodity prices, refer to "Item 1A. Risk Factors."
Credit Risk
The Company is exposed to potential credit losses in the event of nonperformance
by counterparties to its financial instruments. Financial instruments that
potentially subject the Company to credit risk consist of cash and temporary
investments, receivables from customers and derivatives. The Company places cash
and temporary investments with various high-quality financial institutions
throughout the world and exposure is limited at any one institution. Although
the Company typically does not obtain collateral or other security to secure
these obligations, it does regularly monitor the third-party depository
institutions that hold its cash and cash equivalents. The Company's emphasis is
primarily on safety and liquidity of principal and secondarily on maximizing
yield on those funds.
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In addition, concentrations of credit risk arising from receivables from customers are limited due to the diversity of the Company's customers. The Company's businesses perform credit evaluations of their customers' financial conditions as deemed appropriate and also obtain collateral or other security when deemed appropriate. The Company enters into derivative transactions infrequently and typically with high-quality financial institutions, so that exposure at any one institution is limited.
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 flow, cash on hand and other sources of liquidity will be sufficient to allow it to continue investing in existing businesses (including capital expenditures), consummating strategic acquisitions and investments, paying interest and servicing debt, paying dividends, funding restructuring activities and managing its capital structure on a short-term and long-term basis. The Company has relied primarily 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 including to secure financing for more significant acquisitions. Subject to any limitations that may result from the COVID-19 pandemic or other market disruptions (such as the disruptions in the financial and capital markets that occurred at times in 2020), the Company anticipates following the same approach in the future.
Following is an overview of the Company's cash flows and liquidity for the years
ended
Overview of Cash Flows and Liquidity
($ in millions) 2021 2020 2019 Total operating cash flows provided by continuing operations$ 8,358 $ 6,215 $ 3,657 Cash paid for acquisitions$ (10,961) $ (20,971) $ (331) Payments for additions to property, plant and equipment (1,294) (791) (636) Proceeds from sales of property, plant and equipment 13 2 13 Payments for purchases of investments (934) (342) (241) Proceeds from sales of investments 126 13 - Proceeds from sale of product lines 26 826 - All other investing activities 37 24 29 Total investing cash used in discontinued operations - - (72) Net cash used in investing activities$ (12,987) $
(21,239)
Proceeds from the issuance of common stock in connection with stock-based compensation$ 86 $
153
- 1,729 1,443
Proceeds from the public offering of preferred stock, net of issuance costs
- 1,668 1,600
Net proceeds from the sale of Envista Holdings
Corporation common stock, net of issuance costs - - 643
Payment of dividends (742) (615) (527)
Net proceeds from (repayments of) borrowings
(maturities of 90 days or less) 2,265 (4,637) 2,802
Proceeds from borrowings (maturities longer than 90 days)
984 8,670 12,113
Repayments of borrowings (maturities longer than 90 days)
(1,186) (5,933) (1,565)
Make-whole premiums to redeem borrowings prior to
maturity (96) (26) (7)
All other financing activities (16) (3) (43)
Cash distributions to Envista Holdings Corporation, net
- - (224)
Net cash provided by financing activities $ 1,295 $
1,006
•Operating cash flows from continuing operations increased approximately$2.1 billion , or 34%, during 2021 as compared to 2020, due primarily to higher net earnings from continuing operations (after excluding charges for 50
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depreciation, amortization (including intangible assets and inventory step-up), stock compensation, gain on sale of product lines, unrealized investment gains/losses, loss on the extinguishment of debt and the contract settlement expense in 2021). These increases were partially offset by higher cash used in aggregate for accounts receivables, inventories, trade accounts payable and accrued and prepaid expenses in 2021 compared to the prior year. •Net cash used in investing activities consisted primarily of cash paid for acquisitions, capital expenditures and investments, net of proceeds from the sale of investments, and decreased primarily as a result of lower cash paid for acquisitions in 2021 compared to 2020. Refer to Notes 2 and 12 to the Consolidated Financial Statements included in this Annual Report for a discussion of the Company's acquisitions and investments.
•As of
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 and productivity improvement initiatives, pension funding and other items impact reported cash flows.
Operating cash flows from continuing operations were approximately$8.4 billion for 2021, an increase of approximately$2.1 billion , or 34%, as compared to 2020. The year-over-year change in operating cash flows from 2020 to 2021 was primarily attributable to the following factors:
•2021 operating cash flows benefited from higher net earnings in 2021 as compared to 2020.
•Net earnings for 2021 reflected an increase of approximately$679 million of depreciation, amortization, stock compensation expense, unrealized investment gains/losses, loss on the extinguishment of debt and contract settlement expense as compared to 2020. Amortization expense primarily relates to the amortization of intangible assets and inventory fair value adjustments. Depreciation expense relates to both the Company's manufacturing and operating facilities as well as instrumentation leased to customers under operating-type lease arrangements. Contract settlement expense represents the pretax charge related to the modification and partial termination of a prior commercial arrangement and resolution of the associated litigation. Refer to Note 8 to the Consolidated Financial Statements for additional information on the contract settlement expense. Depreciation, amortization, stock compensation and contract settlement expense are noncash expenses that decrease earnings without a corresponding impact to operating cash flows. Cash flows from the gain on sale of product lines and loss on the extinguishment of debt are reflected in cash flows from investing activities while unrealized investment gains/losses impact net earnings without immediately impacting cash flows as the cash flow impact from investments occurs when the invested capital is returned to the Company. •The aggregate of trade accounts receivable, inventories and trade accounts payable used$564 million in operating cash flows during 2021, compared to$160 million of operating cash flows used in 2020. 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, deferred income taxes and accrued expenses and other liabilities used$94 million in operating cash flows during 2021, compared to$739 million provided in 2020. The timing of cash payments for taxes, various employee-related liabilities, customer funding and accrued expenses drove the majority of this change.
Investing Activities
Cash flows relating to investing activities consist primarily 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 was approximately
Acquisitions, Divestitures and Sale of Investments
For a discussion of the Company's 2021 and 2020 acquisitions and divestitures refer to "-Overview" and Note 2 to the Consolidated Financial Statements. In addition, in 2021 and 2020, the Company invested$934 million and$342 million , respectively, in non-marketable equity securities and partnerships. 51
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Capital Expenditures
Capital expenditures are made primarily for increasing manufacturing capacity, replacing equipment, supporting new product development, improving information technology systems and the manufacture of instruments that are used in operating-type lease arrangements that certain of the Company's businesses enter into with customers. Capital expenditures totaled approximately$1.3 billion in 2021 and$791 million in 2020. The year-over-year increase in capital spending in 2021 was primarily due to incremental capital expenditures to increase manufacturing capacity for diagnostic testing and biopharma products (including to address increased COVID-19 related demand) as well as incremental capital expenditures as a result of the Cytiva and Aldevron Acquisitions. In 2022, the Company expects to incur higher capital spending than the prior year to increase manufacturing capacity primarily to support customer demand for products related to testing, treatment and vaccine production for COVID-19 and other growth opportunities. The Company estimates capital expenditures in 2022 to be approximately$1.5 billion . During 2021, certain agencies of theU.S. government, including BARDA, agreed to finance an expansion of production capacity related to chromatography, liquid cell culture media, buffers and cell culture powder media and single-use consumables at certain of the Company's Life Sciences businesses and the development of diagnostics testing technologies and the expansion of testing production capacity at certain of the Company's Diagnostics businesses. The Company's businesses may enter into similar agreements in the future. In consideration of this financing theU.S. government has certain rights, including rights with respect to the allocation of certain of the incremental production capacity associated with such expansion and/or rights in intellectual property produced with its financial assistance. The amount awarded pursuant to these grants in 2021 totaled$568 million and will be paid over periods ranging from one to four years. In 2021, the Company received aggregate payments related to government grants of$73 million that offset operating expenses and capital expenditures of$41 million and$32 million , respectively.
Financing Activities
Cash flows from financing activities consist primarily of cash flows associated with the issuance and repayments of commercial paper, issuance and repayment of 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$1.3 billion during 2021 compared to approximately$1.0 billion of cash provided during 2020. The year-over-year increase in cash provided by financing activities was due primarily to cash provided in 2021 from the issuance of commercial paper used to fund a portion of the Aldevron Acquisition and the issuance of debt securities in the fourth quarter of 2021, partially offset by cash provided by the sale of common and preferred stock and borrowings incurred in 2020 to finance the remaining amounts needed to acquire Cytiva and for general corporate purposes, as well as the issuance of debt securities in the fourth quarter of 2020. Total debt was approximately$22.2 billion and$21.2 billion as ofDecember 31, 2021 and 2020, respectively, and notes payable and current portion of long-term debt was$8 million and$11 million as ofDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 , the Company had the ability to incur approximately$2.2 billion of additional indebtedness in direct borrowings or under the outstanding commercial paper facilities based on the amounts available under the Company's$5.0 billion Five-Year Facility which were not being used to backstop outstanding commercial paper balances. As ofDecember 31, 2021 , the Company has classified approximately$2.8 billion of its borrowings outstanding under theU.S. dollar and euro-denominated commercial paper program,$699 million of borrowings outstanding under the 2022 Biopharma Notes and$284 million of borrowings outstanding under the Floating Rate 2022 Euronotes as long-term debt in the Consolidated Balance Sheet as the Company has the intent and ability, as supported by availability under the Five-Year Facility, to refinance these borrowings for at least one year from the balance sheet date. As commercial paper obligations mature, the Company may issue additional short-term commercial paper obligations to refinance all or part of these borrowings, to the extent commercial paper markets are available. Under the Company'sU.S. dollar and euro-denominated commercial paper program, the notes are typically issued at a discount from par, generally based on the ratings assigned to the Company by credit rating agencies at the time of the issuance and prevailing market rates measured by reference to LIBOR or EURIBOR. Additionally, the Company's floating rate senior unsecured notes due 2022 pay interest based upon the three-month EURIBOR plus 0.3%. InJuly 2017 , the head of theUnited Kingdom Financial Conduct Authority announced the intent to phase out the use of LIBOR by the end of 2021. TheU.S. Federal Reserve , in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of largeU.S. financial institutions, is considering replacingU.S. dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed byTreasury securities. The Company has evaluated the anticipated impact of the transition from LIBOR and does not expect the transition to be material to the Company's financial position. TheU.S. dollar LIBOR-based borrowings will be available to the Company under the Five-Year Facility until 2023, upon the discontinuance of LIBOR. Prior to the discontinuation of LIBOR, the Company expects to amend the Five-Year Facility to replace LIBOR with another reference interest rate. 52
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Refer to Note 14 to the Consolidated Financial Statements for additional
information regarding the Company's financing activities and indebtedness,
including the Company's outstanding debt as of
Common Stock Offering and MCPS Offering
For a description of the 2020 Common Stock and MCPS Series B Offerings, refer to Note 19 to the Consolidated Financial Statements.
Shelf Registration Statement
The Company has filed a "well-known seasoned issuer" shelf registration statement on Form S-3 with theSEC that registers an indeterminate amount of debt securities, common stock, preferred stock, warrants, depositary shares, purchase contracts and units for future issuance. The Company expects to use net proceeds realized by the Company from future securities sales off this shelf registration statement for general corporate purposes, including without limitation repayment or refinancing of debt or other corporate obligations, acquisitions, capital expenditures, share repurchases, dividends and/or working capital. Stock Repurchase Program
Please see Note 19 to the Consolidated Financial Statements for a description of the Company's stock repurchase program.
Dividends
The Company declared a regular quarterly dividend of$0.21 per share of Company common stock that was paid onJanuary 28, 2022 to holders of record onDecember 30, 2021 . In addition, the Company declared quarterly cash dividends of$11.875 per MCPS Series A and$12.50 per MCPS Series B that were paid onJanuary 15, 2022 to holders of record as ofDecember 31, 2021 . Aggregate 2021 and 2020 cash payments for dividends on Company common stock were$578 million and$500 million , respectively, and aggregate 2021 and 2020 cash payments for the dividends on the Company's MCPS were$164 million and$115 million , respectively. The year-over-year increase in dividend payments in 2021 primarily relates to dividends paid on the MCPS Series B, which were issued inMay 2020 , and an increase in the quarterly dividend rate on common stock effective with respect to the dividend paid in the second quarter of 2021.
Cash and Cash Requirements
As ofDecember 31, 2021 , the Company held approximately$2.6 billion of cash and cash equivalents that were on deposit with financial institutions or invested in highly liquid investment-grade debt instruments with a maturity of 90 days or less with an approximate weighted average annual interest rate of 0.2%. Of the cash and cash equivalents,$353 million was held withinthe United States and approximately$2.2 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, acquisitions and investments, 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 borrow under the Company's Five-Year Facility, 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. The Company also may from time to time seek to access the capital markets to take advantage of favorable interest rate environments or other market conditions. 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 TCJA 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 non-U.S. operations and investments, including acquisitions. The income taxes, if any, applicable to such earnings including basis differences in our non-U.S. subsidiaries are not readily determinable. As ofDecember 31, 2021 , management believes that it has sufficient sources of liquidity to satisfy its cash needs, including its cash needs inthe United States . During 2021, the Company contributed$10 million to itsU.S. defined benefit pension plans and$50 million to its non-U.S. defined benefit pension plans. During 2022, the Company's cash contribution requirements for itsU.S. and its non-U.S. defined benefit pension plans are forecasted to be approximately$10 million and$48 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. 53
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Contractual and Other Obligations
For a description of the Company's debt and lease obligations, commitments, and litigation and contingencies, refer to Notes 10, 14, 17 and 18 to the Consolidated Financial Statements.
Legal Proceedings
Refer to Note 18 to the Consolidated Financial Statements for information regarding legal proceedings and contingencies, and for a discussion of risks related to legal proceedings and contingencies, refer to "Item 1A. Risk Factors."
CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of the Company's financial condition and results of operations is based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases these estimates and judgments on historical experience, the current economic environment and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates and judgments. The Company believes the following accounting estimates are most critical to an understanding of its financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the estimate is made, and (2) material changes in the estimate are reasonably likely from period-to-period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 1 to the Consolidated Financial Statements.Acquired Intangibles-The Company's business acquisitions, including the Cytiva andAldevron acquisitions, typically result in the recognition of goodwill, developed technology and other intangible assets, which affect the amount of future period amortization expense and possible impairment charges that the Company may incur. The fair values of acquired intangibles are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including earnings before interest, taxes, depreciation and amortization ("EBITDA"), revenue, revenue growth rates, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. The Company engages third-party valuation specialists who review the Company's critical assumptions and calculations of the fair value of acquired intangible assets in connection with significant acquisitions. In connection with acquisitions during the year endedDecember 31, 2021 , the Company recognized aggregate goodwill of approximately$7.2 billion and intangible assets of approximately$4.0 billion . Refer to Notes 1, 2 and 11 to the Consolidated Financial Statements for a description of the Company's policies relating to goodwill, acquired intangibles and acquisitions. In performing its goodwill impairment testing, the Company estimates the fair value of its reporting units primarily using a market-based approach which relies on current trading multiples of forecasted EBITDA for companies operating in businesses similar to each of the Company's reporting units to calculate an estimated fair value of each reporting unit. In evaluating the estimates derived by the market-based approach, management makes judgments about the relevance and reliability of the multiples by considering factors unique to its reporting units, including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data as well as judgments about the comparability of the market proxies selected. There are inherent uncertainties related to these assumptions and management's judgment in applying them to the analysis of goodwill impairment. As ofDecember 31, 2021 , the Company had five reporting units for goodwill impairment testing. Reporting units resulting from recent acquisitions generally present the highest risk of impairment. Management believes the impairment risk associated with these reporting units generally decreases as these businesses are integrated into the Company and better positioned for potential future earnings growth. The Company's annual goodwill impairment analysis in 2021 indicated that in all instances, the fair values of the Company's reporting units exceeded their carrying values and consequently did not result in an impairment charge. The excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of the Company's reporting units as of the annual testing date ranged from approximately 175% to approximately 1,200%. To evaluate the sensitivity of the fair value calculations used in the goodwill impairment test, the Company applied a hypothetical 10% decrease to the fair values of each reporting unit and compared those hypothetical values to the reporting unit carrying values. Based on this hypothetical 10% decrease, the excess of the estimated fair value 54
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over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of the Company's reporting units ranged from approximately 145% to approximately 1,100%.
The Company reviews identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred for finite-lived intangibles requires a comparison of the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. These analyses require management to make judgments and estimates about future revenues, expenses, market conditions and discount rates related to these assets. Indefinite-lived intangibles are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. Determining whether an impairment loss occurred for indefinite-lived intangible assets involves calculating the fair value of the indefinite-lived intangible assets and comparing the fair value to their carrying value. If the fair value is less than the carrying value, the difference is recorded as an impairment loss. Refer to Note 11 to the Consolidated Financial Statements for a description of intangible assets impairment charges recorded during 2021. If actual results are not consistent with management's estimates and assumptions, goodwill and other intangible assets may be overstated and a charge would need to be taken against net earnings which would adversely affect the Company's financial statements. Historically, the Company's estimates of goodwill and intangible assets have been materially correct. Contingent Liabilities-As discussed in "Item 3. Legal Proceedings" and Notes 8 and 18 to the Consolidated Financial Statements, the Company is, from time to time, subject to a variety of litigation and similar contingent liabilities incidental to its business (or the business operations of previously owned entities). The Company recognizes a liability for any legal contingency or contract settlement expense that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims, the cost of both pending and future claims and the value of the elements in the outcome. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors, including those discussed in Note 18 to the Consolidated Financial Statements. If the reserves established by the Company with respect to these contingent liabilities are inadequate, the Company would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect the Company's financial statements. Income Taxes-For a description of the Company's income tax accounting policies, refer to Notes 1 and 7 to the Consolidated Financial Statements. The Company establishes valuation allowances for its deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. This requires management to make judgments and estimates regarding: (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies. Future changes to tax rates would also impact the amounts of deferred tax assets and liabilities and could have an adverse impact on the Company's financial statements. The Company provides for unrecognized tax benefits when, based upon the technical merits, it is "more likely than not" that an uncertain tax position will not be sustained upon examination. Judgment is required in evaluating tax positions and determining income tax provisions. The Company re-evaluates the technical merits of its tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (1) a tax audit is completed; (2) applicable tax laws change, including a tax case ruling or legislative guidance; or (3) the applicable statute of limitations expires. In addition, certain of the Company's tax returns are currently under review by tax authorities including inDenmark andthe United States (refer to "-Results of Operations-Income Taxes" and Note 7 to the Consolidated Financial Statements). Management believes the positions taken in these returns are in accordance with the relevant tax laws. However, the outcome of these audits is uncertain and could result in the Company being required to record charges for prior year tax obligations which could have a material adverse impact to the Company's financial statements, including its effective tax rate. An increase of 1.0% in the Company's 2021 nominal tax rate would have resulted in an additional income tax provision for continuing operations for the year endedDecember 31, 2021 of$76 million . Valuation of Investments in Equity Securities-For a description of the Company's investments in equity securities and partnerships refer to Notes 1, 9 and 12 to the Consolidated Financial Statements. The Company invests in publicly-traded securities, non-marketable securities of early-stage companies and equity method investments, including partnerships that invest primarily in early-stage companies. Investments in early-stage companies have significant risks, including uncertainty regarding the investee company's ability to successfully develop new technologies and services, bring these new technologies and services to market and gain market acceptance, maintain adequate capitalization and access to cash or other forms of liquidity, and retain critical management personnel. Refer to "Item 1A. Risk Factors" for a further discussion of the risks related to investing in early-stage companies. 55
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The Company's investments in publicly traded securities are measured at fair value based on quotes in active markets. For investments in non-marketable equity securities where the Company does not have influence over the investee, the Company has elected the measurement alternative and records these investments at cost and adjusts the carrying value for impairments and observable price changes with a same or similar security from the same issuer adjusted to reflect the specific rights and preferences of the securities, if applicable. Valuations of non-marketable equity securities are complex and require judgment due to the absence of market prices, lack of liquidity and the risks inherent in early-stage companies. The uncertainty in the process of valuing securities for which a ready market does not exist may cause our estimated values of these securities to differ significantly from the values that would have been derived had a ready market for the securities existed, and those differences could be material. The Company accounts for its investments in the partnerships using the equity method. Accordingly, the investments are initially recorded at cost and adjusted each period for the Company's share of the partnership's income or loss and distributions received. The partnerships' investments are recorded by the partnerships on an estimated fair value basis and pose the same risks and require the same valuation judgments discussed above. As a result, changes in the value of investments in the partnership will have a direct impact on the Company's earnings. Impairment losses are recognized to reduce the investment's carrying value to its fair value if there is a decline in fair value below carrying value that is considered to be other-than-temporary. To determine whether there is an other-than-temporary impairment, the Company uses qualitative and quantitative valuation methods. Realized and unrealized gains (losses) for these investments in equity securities and partnerships are recorded in other income (expense), net, in the Consolidated Statements of Earnings. A 10% decrease in the carrying value of the Company's investments in equity securities and partnerships as ofDecember 31, 2021 would result in a loss of approximately$160 million .
NEW ACCOUNTING STANDARDS
For a discussion of the new accounting standards impacting the Company, refer to Note 1 to the Consolidated Financial Statements.
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