ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of Danaher Corporation’s (“Danaher,” the “Company,” “we,” “us” or “our”) financial statements with a narrative from the perspective of Company management. The Company’s MD&A is divided into four sections:
|
|
•
|
Information Relating to Forward-Looking Statements
|
|
|
•
|
Liquidity and Capital Resources
|
You should read this discussion along with the Company’s MD&A and audited financial statements as of and for the year ended
December 31, 2016
and Notes thereto, included in the Company’s
Current Report on Form 8-K filed on June 19, 2017 and the 2016 Annual Report on Form 10-K filed on February 22, 2017 (collectively, the “2016 Annual Report”)
and the Company’s Consolidated Condensed Financial Statements and related Notes as of and for the three and
nine
-month periods ended
September 29, 2017
included in this Report.
Unless otherwise indicated, all financial results in this report refer to continuing operations.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions and the integration thereof, divestitures, spin-offs, split-offs or other distributions, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; regulatory approvals; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that Danaher intends or believes will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.
Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include the following:
|
|
•
|
Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and financial statements.
|
|
|
•
|
Our growth could suffer if the markets into which we sell our products and services (references to products and services in this report also include software) decline, do not grow as anticipated or experience cyclicality.
|
|
|
•
|
We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products and services.
|
|
|
•
|
Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation.
|
|
|
•
|
Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, agents or business partners.
|
|
|
•
|
Certain of our businesses are subject to extensive regulation by the U.S. Food and Drug Administration and by comparable agencies of other countries, as well as laws regulating fraud and abuse in the health care industry and the privacy and security of health information. Failure to comply with those regulations could adversely affect our reputation and financial statements.
|
|
|
•
|
The health care industry and related industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce costs, which could adversely affect our financial statements.
|
|
|
•
|
Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price.
|
|
|
•
|
Our acquisition of businesses (including our recent acquisitions of Pall and Cepheid), joint ventures and strategic relationships could negatively impact our financial statements.
|
|
|
•
|
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
|
|
|
•
|
Divestitures and other dispositions could negatively impact our business, and contingent liabilities from businesses that we have disposed could adversely affect our financial statements.
|
|
|
•
|
We could incur significant liability if the 2016 spin-off of Fortive or the 2015 split-off of our communications business is determined to be a taxable transaction.
|
|
|
•
|
Potential indemnification liabilities related to the 2016 spin-off of Fortive and the 2015 split-off of our communications business could materially and adversely affect our business and financial statements.
|
|
|
•
|
A significant disruption in, or breach in security of, our information technology systems or the systems of third-parties on which we rely or violation of data privacy laws could adversely affect our business, reputation and financial statements.
|
|
|
•
|
Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our reputation and financial statements.
|
|
|
•
|
Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our business, reputation, and financial statements.
|
|
|
•
|
Our restructuring actions could have long-term adverse effects on our business.
|
|
|
•
|
We may be required to recognize impairment charges for our goodwill and other intangible assets.
|
|
|
•
|
Foreign currency exchange rates may adversely affect our financial statements.
|
|
|
•
|
Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
|
|
|
•
|
Changes in tax law relating to multinational corporations could adversely affect our tax position.
|
|
|
•
|
We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our business and financial statements.
|
|
|
•
|
If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.
|
|
|
•
|
Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses or licensing expenses or be prevented from selling products or services.
|
|
|
•
|
The United States government has certain rights to use and disclose some of the intellectual property that we license and could exclusively license it to a third-party if we fail to achieve practical application of the intellectual property.
|
|
|
•
|
Defects and unanticipated use or inadequate disclosure with respect to our products or services could adversely affect our business, reputation and financial statements.
|
|
|
•
|
The manufacture of many of our products is a highly exacting and complex process, and if we directly or indirectly encounter problems manufacturing products, our business, reputation, and financial statements could suffer.
|
|
|
•
|
Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the covenants that apply to our indebtedness could adversely affect our liquidity and financial statements.
|
|
|
•
|
Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements.
|
|
|
•
|
Certain of our businesses rely on relationships with collaborative partners and other third-parties for development, supply and marketing of certain products and potential products, and such collaborative partners or other third-parties could fail to perform sufficiently.
|
|
|
•
|
Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations.
|
|
|
•
|
If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies.
|
|
|
•
|
Changes in laws or governmental regulations may reduce demand for our products or services or increase our expenses.
|
|
|
•
|
Work stoppages, union and works council campaigns and other labor disputes could adversely impact our productivity and results of operations.
|
|
|
•
|
Developments and uncertainties regarding international economic, political, legal, compliance, trade and business factors could negatively affect our financial statements.
|
|
|
•
|
The results of the European Union membership referendum in the United Kingdom and their formal notice of withdrawal from the European Union could adversely affect customer demand, our relationships with customers and suppliers and our business and financial statements.
|
|
|
•
|
If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed.
|
|
|
•
|
Our defined benefit pension plans are subject to financial market risks that could adversely affect our financial statements.
|
See Part I—Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31,
2016
for a further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. Except to the extent required by applicable law, we do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
OVERVIEW
General
As a result of the Company’s geographic and industry diversity, the Company faces a variety of opportunities and challenges, including rapid innovation and technological development (particularly with respect to computing, mobile connectivity, artificial intelligence, 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 defines high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which includes Eastern Europe, the Middle East, Africa, Latin America and Asia (with the exception of Japan and Australia). The Company operates in a highly competitive business environment in most markets, and the Company’s long-term growth and profitability will depend in particular on its ability to expand its business in high-growth geographies and high-growth market segments, identify,
consummate and integrate appropriate acquisitions, develop innovative and differentiated new products and services with higher gross profit margins, expand and improve the effectiveness of the Company’s sales force, continue to reduce costs and improve operating efficiency and quality, and effectively address the demands of an increasingly regulated environment. The Company is making significant investments, organically and through acquisitions, to address the rapid pace of technological change in its served markets and to globalize its manufacturing, research and development and customer-facing resources (particularly in high-growth markets) in order to be responsive to the Company’s customers throughout the world and improve the efficiency of the Company’s operations.
Business Performance and Outlook
During the third quarter of
2017
, the Company’s revenues increased
9.5%
compared to the comparable period of
2016
. While differences exist among the Company’s businesses, on an overall basis, sales from existing businesses grew
3.0%
during the
third quarter
of
2017
as compared to the comparable period of
2016
. Increased demand for the Company’s products and services on an overall basis, together with the Company’s continued investments in sales growth initiatives and the other business-specific factors discussed below contributed to year-over-year sales growth. Geographically, year-over-year core revenue growth rates during the
third quarter
of
2017
were led by the high-growth markets. Core revenues in high-growth markets increased at a high-single digit rate during the
third quarter
of
2017
as compared to the comparable period of
2016
led primarily by continued strength in China. High-growth markets represented approximately 31% of the Company’s total sales in the
third quarter
of
2017
. Core revenues in developed markets increased at a low-single digit rate during the
third quarter
of
2017
led primarily by growth in the United States and Japan. The Company expects overall year-over-year sales growth to continue, and year-over-year core revenue growth rates to improve, for the remainder of
2017
but remains cautious about challenges due to macro-economic and geopolitical uncertainties, including global uncertainties related to monetary, fiscal and trade policies.
The Company regularly evaluates market needs and conditions with the objective of positioning itself to provide superior products and services to its customers in a cost-efficient manner. Consistent with this approach,
d
uring the second quarter of 2017
,
the Company made the strategic decision to discontinue a molecular diagnostic product line in
its
Diagnostics segment. As a result, the Company recorded
$76 million
of pretax restructuring, impairment and other related charges (
$51 million
after-tax or
$0.07
per diluted share).
These charges included
$49 million
of noncash charges for the impairment of certain technology-related intangible assets as well as related inventory and property, plant and equipment with no further use. In addition, the Company incurred
$27 million
of cash restructuring costs primarily related to employee severance and related charges.
These restructuring charges are expected to result in recurring annual savings of approximately
$40 million
, beginning in 2018.
Acquisitions
During the first
nine
months of
2017
, the Company acquired
five
businesses for total consideration of
$112 million
in cash, net of cash acquired.
The businesses acquired complement existing units of the Life Sciences and Environmental & Applied Solutions segments.
The aggregate annual sales of these
five
businesses at the time of their respective acquisitions, in each case based on the company’s revenues for its last completed fiscal year prior to the acquisition, were approximately
$70 million
. The Company preliminarily recorded an aggregate of
$73 million
of goodwill related to these acquisitions.
Currency Exchange Rates
On a year-over-year basis, currency exchange rates positively impacted reported sales by approximately
1.0%
for the three-month period ended
September 29, 2017
primarily due to the weakness of the U.S. dollar against several major currencies in the third quarter of
2017
compared to the comparable period of
2016
. On a year-over-year basis, currency exchange rates adversely impacted reported sales by approximately
0.5%
for the
nine
-month period ended
September 29, 2017
primarily due to the strength of the U.S. dollar against several major currencies in the
nine
-month period of
2017
compared to the comparable period of
2016
. If the currency exchange rates in effect as of
September 29, 2017
were to prevail throughout the remainder of
2017
, currency exchange rates would increase the Company’s estimated full year
2017
sales by approximately 0.5% on a year-over-year basis since the U.S. dollar is currently weaker in comparison with rates experienced in the second half of 2016 which would offset the negative currency impact reported in the first half of 2017. Any future strengthening of the U.S. dollar against major currencies would adversely impact the Company’s sales and results of operations for the remainder of the year, and any weakening of the U.S. dollar against major currencies would positively impact the Company’s sales and results of operations for the remainder of the year.
RESULTS OF OPERATIONS
Non-GAAP Measures
In this report, references to the non-GAAP measure of core sales or core revenue growth (also referred to as sales from existing businesses) refer to sales from continuing operations calculated according to generally accepted accounting principles in the United States (“GAAP”) but excluding:
|
|
•
|
sales from acquired businesses; and
|
|
|
•
|
the impact of currency translation.
|
References to sales or operating profit attributable to acquisitions or acquired businesses refer to GAAP sales or operating profit, as applicable, from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales and operating profit, as applicable, attributable to divested product lines not considered discontinued operations. 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); and
|
|
|
•
|
the period-to-period change in revenue (excluding sales from acquired businesses) after applying current period foreign exchange rates to the prior year period.
|
Core sales and core revenue growth 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 the non-GAAP financial measure of core sales or core revenue growth 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 core sales and core revenue growth to measure the Company’s operating and financial performance. The Company excludes the effect of currency translation from core sales 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 and divestiture-related items because the nature, size, timing and number of acquisitions and divestitures can vary dramatically from period-to-period and between the Company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult.
Throughout this discussion, references to sales volume refer to the impact of both price and unit sales and references to productivity improvements generally refer to improved cost-efficiencies resulting from the ongoing application of the Danaher Business System.
Revenue Performance
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended September 29, 2017 vs. Comparable 2016 Period
|
|
% Change Nine- Month Period Ended September 29, 2017 vs.
Comparable 2016 Period
|
Total sales growth (GAAP)
|
9.5
|
%
|
|
7.5
|
%
|
Less the impact of:
|
|
|
|
Acquisitions and other
|
(5.5
|
)%
|
|
(5.5
|
)%
|
Currency exchange rates
|
(1.0
|
)%
|
|
0.5
|
%
|
Core revenue growth (non-GAAP)
|
3.0
|
%
|
|
2.5
|
%
|
Operating profit margins were
16.9%
for both the three-month period ended
September 29, 2017
and the comparable period of
2016
.
Third quarter
2017
vs.
third quarter
2016
operating profit margin comparisons were favorably impacted by:
|
|
•
|
Higher
2017
core sales volumes, incremental year-over-year cost savings associated with the restructuring actions and continuing productivity improvement initiatives taken in
2016
and the impact of the weaker U.S. dollar in the third quarter of
2017
, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments -
95
basis points
|
Third quarter
2017
vs.
third quarter
2016
operating profit margin comparisons were unfavorably impacted by:
|
|
•
|
Third quarter 2016 gain on resolution of acquisition-related matters -
40
basis points
|
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses -
55
basis points
|
Operating profit margins were
15.7%
for the
nine
-month period ended
September 29, 2017
as compared to
16.4%
in the comparable period of
2016
.
Year-to-date
2017
vs. year-to-date
2016
operating profit margin comparisons were favorably impacted by:
|
|
•
|
Higher
2017
core sales volumes and incremental year-over-year cost savings associated with the restructuring actions and continuing productivity improvement initiatives taken in
2016
, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments, and the impact of the stronger U.S. dollar in
2017
-
60
basis points
|
Year-to-date
2017
vs. year-to-date
2016
operating profit margin comparisons were unfavorably impacted by:
|
|
•
|
Restructuring, impairment and other related charges related to discontinuing a product line in the second quarter of 2017 related to the Diagnostic segment -
55
basis points
|
|
|
•
|
Third quarter 2016 gain on resolution of acquisition-related matters -
15
basis points
|
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses -
60
basis points
|
Business Segments
Sales by business segment for each of the periods indicated were as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Nine-Month Period Ended
|
|
September 29, 2017
|
|
September 30, 2016
|
|
September 29, 2017
|
|
September 30, 2016
|
Life Sciences
|
$
|
1,392.6
|
|
|
$
|
1,325.4
|
|
|
$
|
4,085.0
|
|
|
$
|
3,911.8
|
|
Diagnostics
|
1,448.7
|
|
|
1,212.7
|
|
|
4,216.0
|
|
|
3,606.5
|
|
Dental
|
694.0
|
|
|
675.6
|
|
|
2,052.1
|
|
|
2,046.1
|
|
Environmental & Applied Solutions
|
992.9
|
|
|
918.4
|
|
|
2,890.9
|
|
|
2,733.7
|
|
Total
|
$
|
4,528.2
|
|
|
$
|
4,132.1
|
|
|
$
|
13,244.0
|
|
|
$
|
12,298.1
|
|
LIFE SCIENCES
The Company’s Life Sciences segment offers a broad range of research tools that scientists use 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 new drugs and vaccines. The segment, through its Pall business, is also a leading provider of filtration, separation and purification technologies to the biopharmaceutical, food and beverage, medical, aerospace, microelectronics and general industrial segments.
Life Sciences Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Nine-Month Period Ended
|
($ in millions)
|
September 29, 2017
|
|
September 30, 2016
|
|
September 29, 2017
|
|
September 30, 2016
|
Sales
|
$
|
1,392.6
|
|
|
$
|
1,325.4
|
|
|
$
|
4,085.0
|
|
|
$
|
3,911.8
|
|
Operating profit
|
246.8
|
|
|
204.7
|
|
|
680.0
|
|
|
574.1
|
|
Depreciation
|
29.5
|
|
|
30.3
|
|
|
88.6
|
|
|
92.5
|
|
Amortization
|
76.9
|
|
|
76.1
|
|
|
229.9
|
|
|
223.3
|
|
Operating profit as a % of sales
|
17.7
|
%
|
|
15.4
|
%
|
|
16.6
|
%
|
|
14.7
|
%
|
Depreciation as a % of sales
|
2.1
|
%
|
|
2.3
|
%
|
|
2.2
|
%
|
|
2.4
|
%
|
Amortization as a % of sales
|
5.5
|
%
|
|
5.7
|
%
|
|
5.6
|
%
|
|
5.7
|
%
|
Revenue Performance
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended September 29, 2017 vs. Comparable 2016 Period
|
|
% Change Nine- Month Period Ended September 29, 2017 vs.
Comparable 2016 Period
|
Total sales growth (GAAP)
|
5.0
|
%
|
|
4.5
|
%
|
Less the impact of:
|
|
|
|
Acquisitions and other
|
(1.0
|
)%
|
|
(2.5
|
)%
|
Currency exchange rates
|
(1.0
|
)%
|
|
1.0
|
%
|
Core revenue growth (non-GAAP)
|
3.0
|
%
|
|
3.0
|
%
|
During the first quarter of 2017, a product line was transferred from the Life Sciences segment to the Environmental & Applied Solutions segment. While this change is not material to segment results in total, the resulting change in sales growth has been included in the “Acquisitions and other” line in the table above.
Price increases in the segment contributed
0.5%
to sales growth on a year-over-year basis during both the three and
nine
-month periods ended
September 29, 2017
, and are reflected as a component of core revenue growth.
Core sales of the business’ broad range of mass spectrometers grew on a year-over-year basis during both the three and
nine
-month periods ended
September 29, 2017
, led by strong sales growth in China and Western Europe, across the food and forensics and pharmaceutical end-markets, partially offset by declines in demand in the clinical end-market in the United States. Core sales of microscopy products grew during the three-month period ended
September 29, 2017
as a result of increased demand in the life science and applied end-markets in North America and the medical end-market in Western Europe. Core sales of microscopy products grew on a year-over-year basis during the
nine
-month period primarily due to increased demand in the high-growth markets and Western Europe. Demand for the business’ flow cytometry and genomics products was strong across all major product lines in both the three and
nine
-month periods ended
September 29, 2017
as compared to the comparable periods in
2016
, due to strong demand in North America, China and Western Europe. Core sales for filtration, separation and purification technologies decreased in the three-month period and increased in the
nine
-month period ended
September 29, 2017
compared to the comparable periods in
2016
, as hurricanes in North America impacted performance in the third quarter of 2017. For these businesses, increased demand in North America and Asia was largely offset by declines in the Middle East and Western Europe in both periods, as increased demand in the microelectronics end-market was offset by lower demand in the process, industrial, and medical end-markets. For the nine-month period, the decline in the Middle East was largely due to a major project in 2016 which did not repeat in 2017. The Company expects the core growth rate of the filtration, separation and purification technologies business to improve sequentially in the fourth quarter.
Operating profit margins
increased
230
basis points during the three-month period ended
September 29, 2017
as compared to the comparable period of
2016
. The following factors favorably impacted year-over-year operating profit margin comparisons:
|
|
•
|
Higher
2017
core sales volumes and incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
, net of incremental year-over-year costs associated with various new product development, sales and marketing growth investments in
2017
-
185
basis points
|
|
|
•
|
The incremental net accretive effect in
2017
of acquired businesses and
intersegment product line transfers
-
45
basis points
|
Operating profit margins
increased
190
basis points during the
nine
-month period ended
September 29, 2017
as compared to the comparable period of
2016
. The following factors favorably impacted year-over-year operating profit margin comparisons:
|
|
•
|
Higher
2017
core sales volumes and incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
, net of incremental year-over-year costs associated with various new product development, sales and marketing growth investments and the impact of the stronger U.S. dollar in
2017
-
160
basis points
|
|
|
•
|
The incremental net accretive effect in
2017
of acquired businesses and
intersegment product line transfers
-
30
basis points
|
DIAGNOSTICS
The Company’s Diagnostics segment offers analytical instruments, reagents, consumables, software and services that hospitals, physicians’ offices, reference laboratories and other critical care settings use to diagnose disease and make treatment decisions.
Diagnostics Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Nine-Month Period Ended
|
($ in millions)
|
September 29, 2017
|
|
September 30, 2016
|
|
September 29, 2017
|
|
September 30, 2016
|
Sales
|
$
|
1,448.7
|
|
|
$
|
1,212.7
|
|
|
$
|
4,216.0
|
|
|
$
|
3,606.5
|
|
Operating profit
|
242.7
|
|
|
193.9
|
|
|
554.9
|
|
|
606.3
|
|
Depreciation
|
92.6
|
|
|
82.3
|
|
|
271.8
|
|
|
239.4
|
|
Amortization
|
54.2
|
|
|
33.9
|
|
|
160.2
|
|
|
101.8
|
|
Operating profit as a % of sales
|
16.8
|
%
|
|
16.0
|
%
|
|
13.2
|
%
|
|
16.8
|
%
|
Depreciation as a % of sales
|
6.4
|
%
|
|
6.8
|
%
|
|
6.4
|
%
|
|
6.6
|
%
|
Amortization as a % of sales
|
3.7
|
%
|
|
2.8
|
%
|
|
3.8
|
%
|
|
2.8
|
%
|
Revenue Performance
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended September 29, 2017 vs. Comparable 2016 Period
|
|
% Change Nine- Month Period Ended September 29, 2017 vs.
Comparable 2016 Period
|
Total sales growth (GAAP)
|
19.5
|
%
|
|
17.0
|
%
|
Less the impact of:
|
|
|
|
Acquisitions and other
|
(15.0
|
)%
|
|
(14.5
|
)%
|
Currency exchange rates
|
(0.5
|
)%
|
|
0.5
|
%
|
Core revenue growth (non-GAAP)
|
4.0
|
%
|
|
3.0
|
%
|
Price changes in the segment modestly benefited sales growth on a year-over-year basis during the three-month period ended
September 29, 2017
.
Price increases in the segment contributed
0.5%
to sales growth on a year-over-year basis during the
nine
-month period ended
September 29, 2017
and are reflected as a component of core revenue growth.
Demand in the segment’s clinical business increased on a year-over-year basis for both the three and
nine
-month periods ended
September 29, 2017
led by increased demand in high-growth markets, primarily in China and the Middle East, and North America. Increased demand in Western Europe also contributed to the year-over-year core sales growth for the three-month period. Lower demand in Japan and Latin America for both the three and nine-month periods and in Western Europe for the
nine
-month period partially offset this growth. Core sales in the acute care diagnostic business increased year-over-year in both the three and
nine
-month periods ended
September 29, 2017
, due to strong sales of blood gas and immunoassay analyzer products across all major geographies. Core sales in the pathology diagnostics business grew year-over-year in both the three and
nine
-month periods ended
September 29, 2017
, due primarily to increased demand for advanced staining and core histology products. Demand increased in Western Europe and China for both periods as well as in North America for the
nine
-month period.
The acquisition of Cepheid in November 2016 provides additional sales and earnings growth opportunities for the segment by expanding geographic and product line diversity, including new product and service offerings in the areas of molecular diagnostics. As Cepheid is integrated into the Company over the next several years, the Company expects to realize significant synergies through the application of the Danaher Business System. During both the three and
nine
-month periods ended
September 29, 2017
, Cepheid’s revenues grew on a year-over-year basis in most major geographies and product lines.
D
uring the second quarter of 2017
,
the Company made the strategic decision to discontinue a molecular diagnostic product line in
the
Diagnostics segment. As a result, the Company recorded
$76 million
of pretax restructuring, impairment and other related charges (
$51 million
after-tax or
$0.07
per diluted share).
These charges included
$49 million
of noncash charges for the impairment of certain technology-related intangible assets as well as related inventory and property, plant and equipment with no further use. In addition, the Company incurred
$27 million
of cash restructuring costs primarily related to employee
severance and related charges.
These restructuring charges are expected to result in recurring annual savings of approximately
$40 million
, beginning in 2018.
Operating profit margins
increased
80
basis points during the three-month period ended
September 29, 2017
as compared to the comparable period of
2016
.
Third quarter
2017
vs.
third quarter
2016
operating profit margin comparisons were favorably impacted by:
|
|
•
|
Higher
2017
core sales volumes and incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
and the impact of the weaker U.S. dollar in the third quarter of
2017
, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments -
245
basis points
|
Third quarter
2017
vs.
third quarter
2016
operating profit margin comparisons were unfavorably impacted by:
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses -
165
basis points
|
Operating profit margins
decreased
360
basis points during the
nine
-month period ended
September 29, 2017
as compared to the comparable period of
2016
.
Third quarter
2017
vs.
third quarter
2016
operating profit margin comparisons were favorably impacted by:
|
|
•
|
Higher
2017
core sales volumes and incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments, and the impact of the stronger U.S. dollar in
2017
-
5
basis points
|
Third quarter
2017
vs.
third quarter
2016
operating profit margin comparisons were unfavorably impacted by:
|
|
•
|
Restructuring, impairment and other related charges related to discontinuing a product line in the second quarter of 2017 -
180
basis points
|
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses -
185
basis points
|
Amortization as a percentage of sales increased during both the three and
nine
-month periods ended
September 29, 2017
as compared to the comparable periods of
2016
due primarily to the impact of recently acquired businesses, particularly Cepheid.
DENTAL
The Company’s Dental segment provides products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile. The Company is a leading worldwide provider of a broad range of dental consumables, equipment and services, and is dedicated to driving technological innovations that help dental professionals improve clinical outcomes and enhance productivity.
Dental Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Nine-Month Period Ended
|
($ in millions)
|
September 29, 2017
|
|
September 30, 2016
|
|
September 29, 2017
|
|
September 30, 2016
|
Sales
|
$
|
694.0
|
|
|
$
|
675.6
|
|
|
$
|
2,052.1
|
|
|
$
|
2,046.1
|
|
Operating profit
|
102.2
|
|
|
101.3
|
|
|
301.4
|
|
|
305.6
|
|
Depreciation
|
9.3
|
|
|
10.8
|
|
|
29.7
|
|
|
32.6
|
|
Amortization
|
20.8
|
|
|
20.4
|
|
|
61.0
|
|
|
63.2
|
|
Operating profit as a % of sales
|
14.7
|
%
|
|
15.0
|
%
|
|
14.7
|
%
|
|
14.9
|
%
|
Depreciation as a % of sales
|
1.3
|
%
|
|
1.6
|
%
|
|
1.4
|
%
|
|
1.6
|
%
|
Amortization as a % of sales
|
3.0
|
%
|
|
3.0
|
%
|
|
3.0
|
%
|
|
3.1
|
%
|
Revenue Performance
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended September 29, 2017 vs. Comparable 2016 Period
|
|
% Change Nine- Month Period Ended September 29, 2017 vs.
Comparable 2016 Period
|
Total sales growth (GAAP)
|
2.5
|
%
|
|
0.5
|
%
|
Less the impact of:
|
|
|
|
Acquisitions and other
|
—
|
%
|
|
—
|
%
|
Currency exchange rates
|
(1.5
|
)%
|
|
(0.5
|
)%
|
Core revenue growth (non-GAAP)
|
1.0
|
%
|
|
—
|
%
|
Price increases modestly benefited sales growth on a year-over-year basis in the three-month period and did not significantly impact sales growth on a year-over-year basis during the
nine
-month period ended
September 29, 2017
.
Geographically, year-over-year core revenue growth in China and other high-growth markets was strong in both the three and
nine
-month periods ended
September 29, 2017
, offset by softer demand in North America and Western Europe. Core revenue growth for implant systems was driven by increased demand in high-growth markets and North America for both the three and
nine
-month periods. In addition, increased demand in China and North America drove increased core sales of orthodontic products. Dental equipment sales also grew during both periods, primarily in high-growth markets and North America. Lower demand for dental consumable product lines in North America and Western Europe largely offset the year-over-year growth in the other product categories for both the three and
nine
-month periods, primarily reflecting inventory destocking by several distribution partners. While the Company expects the impact of inventory destocking in its consumables business to lessen, the recent realignment of distributors and manufacturers in the dental industry, primarily in North America, may have a negative impact on equipment revenues in the near-term.
Operating profit margins
decreased
30
basis points during the three-month period ended
September 29, 2017
as compared to the comparable period of
2016
. The following factors unfavorably impacted year-over-year operating profit margin comparisons:
|
|
•
|
Incremental year-over-year costs associated with various new product development, sales and marketing growth investments, and unfavorable product mix due to lower sales of dental consumables in
2017
, net of incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
-
15
basis points
|
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses -
15
basis points
|
Operating profit margins
decreased
20
basis points during the
nine
-month period ended
September 29, 2017
as compared to the comparable period of
2016
. The following factors unfavorably impacted year-over-year operating profit margin comparisons:
|
|
•
|
Incremental year-over-year costs associated with various new product development, sales and marketing growth investments, the impact of the stronger U.S. dollar in 2017 and unfavorable product mix due to lower sales of dental consumables in
2017
, net of incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
-
10
basis points
|
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses -
10
basis points
|
ENVIRONMENTAL & APPLIED SOLUTIONS
The Company’s Environmental & Applied Solutions segment products and services help protect important resources and keep global food and water supplies safe. The Company’s water quality business provides instrumentation, services and disinfection systems to help analyze, treat and manage the quality of ultra-pure, potable, waste, ground, source and ocean water in residential, commercial, municipal, industrial and natural resource applications. The Company’s product identification business provides equipment, consumables, software and services for various printing, marking, coding, traceability, packaging, design and color management applications on consumer, pharmaceutical and industrial products.
Environmental & Applied Solutions Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Nine-Month Period Ended
|
($ in millions)
|
September 29, 2017
|
|
September 30, 2016
|
|
September 29, 2017
|
|
September 30, 2016
|
Sales
|
$
|
992.9
|
|
|
$
|
918.4
|
|
|
$
|
2,890.9
|
|
|
$
|
2,733.7
|
|
Operating profit
|
222.8
|
|
|
223.4
|
|
|
666.0
|
|
|
640.1
|
|
Depreciation
|
11.3
|
|
|
9.1
|
|
|
31.6
|
|
|
26.4
|
|
Amortization
|
14.6
|
|
|
12.8
|
|
|
41.8
|
|
|
38.3
|
|
Operating profit as a % of sales
|
22.4
|
%
|
|
24.3
|
%
|
|
23.0
|
%
|
|
23.4
|
%
|
Depreciation as a % of sales
|
1.1
|
%
|
|
1.0
|
%
|
|
1.1
|
%
|
|
1.0
|
%
|
Amortization as a % of sales
|
1.5
|
%
|
|
1.4
|
%
|
|
1.4
|
%
|
|
1.4
|
%
|
Revenue Performance
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended September 29, 2017 vs. Comparable 2016 Period
|
|
% Change Nine- Month Period Ended September 29, 2017 vs.
Comparable 2016 Period
|
Total sales growth (GAAP)
|
8.0
|
%
|
|
6.0
|
%
|
Less the impact of:
|
|
|
|
Acquisitions and other
|
(3.0
|
)%
|
|
(2.5
|
)%
|
Currency exchange rates
|
(2.0
|
)%
|
|
—
|
%
|
Core revenue growth (non-GAAP)
|
3.0
|
%
|
|
3.5
|
%
|
During the first quarter of 2017, a product line was transferred from the Life Sciences segment to the Environmental & Applied Solutions segment. While this change is not material to segment results in total, the resulting change in sales growth has been included in the “Acquisitions and other” line in the table above.
Price increases in the segment contributed
1.0%
and
0.5%
to sales growth on a year-over-year basis during the three and
nine
-month periods ended
September 29, 2017
, respectively, and are reflected as a component of core revenue growth.
Core sales in the segment’s water quality business grew at a low-single digit rate during both the three and
nine
-month periods ended
September 29, 2017
as compared to the comparable periods of
2016
. Year-over-year core sales in the analytical instrumentation product line increased in both the three and
nine
-month periods, as increased demand in the industrial and municipal end-markets was partially offset by lower demand in the environmental end-markets. Geographically, year-over-year core revenue growth for both the three and
nine
-month periods was driven by increased demand in China and Western Europe partially offset by weakness in the Middle East and Latin America. Increased demand in North America also contributed to the year-over-year core revenue growth for the
nine
-month period. Core revenue growth in the business’ chemical treatment solutions product line for both the three and
nine
-month periods was due to an expansion of the customer base in the United States and increased demand in Latin America, driven by higher demand in food, steel and oil and gas-related end-markets. Core sales in the business’ ultraviolet water disinfection product line decreased in the three-month period and increased slightly in the
nine
-month period ended
September 29, 2017
due to differences in the timing of the completion of several projects in 2017 as compared to the comparable periods of
2016
.
Core sales in the segment’s product identification businesses grew at a mid-single digit rate during both the three and
nine
-month periods ended
September 29, 2017
as compared to the comparable periods of
2016
. Continued strong year-over-year demand for marking and coding equipment and related consumables in most major geographies, led by North America, drove the majority of the core revenue growth. Increased year-over-year demand for the business’ packaging and color solutions products and services, led by Asia and Western Europe, also contributed to core revenue growth for both the three and
nine
-month periods ended
September 29, 2017
.
Operating profit margins
decreased
190
basis points during the three-month period ended
September 29, 2017
as compared to the comparable period of
2016
. The following factors unfavorably impacted year-over-year operating profit margin comparisons:
|
|
•
|
Incremental year-over-year costs associated with various new product development, sales and marketing growth investments, net of the positive impact of higher
2017
core sales volumes and incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
-
105
basis points
|
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses and
intersegment product line transfers
-
85
basis points
|
Operating profit margins
decreased
40
basis points during the
nine
-month period ended
September 29, 2017
as compared to the comparable period of
2016
.
Year-to-date
2017
vs. year-to-date
2016
operating profit margin comparisons were favorably impacted by:
|
|
•
|
Higher
2017
core sales volumes, incremental year-over-year cost savings associated with the
restructuring actions
and continuing productivity improvement initiatives taken in
2016
and improved pricing, net of incremental year-over-year costs associated with various new product development, sales and marketing growth investments -
20
basis points
|
Year-to-date
2017
vs. year-to-date
2016
operating profit margin comparisons were unfavorably impacted by:
|
|
•
|
The incremental net dilutive effect in
2017
of acquired businesses and
intersegment product line transfers
-
60
basis points
|
COST OF SALES AND GROSS PROFIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Nine-Month Period Ended
|
($ in millions)
|
September 29, 2017
|
|
September 30, 2016
|
|
September 29, 2017
|
|
September 30, 2016
|
Sales
|
$
|
4,528.2
|
|
|
$
|
4,132.1
|
|
|
$
|
13,244.0
|
|
|
$
|
12,298.1
|
|
Cost of sales
|
(1,991.4
|
)
|
|
(1,846.1
|
)
|
|
(5,890.6
|
)
|
|
(5,463.5
|
)
|
Gross profit
|
$
|
2,536.8
|
|
|
$
|
2,286.0
|
|
|
$
|
7,353.4
|
|
|
$
|
6,834.6
|
|
Gross profit margin
|
56.0
|
%
|
|
55.3
|
%
|
|
55.5
|
%
|
|
55.6
|
%
|
The year-over-year
increase
in cost of sales during both the three and
nine
-month periods ended
September 29, 2017
as compared to the comparable periods in
2016
, is due primarily to the impact of higher year-over-year sales volumes, including sales from recently acquired businesses. During the
nine
-month period ended
September 29, 2017
the impact of
restructuring, impairment and other related charges
associated with the Company’s strategic decision to discontinue a product line in its Diagnostics segment
also contributed to the year-over-year
increase
in cost of sales. Foreign exchange losses realized due to the weakening of the U.S. dollar against other major currencies also increased cost of sales for the
nine
-month period ended
September 29, 2017
. These increases were partially offset by incremental year-over-year cost savings associated with the restructuring and continued productivity improvement actions taken in
2016
.
The year-over-year increase in gross profit margins during the three-month period ended
September 29, 2017
as compared to the comparable period in
2016
, is due to the favorable impact of higher year-over-year sales volumes, and incremental year-over-year cost savings associated with the restructuring activities and continued productivity improvement actions taken in
2016
. The year-over-year
decrease
in gross profit margins during the
nine
-month period ended
September 29, 2017
as compared to the comparable period in
2016
, is due primarily to the impact of the
restructuring, impairment and other related charges
associated with the Company’s strategic decision to discontinue a product line in its Diagnostics segment
. The above mentioned foreign exchange losses also reduced gross profit margins for the nine-month period ended
September 29, 2017
. These impacts were largely offset by the favorable impact of higher year-over-year sales volumes, and incremental year-over-year cost savings associated with the restructuring activities and continued productivity improvement actions taken in
2016
.
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Nine-Month Period Ended
|
($ in millions)
|
September 29, 2017
|
|
September 30, 2016
|
|
September 29, 2017
|
|
September 30, 2016
|
Sales
|
$
|
4,528.2
|
|
|
$
|
4,132.1
|
|
|
$
|
13,244.0
|
|
|
$
|
12,298.1
|
|
Selling, general and administrative (“SG&A”) expenses
|
1,490.1
|
|
|
1,345.8
|
|
|
4,448.4
|
|
|
4,105.2
|
|
Research and development (“R&D”) expenses
|
279.2
|
|
|
241.1
|
|
|
829.9
|
|
|
707.1
|
|
SG&A as a % of sales
|
32.9
|
%
|
|
32.6
|
%
|
|
33.6
|
%
|
|
33.4
|
%
|
R&D as a % of sales
|
6.2
|
%
|
|
5.8
|
%
|
|
6.3
|
%
|
|
5.7
|
%
|
The year-over-year
increase
in SG&A expenses as a percentage of sales for the three-month period ended
September 29, 2017
as compared to the comparable period in
2016
, was driven by higher relative spending levels at recently acquired companies, primarily Cepheid, and continued investments in sales and marketing growth initiatives, partially offset by the benefit of increased leverage of the Company’s general and administrative cost base resulting from higher
2017
sales volumes. The year-over-year
increase
in SG&A expenses as a percentage of sales for the
nine
-month period ended
September 29, 2017
as compared to the comparable period in
2016
, was driven by
restructuring, impairment and other related charges
associated with the Company’s strategic decision to discontinue a product line in its Diagnostics segment
, higher relative spending levels at recently acquired companies, primarily Cepheid, and continued investments in sales and marketing growth initiatives. These increases were partially offset by the benefit of increased leverage of the Company’s general and administrative cost base resulting from higher
2017
sales volumes.
The year-over-year
increase
in R&D expenses (consisting principally of internal and contract engineering personnel costs) as a percentage of sales for both the three and
nine
-month periods ended
September 29, 2017
as compared to the comparable periods in
2016
, was due primarily to higher R&D expenses as a percentage of sales in the businesses most recently acquired, particularly Cepheid, as well as continued investments in new product development initiatives.
NONOPERATING INCOME (EXPENSE)
The Company received
$265 million
of cash proceeds from the sale of marketable equity securities during the first quarter of 2016. The Company recorded a pretax gain related to this sale of
$223 million
(
$140 million
after-tax or
$0.20
per diluted share) during the
nine
-month period ended
September 30, 2016
.
In the third quarter of 2016, the Company redeemed approximately
$1.9 billion
in aggregate principal amount of outstanding indebtedness and paid an aggregate of
$188 million
in make-whole premiums in connection with those redemptions, plus accrued and unpaid interest. The payment of these make-whole premiums, net of certain deferred gains of
$9 million
, are reflected as a loss on early extinguishment of borrowings in the accompanying Consolidated Condensed Statement of Earnings of
$179 million
(
$112 million
after-tax or
$
0.16
per diluted share) in the three and
nine
-month periods ended
September 30, 2016
.
INTEREST COSTS AND FINANCING
For a discussion of the Company’s outstanding indebtedness, refer to Note 6 to the accompanying Consolidated Condensed Financial Statements.
Interest expense of
$40 million
and
$121 million
for the three and
nine
-month periods ended
September 29, 2017
, respectively, was
$4 million
lower
and
$31 million
lower
than the comparable periods of
2016
, respectively, due primarily to the decrease in interest costs as a result of the early extinguishment of certain outstanding borrowings in the third quarter of 2016 using the proceeds from the Fortive Distribution, partially offset by the cost of additional borrowings incurred to finance the acquisition of Cepheid in November 2016 and additional long-term debt refinancing in 2017.
INCOME TAXES
The Company’s effective tax rate from continuing operations for the three and
nine
-month periods ended
September 29, 2017
was
21.6%
and
17.7%
, respectively, as compared to
15.5%
and
26.6%
for the three and
nine
-month periods ended
September 30, 2016
, respectively.
The Company’s effective tax rate for
2017
and
2016
differs from the U.S. federal statutory rate of
35.0%
due principally to the Company’s earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal
statutory rate.
The effective tax rate for the nine-month period ended September 29, 2017 includes a benefit from the release of reserves upon the expiration of statutes of limitations and audit settlements, excess tax benefits from stock-based compensation, as well as higher tax benefits from restructuring charges that are predominantly in the United States, which in aggregate decreased the reported tax rate by
3.3%
. The effective tax rate for the three and nine-month periods ended September 30, 2016 includes a higher tax rate associated with the loss on the early extinguishment of borrowings during the third quarter of 2016 which lowered the effective tax rate by 6.0% and 1.0%, respectively.
The effective tax rate for the nine-month periods ended September 30, 2016 also includes charges related to the repatriation of earnings and legal entity realignments associated with the Separation and higher tax rate on the gain from sale of marketable equity securities which in aggregate increased the effective tax rate by
6.6%
.
The Company conducts business globally, and files numerous consolidated and separate income tax returns in federal, state and foreign jurisdictions. The countries in which the Company has a significant presence that have significantly lower statutory tax rates than the United States include China, Denmark, Germany, Singapore, Switzerland and the United Kingdom. The Company’s ability to obtain tax benefits from lower statutory tax rates outside the United States is dependent on its levels of taxable income in these foreign countries and the amount of foreign earnings which are indefinitely reinvested in those countries. The Company believes that a change in the statutory tax rate of any individual foreign country would not have a material effect on the Company’s financial statements given the geographic dispersion of the Company’s taxable income.
The Company and its subsidiaries are routinely examined by various domestic and international taxing authorities. The U.S. Internal Revenue Service (“IRS”) has completed the examinations of substantially all of the Company’s federal income tax returns through 2011 and is currently examining certain of the Company’s federal income tax returns for 2012 through 2015. In addition, the Company has subsidiaries in Belgium, Canada, China, Denmark, France, Finland, Germany, India, Italy, Japan, Singapore, Sweden, the United Kingdom and various other countries, states and provinces that are currently under audit for years ranging from 2004 through 2015.
Tax authorities in Denmark have raised significant issues related to interest accrued by certain of the Company’s subsidiaries. On December 10, 2013, the Company received assessments from
the Danish tax authority (“SKAT”)
totaling approximately
DKK 1.5 billion
including interest through
September 29, 2017
(approximately
$235 million
based on the exchange rate as of
September 29, 2017
), imposing withholding tax relating to interest accrued in Denmark on borrowings from certain of the Company’s subsidiaries for the years 2004-2009. The Company is currently in discussions with SKAT and anticipates receiving an assessment for years 2010-2012 totaling approximately
DKK 874 million
including interest through
September 29, 2017
(approximately
$139 million
based on the exchange rate as of
September 29, 2017
). Management believes the positions the Company has taken in Denmark are in accordance with the relevant tax laws and is vigorously defending its positions. The Company appealed these assessments to the National Tax Tribunal in 2014 and intends on pursuing this matter through the European Court of Justice should this appeal be unsuccessful. The ultimate resolution of this matter is uncertain, could take many years, and could result in a material adverse impact to the Company’s financial statements, including its effective tax rate.
The Company expects its effective tax rate related to continuing operations for the remainder of
2017
to be approximately 21% based on its projected mix of earnings, although the actual effective tax rate could vary from the anticipated rate as a result of many factors, including but not limited to the following:
|
|
•
|
The expected rate for the remainder of
2017
includes the anticipated discrete income tax benefits from excess tax deductions related to the Company’s stock compensation programs, which are now reflected as a reduction in tax expense (refer to Note 1 to the accompanying Consolidated Condensed Financial Statements for additional information related to this change in accounting guidance), though the actual benefits will depend on the Company’s stock price and stock option exercise patterns.
|
|
|
•
|
The actual mix of earnings by jurisdiction could fluctuate from the Company’s projection.
|
|
|
•
|
The tax effects of other discrete items, including accruals related to tax contingencies, the resolution of worldwide tax matters, tax audit settlements, statute of limitations expirations and changes in tax regulations, are reflected in the period in which they occur.
|
|
|
•
|
Any future legislative changes or potential tax reform in the United States or other jurisdictions and any related additional tax planning efforts to address these changes.
|
As a result of the uncertainty in predicting these items, it is reasonably possible that the actual effective tax rate used for financial reporting purposes will change in future periods.
In the nine-month period ended
September 29, 2017
, Danaher recorded a
$22 million
income tax benefit related to the release of previously provided reserves associated with uncertain tax positions on certain Danaher tax returns which were jointly filed with Fortive entities. These reserves were released due to the expiration of statutes of limitations for those returns. All Fortive entity-related balances were included in the income tax benefit related to discontinued operations.
COMPREHENSIVE INCOME
For the three-month period ended
September 29, 2017
, comprehensive income
increased
$154 million
as compared to the comparable period of
2016
, primarily due to an
increase
in net earnings in the three-month period partially offset by a smaller impact from foreign currency translation adjustments. In the
nine
-month period ended
September 29, 2017
, comprehensive income
increased
$490 million
as compared to the comparable period of
2016
, due to an increased gain from foreign currency translation adjustments compared to the gain realized in
2016
and the change in the unrealized gains on the available-for-sale securities, partially offset by
lower
net earnings in the
nine
-month period of 2017 associated with the spin-off of Fortive in July 2016. For the three and
nine
-month periods ended
September 29, 2017
, the Company recorded a foreign currency translation
gain
of
$260 million
and
$839 million
, respectively, as compared to a translation
gain
of
$276 million
and
$315 million
for the three and
nine
-month periods ended
September 30, 2016
, respectively.
INFLATION
The effect of inflation on the Company’s revenues and net earnings was not significant in the three and
nine
-month periods ended
September 29, 2017
.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company continues to generate substantial cash from operating activities and believes that its operating cash flow and other sources of liquidity will be sufficient to allow it to continue investing in existing businesses, consummating strategic acquisitions, paying interest and servicing debt and managing its capital structure on a short and long-term basis.
Following is an overview of the Company’s cash flows and liquidity for the
nine
-month period ended
September 29, 2017
:
Overview of Cash Flows and Liquidity
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended
|
($ in millions)
|
September 29, 2017
|
|
September 30, 2016
|
Total operating cash flows provided by continuing operations
|
$
|
2,643.1
|
|
|
$
|
2,438.5
|
|
|
|
|
|
Cash paid for acquisitions
|
$
|
(112.0
|
)
|
|
$
|
(99.6
|
)
|
Payments for additions to property, plant and equipment
|
(445.8
|
)
|
|
(422.1
|
)
|
Proceeds from sales of property, plant and equipment
|
32.3
|
|
|
7.2
|
|
Proceeds from sale of investments
|
—
|
|
|
264.8
|
|
All other investing activities
|
(2.4
|
)
|
|
—
|
|
Total investing cash used in discontinued operations
|
—
|
|
|
(69.8
|
)
|
Net cash used in investing activities
|
$
|
(527.9
|
)
|
|
$
|
(319.5
|
)
|
|
|
|
|
Proceeds from the issuance of common stock
|
$
|
49.0
|
|
|
$
|
156.6
|
|
Payment of dividends
|
(281.0
|
)
|
|
(313.3
|
)
|
Make-whole premiums to redeem borrowings prior to maturity
|
—
|
|
|
(188.1
|
)
|
Payment for purchase of noncontrolling interests
|
(64.4
|
)
|
|
—
|
|
Net repayments of borrowings (maturities of 90 days or less)
|
(3,319.1
|
)
|
|
(2,334.2
|
)
|
Proceeds from borrowings (maturities longer than 90 days)
|
1,684.0
|
|
|
3,240.9
|
|
Repayments of borrowings (maturities longer than 90 days)
|
(562.4
|
)
|
|
(2,354.2
|
)
|
All other financing activities
|
(50.7
|
)
|
|
(26.7
|
)
|
Cash distributions to Fortive, net
|
—
|
|
|
(485.3
|
)
|
Net cash used in financing activities
|
$
|
(2,544.6
|
)
|
|
$
|
(2,304.3
|
)
|
|
|
•
|
Operating cash flows from continuing operations
increased
$205 million
, or approximately
8%
, during the first
nine
months of
2017
as compared to the first
nine
months of
2016
, due to higher earnings and lower cash used for funding accounts receivable, inventories and accounts payable during the period partially offset by increased cash used for income tax and certain employee benefit payments compared to the prior years.
|
|
|
•
|
The Company used cash generated from operations as well as the proceeds from the long-term borrowings noted below to reduce net outstanding borrowings with maturities of 90 days or less, primarily commercial paper borrowings, by approximately
$3.3 billion
.
|
|
|
•
|
In May 2017, the Company received net proceeds, after offering expenses, of approximately
¥83.6 billion
(approximately
$744 million
based on currency exchange rates as of the
date of the pricing of the notes
) from the issuance of yen-denominated notes (refer to Note 6 of the accompanying Consolidated Condensed Financial Statements), and used the net proceeds from the offering to repay commercial paper borrowings.
|
|
|
•
|
In June 2017, the Company received net proceeds, after underwriting discounts and commissions and offering expenses, of approximately
€843 million
(approximately
$940 million
based on currency exchange rates as of the
date of the pricing of the notes
) from the issuance of euro-denominated notes (refer to Note 6 of the accompanying Consolidated Condensed Financial Statements) and used the net proceeds from the offering to repay the
€500 million
floating rate senior unsecured notes
which matured on June 30, 2017 as well as to repay commercial paper borrowings.
|
|
|
•
|
As of
September 29, 2017
, the Company held
$649 million
of cash and cash equivalents.
|
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impact reported cash flows.
Operating cash flows from continuing operations were approximately
$2.6 billion
for the first
nine
months of
2017
,
an increase
of
$205 million
, or approximately
8%
, as compared to the comparable period of
2016
. The year-over-year change in operating cash flows from
2016
to
2017
was primarily attributable to the following factors:
|
|
•
|
2017
operating cash flows reflected
an increase
in net earnings from continuing operations for the first
nine
months of
2017
as compared to the comparable period in
2016
. The increase in net earnings from continuing operations was partially offset by the net impact of the gain from the sale of marketable equity securities and the loss on early extinguishment of borrowings in 2016. The cash flow impact of the gain from the sale of marketable equity securities is reflected in the investing activities section of the accompanying Consolidated Condensed Statement of Cash Flows, and the cash flow impact of the loss on early extinguishment of borrowings is reflected in the financing activities section of the Consolidated Condensed Statement of Cash Flows, and therefore, do not contribute to operating cash flows.
|
|
|
•
|
Net earnings from continuing operations for the first
nine
months of
2017
reflected
an increase
of
$98 million
of depreciation and amortization expense as compared to the comparable period of
2016
. Amortization expense primarily relates to the amortization of intangible assets acquired in connection with acquisitions and increased due to the impact of recently acquired businesses, particularly Cepheid. Depreciation expense relates to both the Company’s manufacturing and operating facilities as well as instrumentation leased to customers under operating-type lease arrangements and increased due primarily to the impact of recently acquired businesses, particularly Cepheid. Depreciation and amortization are noncash expenses that decrease earnings without a corresponding impact to operating cash flows.
|
|
|
•
|
The aggregate of trade accounts receivable, inventories and trade accounts payable
used
$72 million
in operating cash flows during the first
nine
months of
2017
, compared to
$271 million
of operating cash flows
used
in the comparable period of
2016
. The amount of cash flow generated from or used by the aggregate of trade accounts receivable, inventories and trade accounts payable depends upon how effectively the Company manages the cash conversion cycle, which effectively represents the number of days that elapse from the day it pays for the purchase of raw materials and components to the collection of cash from its customers and can be significantly impacted by the timing of collections and payments in a period.
|
|
|
•
|
The aggregate of prepaid expenses and other assets and accrued expenses and other liabilities
provided
$28 million
of operating cash flows during the first
nine
months of
2017
, compared to
$429 million
provided
in the comparable period of
2016
. This operational cash flow in the first
nine
months of
2017
resulted primarily from the timing of cash payments for income taxes compared to the timing of recording the related income tax provisions, various employee-related liabilities and customer funding during the first
nine
months of
2017
compared to the comparable period of
2016
.
|
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 from continuing operations was
$528 million
during the first
nine
months of
2017
compared to $
250 million
of cash
used
in the first
nine
months of
2016
. For a discussion of the Company’s acquisitions during the first
nine
months of
2017
refer to “—Overview” and for a discussion of the Company’s 2016 sale of marketable equity securities refer to “—Results of Operations—Nonoperating Income (Expense)”.
Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development, improving information technology systems and the manufacture of instruments that are used in operating-type lease arrangements that certain of the Company’s businesses enter into with customers. Capital expenditures
increased
$24 million
on a year-over-year basis for the first
nine
months of
2017
compared to
2016
due to increased investments in other operating assets, particularly new facilities and operating assets at newly acquired businesses. For the full year
2017
, the Company expects capital spending to be approximately $675 million, though actual expenditures will ultimately depend on business conditions.
Capital disposals in the first
nine
months of 2017 were primarily related to the sale of a building.
Financing Activities and Indebtedness
Cash flows relating to financing activities consist primarily of cash flows associated with the issuance and repayments of commercial paper and other debt, issuance and repurchases of common stock and payments of cash dividends to shareholders.
Financing activities from continuing operations
used
cash of approximately
$2.5 billion
during the first
nine
months of
2017
compared to approximately
$1.8 billion
of cash
used
in the comparable period of
2016
. The year-over-year
increase
in cash
used
in financing activities was due primarily to
higher
net repayments of commercial paper borrowings in 2017 as well as
lower
proceeds from the issuance of the Yen Notes and the Euronotes in 2017 as compared to the proceeds from the issuance of debt (primarily related to Fortive) in the comparable period of
2016
.
For a description of the Company’s outstanding debt as of
September 29, 2017
, the debt issued and debt repaid during the
nine
-month period ended
September 29, 2017
and the Company’s commercial paper programs and credit facilities, refer to Note 6 to the accompanying Consolidated Condensed Financial Statements. As of
September 29, 2017
, the Company was in compliance with all of its debt covenants.
The Company satisfies any short-term liquidity needs that are not met through operating cash flow and available cash primarily through issuances of commercial paper under its
U.S. dollar and euro-denominated
commercial paper programs. Credit support for the commercial paper programs is generally provided by the Company’s
$4.0 billion
unsecured, multi-year revolving credit facility with a syndicate of banks that expires on July 10, 2020 (the “Credit Facility”), which can also be used for working capital and other general corporate purposes. In October 2016, the Company expanded its borrowing capacity by entering into a
$3.0 billion
364-day unsecured revolving credit facility with a syndicate of banks that expires on October 23, 2017 (the “364-Day Facility” and together with the Credit Facility, the “Credit Facilities”), to provide additional liquidity support for issuances under the Company’s
U.S. dollar and euro-denominated
commercial paper programs.
Effective April 21, 2017, the Company reduced the commitment amount under the 364-Day Facility from
$3.0 billion
to
$2.3 billion
, and effective June 23, 2017, the Company further reduced the commitment amount under the facility to
$1.0 billion
, as permitted by the facility.
As of
September 29, 2017
, Danaher had the ability to incur approximately an additional $2.1 billion of indebtedness in direct borrowings under the Credit Facilities or under outstanding commercial paper facilities (based on aggregate amounts available under the Credit Facilities that were not being used to backstop outstanding commercial paper balances). Effective October 23, 2017, Danaher’s ability to incur additional indebtedness will be reduced to approximately $1.1 billion due to the expiration of the 364-Day Facility noted above.
The Company has classified approximately
$2.9 billion
of its borrowings outstanding under the commercial paper programs as of
September 29, 2017
as long-term debt in the accompanying Consolidated Condensed Balance Sheet as the Company had the intent and ability, as supported by availability under the Credit 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.
Stock Repurchase Program
Neither the Company nor any “affiliated purchaser” repurchased any shares of Company common stock
during the
nine
-month period ended
September 29, 2017
. On July 16, 2013, the Company’s Board of Directors approved the Repurchase Program authorizing the repurchase of up to 20 million shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions. There is no expiration date for the Repurchase Program, and the timing and amount of any shares repurchased under the program will be determined by the Company’s management based on its evaluation of market conditions and other factors. The Repurchase Program may be suspended or discontinued at any time. Any repurchased shares will be available for use in connection with the Company’s equity compensation plans (or any successor plan) and for other corporate purposes. As of
September 29, 2017
,
20 million
shares remained available for repurchase pursuant to the Repurchase Program. The Company expects to fund any future stock repurchases using the Company’s available cash balances or proceeds from the issuance of debt.
Dividends
Aggregate cash payments for dividends during the first
nine
months of
2017
were
$281 million
. This is
lower
than in the comparable period of
2016
, as the Company decreased the per share amount of its quarterly dividend in the third quarter of 2016 as a result of the Fortive Separation.
In the
third quarter
of
2017
, the Company declared a regular quarterly dividend of
$0.14
per share payable on October 27, 2017 to holders of record on September 29, 2017.
Cash and Cash Requirements
As of
September 29, 2017
, the Company held
$649 million
of cash and cash equivalents that were held on deposit with financial institutions or invested in highly liquid investment-grade debt instruments with a maturity of 90 days or less with an approximate weighted average annual interest rate of 1.1%. Of this amount,
$22 million
was held within the United States and
$627 million
was held outside of the United States. The Company will continue to have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund its restructuring activities and pension plans as required, pay dividends to shareholders, repurchase shares of the Company’s common stock and support 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, particularly in connection with acquisitions, the Company may also borrow under its commercial paper programs or the credit facilities, enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under its commercial paper programs and/or access the capital markets. The Company also may from time to time access the capital markets to take advantage of favorable interest rate environments or other market conditions. With respect to the Company’s commercial paper, notes and bonds scheduled to mature during the remainder of 2017, the Company expects to repay the principal amounts when due using available cash, proceeds from the issuance of commercial paper and/or proceeds from other debt issuances.
While repatriation of some cash held outside the United States may be restricted by local laws, most of the Company’s foreign cash balances could be repatriated to the United States but, under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. For most of its foreign subsidiaries, the Company makes an election regarding the amount of earnings intended for indefinite reinvestment, with the balance available to be repatriated to the United States. The Company has recorded a deferred tax liability for the funds that are available to be repatriated to the United States. No provisions for U.S. income taxes have been made with respect to earnings that are planned to be reinvested indefinitely outside the United States, and the amount of U.S. income taxes that may be applicable to such earnings is not readily determinable given the various tax planning alternatives the Company could employ if it repatriated these earnings. The cash that the Company’s foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. As of
September 29, 2017
, management believes that it has sufficient liquidity to satisfy its cash needs, including its cash needs in the United States.
During
2017
,
the Company’s cash contribution requirements for its U.S. and non-U.S. defined benefit pension plans are expected to be approximately
$55 million
and
$40 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.