Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-Q
________________________________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 28, 2018
OR
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¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-8089
DANAHER CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | | 59-1995548 |
(State of Incorporation) | | (I.R.S. Employer Identification number) |
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2200 Pennsylvania Avenue, N.W., Suite 800W Washington, D.C. | | 20037-1701 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code: 202-828-0850
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | ý | | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ | | Smaller reporting company | | ¨ |
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Emerging growth company | | ¨ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No ý
The number of shares of common stock outstanding at October 12, 2018 was 700,902,703.
DANAHER CORPORATION
INDEX
FORM 10-Q
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PART I - | FINANCIAL INFORMATION | |
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PART II - | OTHER INFORMATION | |
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DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ and shares in millions, except per share amount)
(unaudited)
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| September 28, 2018 | | December 31, 2017 |
ASSETS | | | |
Current assets: | | | |
Cash and equivalents | $ | 776.2 |
| | $ | 630.3 |
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Trade accounts receivable, net | 3,323.1 |
| | 3,521.8 |
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Inventories: | | | |
Finished goods | 1,110.1 |
| | 982.5 |
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Work in process | 331.4 |
| | 309.7 |
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Raw materials | 587.9 |
| | 548.6 |
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Total inventories | 2,029.4 |
| | 1,840.8 |
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Prepaid expenses and other current assets | 701.8 |
| | 857.1 |
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Total current assets | 6,830.5 |
| | 6,850.0 |
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Property, plant and equipment, net of accumulated depreciation of $2,739.6 and $2,519.4, respectively | 2,462.3 |
| | 2,454.6 |
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Other long-term assets | 577.3 |
| | 538.3 |
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Goodwill | 26,035.0 |
| | 25,138.6 |
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Other intangible assets, net | 11,814.4 |
| | 11,667.1 |
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Total assets | $ | 47,719.5 |
| | $ | 46,648.6 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Notes payable and current portion of long-term debt | $ | 59.8 |
| | $ | 194.7 |
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Trade accounts payable | 1,569.6 |
| | 1,509.9 |
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Accrued expenses and other liabilities | 2,835.9 |
| | 3,087.7 |
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Total current liabilities | 4,465.3 |
| | 4,792.3 |
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Other long-term liabilities | 5,011.0 |
| | 5,161.1 |
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Long-term debt | 10,558.0 |
| | 10,327.4 |
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Stockholders’ equity: | | | |
Common stock - $0.01 par value, 2.0 billion shares authorized; 817.2 and 812.5 issued; 700.8 and 696.6 outstanding, respectively | 8.2 |
| | 8.1 |
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Additional paid-in capital | 5,772.2 |
| | 5,538.2 |
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Retained earnings | 24,528.7 |
| | 22,806.1 |
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Accumulated other comprehensive income (loss) | (2,635.7 | ) | | (1,994.2 | ) |
Total Danaher stockholders’ equity | 27,673.4 |
| | 26,358.2 |
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Noncontrolling interests | 11.8 |
| | 9.6 |
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Total stockholders’ equity | 27,685.2 |
| | 26,367.8 |
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Total liabilities and stockholders’ equity | $ | 47,719.5 |
| | $ | 46,648.6 |
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See the accompanying Notes to the Consolidated Condensed Financial Statements.
DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
(unaudited)
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| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Sales | $ | 4,853.1 |
| | $ | 4,528.2 |
| | $ | 14,529.5 |
| | $ | 13,244.0 |
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Cost of sales | (2,162.6 | ) | | (1,991.4 | ) | | (6,378.3 | ) | | (5,890.6 | ) |
Gross profit | 2,690.5 |
| | 2,536.8 |
| | 8,151.2 |
| | 7,353.4 |
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Operating costs: | | | | | | | |
Selling, general and administrative expenses | (1,558.6 | ) | | (1,498.4 | ) | | (4,798.4 | ) | | (4,470.6 | ) |
Research and development expenses | (301.2 | ) | | (279.2 | ) | | (911.6 | ) | | (829.9 | ) |
Operating profit | 830.7 |
| | 759.2 |
| | 2,441.2 |
| | 2,052.9 |
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Nonoperating income (expense): | | | | | | | |
Other income, net | 9.1 |
| | 8.3 |
| | 25.2 |
| | 22.2 |
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Interest expense | (41.3 | ) | | (39.9 | ) | | (123.6 | ) | | (120.9 | ) |
Interest income | 2.8 |
| | 2.2 |
| | 6.7 |
| | 5.6 |
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Earnings from continuing operations before income taxes | 801.3 |
| | 729.8 |
| | 2,349.5 |
| | 1,959.8 |
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Income taxes | (137.6 | ) | | (157.7 | ) | | (445.4 | ) | | (346.6 | ) |
Net earnings from continuing operations | 663.7 |
| | 572.1 |
| | 1,904.1 |
| | 1,613.2 |
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Earnings from discontinued operations, net of income taxes | — |
| | — |
| | — |
| | 22.3 |
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Net earnings | $ | 663.7 |
| | $ | 572.1 |
| | $ | 1,904.1 |
| | $ | 1,635.5 |
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Net earnings per share from continuing operations: | | | | | | | |
Basic | $ | 0.95 |
| | $ | 0.82 |
| | $ | 2.72 |
| | $ | 2.32 |
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Diluted | $ | 0.93 |
| | $ | 0.81 |
| | $ | 2.68 |
| | $ | 2.29 |
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Net earnings per share from discontinued operations: | | | | | | | |
Basic | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.03 |
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Diluted | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.03 |
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Net earnings per share: | | | | | | | |
Basic | $ | 0.95 |
| | $ | 0.82 |
| | $ | 2.72 |
| | $ | 2.35 |
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Diluted | $ | 0.93 |
| | $ | 0.81 |
| | $ | 2.68 |
| | $ | 2.32 |
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Average common stock and common equivalent shares outstanding: | | | | | | | |
Basic | 701.4 |
| | 696.2 |
| | 700.1 |
| | 695.3 |
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Diluted | 710.6 |
| | 705.6 |
| | 709.9 |
| | 705.5 |
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See the accompanying Notes to the Consolidated Condensed Financial Statements.
DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
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| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Net earnings | $ | 663.7 |
| | $ | 572.1 |
| | $ | 1,904.1 |
| | $ | 1,635.5 |
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Other comprehensive income (loss), net of income taxes: | | | | | | | |
Foreign currency translation adjustments | (162.4 | ) | | 260.0 |
| | (509.4 | ) | | 839.2 |
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Pension and postretirement plan benefit adjustments | 5.9 |
| | 4.6 |
| | 19.7 |
| | 14.4 |
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Unrealized (loss) gain on available-for-sale securities adjustments | — |
| | (1.9 | ) | | (0.6 | ) | | 16.3 |
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Total other comprehensive income (loss), net of income taxes | (156.5 | ) | | 262.7 |
| | (490.3 | ) | | 869.9 |
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Comprehensive income | $ | 507.2 |
| | $ | 834.8 |
| | $ | 1,413.8 |
| | $ | 2,505.4 |
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See the accompanying Notes to the Consolidated Condensed Financial Statements.
DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
($ and shares in millions)
(unaudited)
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| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests |
Shares | | Amount | |
Balance, December 31, 2017 | 812.5 |
| | $ | 8.1 |
| | $ | 5,538.2 |
| | $ | 22,806.1 |
| | $ | (1,994.2 | ) | | $ | 9.6 |
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Adoption of accounting standards | — |
| | — |
| | — |
| | 154.5 |
| | (151.2 | ) | | — |
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Balance, January 1, 2018 | 812.5 |
| | 8.1 |
| | 5,538.2 |
| | 22,960.6 |
| | (2,145.4 | ) | | 9.6 |
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Net earnings | — |
| | — |
| | — |
| | 1,904.1 |
| | — |
| | — |
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Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (490.3 | ) | | — |
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Dividends declared | — |
| | — |
| | — |
| | (336.0 | ) | | — |
| | — |
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Common stock-based award activity | 4.0 |
| | 0.1 |
| | 194.0 |
| | — |
| | — |
| | — |
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Common stock issued in connection with acquisitions | 0.2 |
| | — |
| | 23.9 |
| | — |
| | — |
| | — |
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Common stock issued in connection with LYONs’ conversions, including tax benefit of $4.2 | 0.5 |
| | — |
| | 16.1 |
| | — |
| | — |
| | — |
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Change in noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 2.2 |
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Balance, September 28, 2018 | 817.2 |
| | $ | 8.2 |
| | $ | 5,772.2 |
| | $ | 24,528.7 |
| | $ | (2,635.7 | ) | | $ | 11.8 |
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See the accompanying Notes to the Consolidated Condensed Financial Statements.
DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
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| Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 |
Cash flows from operating activities: | | | |
Net earnings | $ | 1,904.1 |
| | $ | 1,635.5 |
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Less: earnings from discontinued operations, net of income taxes | — |
| | 22.3 |
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Net earnings from continuing operations | 1,904.1 |
| | 1,613.2 |
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Noncash items: | | | |
Depreciation | 449.4 |
| | 427.3 |
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Amortization | 527.5 |
| | 492.9 |
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Stock-based compensation expense | 111.6 |
| | 104.8 |
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Restructuring and impairment charges | — |
| | 49.3 |
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Change in trade accounts receivable, net | 128.6 |
| | 74.6 |
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Change in inventories | (255.4 | ) | | (98.2 | ) |
Change in trade accounts payable | 71.5 |
| | (48.5 | ) |
Change in prepaid expenses and other assets | 245.6 |
| | 242.3 |
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Change in accrued expenses and other liabilities | (398.5 | ) | | (214.6 | ) |
Net operating cash provided by continuing operations | 2,784.4 |
| | 2,643.1 |
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Cash flows from investing activities: | | | |
Cash paid for acquisitions | (2,173.3 | ) | | (112.0 | ) |
Payments for additions to property, plant and equipment | (441.3 | ) | | (445.8 | ) |
Proceeds from sales of property, plant and equipment | 1.6 |
| | 32.3 |
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Proceeds from sale of investments | 22.1 |
| | — |
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All other investing activities | (61.1 | ) | | (2.4 | ) |
Net operating cash used in investing activities | (2,652.0 | ) | | (527.9 | ) |
Cash flows from financing activities: | | | |
Proceeds from the issuance of common stock | 77.3 |
| | 49.0 |
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Payment of dividends | (321.2 | ) | | (281.0 | ) |
Payment for purchase of noncontrolling interests | — |
| | (64.4 | ) |
Net proceeds from (repayments of) borrowings (maturities of 90 days or less) | 882.1 |
| | (3,319.1 | ) |
Proceeds from borrowings (maturities longer than 90 days) | — |
| | 1,684.0 |
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Repayments of borrowings (maturities longer than 90 days) | (503.9 | ) | | (562.4 | ) |
All other financing activities | (16.6 | ) | | (50.7 | ) |
Net operating cash provided by (used in) financing activities | 117.7 |
| | (2,544.6 | ) |
Effect of exchange rate changes on cash and equivalents | (104.2 | ) | | 114.3 |
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Net change in cash and equivalents | 145.9 |
| | (315.1 | ) |
Beginning balance of cash and equivalents | 630.3 |
| | 963.7 |
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Ending balance of cash and equivalents | $ | 776.2 |
| | $ | 648.6 |
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Supplemental disclosures: | | | |
Cash interest payments | $ | 129.0 |
| | $ | 117.4 |
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Cash income tax payments | 502.0 |
| | 378.3 |
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See the accompanying Notes to the Consolidated Condensed Financial Statements.
DANAHER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. GENERAL
The consolidated condensed financial statements included herein have been prepared by Danaher Corporation (“Danaher” or the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In this quarterly report, the terms “Danaher” or the “Company” refer to Danaher Corporation, Danaher Corporation and its consolidated subsidiaries or the consolidated subsidiaries of Danaher Corporation, as the context requires. Unless otherwise indicated, all amounts in this quarterly report refer to continuing operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The Consolidated Condensed Financial Statements included herein should be read in conjunction with the financial statements as of and for the year ended December 31, 2017 and the Notes thereto included in the Company’s 2017 Annual Report on Form 10-K filed on February 21, 2018.
In the opinion of the Company, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company as of September 28, 2018 and December 31, 2017, its results of operations for the three and nine-month periods ended September 28, 2018 and September 29, 2017 and its cash flows for each of the nine-month periods then ended. Reclassifications of certain prior year amounts have been made to conform to the current year presentation.
Accounting Standards Recently Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes nearly all existing revenue recognition guidance. Subsequent to the issuance of Topic 606, the FASB clarified the guidance through several ASUs; hereinafter the collection of revenue guidance is referred to as “ASC 606”. The core principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605, Revenue Recognition.
The Company recorded a net increase to beginning retained earnings of $3 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact to beginning retained earnings was primarily driven by the capitalization of certain costs to obtain a contract, primarily sales-related commissions, partially offset by the deferral of revenue for unfulfilled performance obligations. The adoption of ASC 606 did not have a significant impact on the Company’s Consolidated Condensed Financial Statements as of and for the three and nine-month periods ended September 28, 2018 and, as a result, comparisons of revenues and operating profit performance between periods are not affected by the adoption of this ASU. Refer to Note 2 for additional disclosures required by ASC 606.
The Company derives revenues primarily from the sale of Life Sciences, Diagnostics, Dental and Environmental & Applied Solutions products and services. Revenue is recognized when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606. For equipment, consumables, spare parts and most software licenses sold by the Company, control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is not a formality, the customer must have accepted the product or service. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB Shipping Point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. If a performance obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition for that performance obligation is deferred until such commitments have been fulfilled. Returns for products sold are estimated and recorded as a reduction of revenue at the time of sale. Customer allowances and rebates, consisting primarily
of volume discounts and other short-term incentive programs, are recorded as a reduction of revenue at the time of sale because these allowances reflect a reduction in the transaction price. Product returns, customer allowances and rebates are estimated based on historical experience and known trends. For extended warranty, service, post contract support (“PCS”), software-as-a-service (“SaaS”) and other long-term contracts, control transfers to the customer over the term of the arrangement. Revenue for extended warranty, service, PCS, SaaS and certain software licenses is recognized based upon the period of time elapsed under the arrangement. Revenue for other long-term contracts is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with transferring control of the good or service over time.
Certain of the Company’s revenues relate to operating-type lease (“OTL”) arrangements. Leases are outside the scope of ASC 606 and are therefore accounted for in accordance with ASC 840, Leases. Instrument lease revenue for OTL agreements is recognized on a straight-line basis over the life of the lease, and the costs of customer-leased instruments are recorded within property, plant and equipment in the accompanying Consolidated Condensed Balance Sheets and depreciated over the instrument’s estimated useful life. The depreciation expense is reflected in cost of sales in the accompanying Consolidated Condensed Statements of Earnings. The OTLs are generally not cancellable until after an initial term and may or may not require the customer to purchase a minimum number of consumables or tests throughout the contract term. Certain of the Company’s lease contracts are customized for larger customers and often result in complex terms and conditions that typically require significant judgment in applying the criteria used to evaluate whether the arrangement should be considered an OTL or a sales-type lease (“STL”). A sales-type lease would result in earlier recognition of instrument revenue as compared to an OTL.
For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers; however, when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price. Allocation of the transaction price is determined at the contracts’ inception. The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less. This allocation approach also applies to contracts that include a lease component.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU amends guidance on the classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. The ASU requires equity securities to be measured at fair value with changes in fair value recognized through net earnings and amends certain disclosure requirements associated with the fair value of financial instruments. In the period of adoption, the Company is required to reclassify the unrealized gains/losses on equity securities within accumulated other comprehensive income (loss) to retained earnings. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), which clarified certain aspects of the previously issued ASU. The ASU was adopted by the Company on January 1, 2018 and did not have a material effect on the Company’s Consolidated Condensed Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires employers to disaggregate the service cost component from other components of net periodic benefit costs and to disclose the amounts of net periodic benefit costs that are included in each income statement line item. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income. The income statement guidance requires application on a retrospective basis. The ASU was adopted by the Company on January 1, 2018 and as a result operating profit decreased and other income, net increased by $8.3 million and $22.2 million for the three and nine-month periods ended September 29, 2017, respectively. Refer to Note 8 for further information on the implementation of this ASU.
The Company measures its pension and postretirement plans’ assets and its obligations that determine the respective plan’s funded status as of the end of the Company’s fiscal year, and recognizes an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in its balance sheet. Changes in the funded status of the plans are recognized in the year in which the changes occur and reported in other comprehensive income (loss). The service cost component of net periodic pension cost is included in cost of sales and selling, general and administrative expenses in the accompanying Consolidated Condensed Statements of Earnings and the other components of net periodic pension cost are included in nonoperating income (expense).
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address a specific consequence of the Tax Cuts and Jobs Act (“TCJA”) by allowing a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the TCJA’s reduction of the U.S. federal corporate income tax rate. The standard is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company early adopted this ASU on January 1, 2018 and as a result recorded a net increase to beginning retained earnings and decrease to accumulated other comprehensive income (loss) of $151 million to reclassify the income tax effects of the TCJA on the Company’s U.S. pension plans, available-for-sale debt securities and certain foreign currency losses. The ASU also requires the Company to disclose its policy on accounting for income tax effects in accumulated other comprehensive income (loss). In general, the Company applies the individual item approach with respect to available-for-sale debt securities and the portfolio approach with respect to pension, postretirement benefit plan obligations and currency translation matters.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which allowed SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of the TCJA. The Company recognized the estimated income tax effects of the TCJA in its 2017 Consolidated Financial Statements in accordance with SEC Staff Accounting Bulletin No. 118 (“SAB No. 118”). Refer to Note 9 for further information regarding the provisional amounts recorded by the Company as of December 31, 2017.
Except for the above accounting policy for revenue recognition that was updated as a result of adopting ASC 606 and the policy for pension and postretirement benefit plans that was updated as a result of adopting ASU 2017-07, there have been no significant changes to the Company’s accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017.
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on trade accounts receivable and the recognition of credit losses.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for all leases with terms greater than 12 months. The standard also requires disclosures by lessees and lessors about the amount, timing and uncertainty of cash flows arising from leases. The accounting applied by a lessor is largely unchanged from that applied under the current standard. The standard must be adopted using a modified retrospective transition approach and provides for certain practical expedients. The ASU is effective for public entities for fiscal years beginning after December 15, 2018, with early adoption permitted. In September 2017, January 2018 and July 2018 the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), ASU No. 2018-01, Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842, ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provided additional implementation guidance on the previously issued ASU. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements. The Company is in the process of implementing a new lease system and the related processes and controls for the accounting for leases in accordance with the ASU. Management currently believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and a lease liability for its real estate and automobile leases.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements.
Accumulated Other Comprehensive Income (Loss)—Accumulated other comprehensive income (loss) refers to certain gains and losses that under U.S. GAAP are included in comprehensive income (loss) but are excluded from net earnings as these amounts are initially recorded as an adjustment to stockholders’ equity. The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions). Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Pension & Postretirement Plan Benefit Adjustments | | Unrealized Gain (Loss) on Available-For-Sale Securities Adjustments | | Total |
For the Three-Month Period Ended September 28, 2018: | | | | | | | |
Balance, June 29, 2018 | $ | (1,812.9 | ) | | $ | (664.6 | ) | | $ | (1.7 | ) | | $ | (2,479.2 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | |
Decrease | (162.4 | ) | | — |
| | — |
| | (162.4 | ) |
Other comprehensive income (loss) before reclassifications, net of income taxes | (162.4 | ) | | — |
| | — |
| | (162.4 | ) |
Amounts reclassified from accumulated other comprehensive income (loss): | | | | | | | |
Increase | — |
| | 7.7 |
| (a) | — |
| | 7.7 |
|
Income tax impact | — |
| | (1.8 | ) | | — |
| | (1.8 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — |
| | 5.9 |
| | — |
| | 5.9 |
|
Net current period other comprehensive income (loss), net of income taxes | (162.4 | ) | | 5.9 |
| | — |
| | (156.5 | ) |
Balance, September 28, 2018 | $ | (1,975.3 | ) | | $ | (658.7 | ) | | $ | (1.7 | ) | | $ | (2,635.7 | ) |
For the Three-Month Period Ended September 29, 2017: | | | | | | | |
Balance, June 30, 2017 | $ | (1,819.0 | ) | | $ | (632.4 | ) | | $ | 36.9 |
| | $ | (2,414.5 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | |
Increase (decrease) | 260.0 |
| | — |
| | (3.0 | ) | | 257.0 |
|
Income tax impact | — |
| | — |
| | 1.1 |
| | 1.1 |
|
Other comprehensive income (loss) before reclassifications, net of income taxes | 260.0 |
| | — |
| | (1.9 | ) | | 258.1 |
|
Amounts reclassified from accumulated other comprehensive income (loss): | | | | | | | |
Increase | — |
| | 7.0 |
| (a) | — |
| | 7.0 |
|
Income tax impact | — |
| | (2.4 | ) | | — |
| | (2.4 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — |
| | 4.6 |
| | — |
| | 4.6 |
|
Net current period other comprehensive income (loss), net of income taxes | 260.0 |
| | 4.6 |
| | (1.9 | ) | | 262.7 |
|
Balance, September 29, 2017 | $ | (1,559.0 | ) | | $ | (627.8 | ) | | $ | 35.0 |
| | $ | (2,151.8 | ) |
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. Refer to Note 8 for additional details.
|
| | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Pension & Postretirement Plan Benefit Adjustments | | Unrealized Gain (Loss) on Available-For-Sale Securities Adjustments | | Total |
For the Nine-Month Period Ended September 28, 2018: | | | | | | | |
Balance, December 31, 2017 | $ | (1,422.1 | ) | | $ | (571.2 | ) | | $ | (0.9 | ) | | $ | (1,994.2 | ) |
Adoption of accounting standards | (43.8 | ) | | (107.2 | ) | | (0.2 | ) | | (151.2 | ) |
Balance, January 1, 2018 | (1,465.9 | ) | | (678.4 | ) | | (1.1 | ) | | (2,145.4 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | |
Decrease | (509.4 | ) | | — |
| | (0.8 | ) | | (510.2 | ) |
Income tax impact | — |
| | — |
| | 0.2 |
| | 0.2 |
|
Other comprehensive income (loss) before reclassifications, net of income taxes | (509.4 | ) | | — |
| | (0.6 | ) | | (510.0 | ) |
Amounts reclassified from accumulated other comprehensive income (loss): | | | | | | | |
Increase | — |
| | 25.8 |
| (a) | — |
| | 25.8 |
|
Income tax impact | — |
| | (6.1 | ) | | — |
| | (6.1 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — |
| | 19.7 |
| | — |
| | 19.7 |
|
Net current period other comprehensive income (loss), net of income taxes | (509.4 | ) | | 19.7 |
| | (0.6 | ) | | (490.3 | ) |
Balance, September 28, 2018 | $ | (1,975.3 | ) | | $ | (658.7 | ) | | $ | (1.7 | ) | | $ | (2,635.7 | ) |
For the Nine-Month Period Ended September 29, 2017: | | | | | | | |
Balance, December 31, 2016 | $ | (2,398.2 | ) | | $ | (642.2 | ) | | $ | 18.7 |
| | $ | (3,021.7 | ) |
Other comprehensive income (loss) before reclassifications: | | | | | | | |
Increase | 839.2 |
| | — |
| | 26.1 |
| | 865.3 |
|
Income tax impact | — |
| | — |
| | (9.8 | ) | | (9.8 | ) |
Other comprehensive income (loss) before reclassifications, net of income taxes | 839.2 |
| | — |
| | 16.3 |
| | 855.5 |
|
Amounts reclassified from accumulated other comprehensive income (loss): | | | | | | | |
Increase | — |
| | 22.2 |
| (a) | — |
| | 22.2 |
|
Income tax impact | — |
| | (7.8 | ) | | — |
| | (7.8 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes | — |
| | 14.4 |
| | — |
| | 14.4 |
|
Net current period other comprehensive income (loss), net of income taxes | 839.2 |
| | 14.4 |
| | 16.3 |
| | 869.9 |
|
Balance, September 29, 2017 | $ | (1,559.0 | ) | | $ | (627.8 | ) | | $ | 35.0 |
| | $ | (2,151.8 | ) |
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. Refer to Note 8 for additional details.
NOTE 2. REVENUE
The following tables present the Company’s revenues disaggregated by geographical region and revenue type for the three and nine-month periods ended September 28, 2018 ($ in millions). Sales taxes and other usage-based taxes are excluded from revenues. 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 defines developed markets as all markets of the world that are not high-growth markets.
|
| | | | | | | | | | | | | | | | | | | |
| Three-Month Period Ended September 28, 2018 |
| Life Sciences | | Diagnostics | | Dental | | Environmental & Applied Solutions | | Total |
Geographical region: | | | | | | | | | |
North America | $ | 584.0 |
| | $ | 574.0 |
| | $ | 339.8 |
| | $ | 439.7 |
| | $ | 1,937.5 |
|
Western Europe | 447.1 |
| | 262.3 |
| | 137.2 |
| | 257.5 |
| | 1,104.1 |
|
Other developed markets | 134.5 |
| | 91.8 |
| | 42.5 |
| | 31.0 |
| | 299.8 |
|
High-growth markets | 431.1 |
| | 574.4 |
| | 160.0 |
| | 346.2 |
| | 1,511.7 |
|
Total | $ | 1,596.7 |
| | $ | 1,502.5 |
| | $ | 679.5 |
| | $ | 1,074.4 |
| | $ | 4,853.1 |
|
| | | | | | | | | |
Revenue type: | | | | | | | | | |
Recurring | $ | 1,030.9 |
| | $ | 1,273.3 |
| | $ | 478.2 |
| | $ | 571.1 |
| | $ | 3,353.5 |
|
Nonrecurring | 565.8 |
| | 229.2 |
| | 201.3 |
| | 503.3 |
| | 1,499.6 |
|
Total | $ | 1,596.7 |
| | $ | 1,502.5 |
| | $ | 679.5 |
| | $ | 1,074.4 |
| | $ | 4,853.1 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine-Month Period Ended September 28, 2018 |
| Life Sciences | | Diagnostics | | Dental | | Environmental & Applied Solutions | | Total |
Geographical region: | | | | | | | | | |
North America | $ | 1,642.4 |
| | $ | 1,760.1 |
| | $ | 977.2 |
| | $ | 1,308.7 |
| | $ | 5,688.4 |
|
Western Europe | 1,346.5 |
| | 861.4 |
| | 483.3 |
| | 785.5 |
| | 3,476.7 |
|
Other developed markets | 417.9 |
| | 275.3 |
| | 133.5 |
| | 94.9 |
| | 921.6 |
|
High-growth markets | 1,271.1 |
| | 1,676.3 |
| | 491.5 |
| | 1,003.9 |
| | 4,442.8 |
|
Total | $ | 4,677.9 |
| | $ | 4,573.1 |
| | $ | 2,085.5 |
| | $ | 3,193.0 |
| | $ | 14,529.5 |
|
| | | | | | | | | |
Revenue type: | | | | | | | | | |
Recurring | $ | 3,057.3 |
| | $ | 3,892.8 |
| | $ | 1,513.5 |
| | $ | 1,702.7 |
| | $ | 10,166.3 |
|
Nonrecurring | 1,620.6 |
| | 680.3 |
| | 572.0 |
| | 1,490.3 |
| | 4,363.2 |
|
Total | $ | 4,677.9 |
| | $ | 4,573.1 |
| | $ | 2,085.5 |
| | $ | 3,193.0 |
| | $ | 14,529.5 |
|
The Company sells equipment to customers as well as consumables, spare parts, software licenses and services that customers purchase on a recurring basis. Consumables are typically critical to the use of the equipment and are used on a one-time or limited basis, requiring frequent replacement in the customer’s operating cycle. Examples of these consumables include reagents used in diagnostic tests, filters used in filtration, separation and purification processes and cartridges for marking and coding equipment. Additionally, some of the Company’s consumables are used on a standalone basis, such as dental implants and water treatment solutions. The Company separates its goods and services between those sold on a recurring basis and those sold on a nonrecurring basis. Recurring revenue includes revenue from consumables, services, spare parts, software licenses recognized over time, SaaS, sales-and-usage based royalties and OTLs. Nonrecurring revenue includes sales from equipment, software licenses recognized at a point in time and STLs. OTLs and STLs are included in the above revenue amounts. For the three and nine-month periods ended September 28, 2018, revenue accounted for under Topic 840, Leases was $115 million and $308 million, respectively.
Remaining Performance Obligations
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year which are fully or partially unsatisfied at the end of the period. Remaining performance obligations include noncancelable purchase orders, the non-lease portion of minimum purchase commitments under long-term consumable supply arrangements, extended warranty, service and PCS contracts, SaaS and other long-term contracts. Remaining performance obligations do not include revenue from contracts with customers with an original term of one year or less, revenue from long-term consumable supply arrangements with no minimum purchase requirements or revenue expected from purchases made in excess of the minimum purchase requirements or revenue from equipment leased to customers. While the remaining performance obligation disclosure is similar in concept to backlog, the definition of remaining performance obligations excludes leases and contracts that provide the customer with the right to cancel or terminate for convenience with no substantial penalty, even if historical experience indicates the likelihood of cancellation or termination is remote. Additionally, the Company has elected to exclude contracts with customers with an original term of one year or less from remaining performance obligations while these contracts are included within backlog.
As of September 28, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $1.8 billion. The Company expects to recognize revenue on approximately 44% of the remaining performance obligations over the next 12 months, 26% recognized over the subsequent 12 months, and the remainder recognized thereafter.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and deferred revenue, customer deposits and billings in excess of revenue recognized (contract liabilities) on the Consolidated Condensed Balance Sheets. In addition, the Company defers certain costs incurred to obtain a contract (contract costs).
Contract assets—Most of the Company’s long-term contracts are billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. Often this results in billing occurring subsequent to revenue recognition resulting in contract assets. Contract assets are generally classified as other current assets in the Consolidated Condensed Balance Sheet. The balance of contract assets as of September 28, 2018 and at the date of adoption of ASC 606 were $97 million and $114 million, respectively.
Contract liabilities—The Company often receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the Consolidated Condensed Balance Sheet based on the timing of when the Company expects to recognize revenue. As of September 28, 2018 and at the date of adoption of ASC 606, contract liabilities were $787 million and $783 million, respectively, and are included within accrued expenses and other liabilities and other long-term liabilities in the accompanying Consolidated Condensed Balance Sheet. The increase in the contract liability balance during the nine-month period ended September 28, 2018 is primarily as a result of cash payments received in advance of satisfying performance obligations and acquisitions, partially offset by revenue recognized during the period that was included in the contract liability balance at the date of adoption and foreign currency exchange. Revenue recognized during the three and nine-month periods ended September 28, 2018 that was included in the contract liability balance at the date of adoption was $144 million and $568 million, respectively.
Contract costs—The Company capitalizes certain direct incremental costs incurred to obtain a contract, typically sales-related commissions, where the amortization period for the related asset is greater than one year. These costs are amortized over the contract term or a longer period, generally the expected life of the customer relationship if renewals are expected and the renewal commission is not commensurate with the initial commission. Contract costs are classified as current or long-term other assets in the Consolidated Condensed Balance Sheet based on the timing of when the Company expects to recognize the expense and are generally amortized into earnings on a straight-line basis (which is consistent with the transfer of control for the related goods or services). Management assesses these costs for impairment at least quarterly and as “triggering” events occur that indicate it is more likely than not that an impairment exists. The balance of contract costs as of September 28, 2018 and at the date of adoption were not significant. Amortization expense for the three and nine-month periods ended September 28, 2018, was also not significant. The costs to obtain a contract where the amortization period for the related asset is one year or less are expensed as incurred and recorded within selling, general and administrative expenses in the accompanying Consolidated Condensed Statements of Earnings.
Contract assets, liabilities and costs are reported on the accompanying Consolidated Condensed Balance Sheet on a contract-by-contract basis.
NOTE 3. ACQUISITIONS
For a description of the Company’s acquisition activity for the year ended December 31, 2017 reference is made to the financial statements as of and for the year ended December 31, 2017 and Note 2 thereto included in the Company’s 2017 Annual Report.
The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into a new and attractive business area. The Company has completed a number of acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill arises because the purchase prices for these businesses reflect a number of factors including the future earnings and cash flow potential of these businesses, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which the Company acquired the businesses, avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance the Company’s existing product offerings to key target markets and enter into new and profitable businesses, anticipated opportunities for synergies from the elimination of redundant facilities and staffing and use of each party’s respective, existing commercial infrastructure to cost-effectively expand sales of the other party’s products and services, and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
The Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. In the months after closing, as the Company obtains additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learns more about the newly acquired business, it is able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. The Company is continuing to evaluate certain pre-acquisition contingencies associated with certain of its 2017 and 2018 acquisitions and is also in the process of obtaining valuations of certain property, plant and equipment, acquired intangible assets and certain acquisition-related liabilities in connection with these acquisitions. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
On April 13, 2018, the Company acquired Integrated DNA Technologies, Inc. (“IDT”), a privately-held manufacturer of custom DNA and RNA oligonucleotides serving customers in the academic and biopharmaceutical research, biotechnology, agriculture, clinical diagnostics and pharmaceutical development end-markets, for a purchase price of approximately $2.1 billion, net of cash acquired. IDT had revenues of approximately $260 million in 2017, and is now part of the Company’s Life Sciences segment.
The Company financed the acquisition of IDT with available cash and proceeds from the issuance of commercial paper. The Company preliminarily recorded approximately $1.2 billion of goodwill related to the IDT acquisition. The acquisition of IDT provides additional sales and earnings growth opportunities for the Company’s Life Sciences segment by expanding the segment’s product line diversity, including new product and service offerings in the area of genomics consumables, and through the potential future acquisition of complementary businesses.
In addition to the IDT acquisition, during the first nine months of 2018, the Company acquired one other business for total consideration of $95 million in cash, net of cash acquired. The business acquired complements existing units of the Environmental & Applied Solutions segment. The aggregate annual sales of this business at the time of its acquisition, based on the company’s revenues for its last completed fiscal year prior to the acquisition, were approximately $26 million. The Company preliminarily recorded an aggregate of $71 million of goodwill related to this acquisition.
The following summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions consummated during the nine-month period ended September 28, 2018 ($ in millions):
|
| | | | | | | | | | | |
| IDT | | Others | | Total |
Trade accounts receivable | $ | 36.0 |
| | $ | 5.3 |
| | $ | 41.3 |
|
Inventories | 15.1 |
| | — |
| | 15.1 |
|
Property, plant and equipment | 88.6 |
| | 0.4 |
| | 89.0 |
|
Goodwill | 1,239.9 |
| | 70.5 |
| | 1,310.4 |
|
Other intangible assets, primarily customer relationships, trade names and technology | 759.0 |
| | 30.0 |
| | 789.0 |
|
Trade accounts payable | (5.5 | ) | | (2.7 | ) | | (8.2 | ) |
Other assets and liabilities, net | (31.0 | ) | | (8.4 | ) | | (39.4 | ) |
Net assets acquired | 2,102.1 |
| | 95.1 |
| | 2,197.2 |
|
Less: noncash consideration | (23.9 | ) | | — |
| | (23.9 | ) |
Net cash consideration | $ | 2,078.2 |
| | $ | 95.1 |
| | $ | 2,173.3 |
|
Pro Forma Financial Information
The unaudited pro forma information for the periods set forth below gives effect to the 2018 and 2017 acquisitions as if they had occurred as of January 1, 2017. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time ($ in millions, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Sales | $ | 4,855.6 |
| | $ | 4,629.4 |
| | $ | 14,632.2 |
| | $ | 13,572.1 |
|
Net earnings from continuing operations | 663.8 |
| | 561.2 |
| | 1,906.1 |
| | 1,581.1 |
|
Diluted net earnings per share from continuing operations | 0.93 |
| | 0.80 |
| | 2.69 |
| | 2.24 |
|
In the nine-month period ended September 28, 2018, unaudited pro forma earnings set forth above were adjusted to exclude the $1 million pretax impact of nonrecurring acquisition date fair value adjustments to inventory related to the 2018 acquisition of IDT and in the nine-month period ended September 29, 2017 unaudited pro forma earnings set forth above were adjusted to include the impact of this same fair value adjustment as if the acquisition had occurred on January 1, 2017.
In addition, acquisition-related transaction costs of $15 million in 2018 associated with the IDT acquisition were excluded from pro forma earnings in both 2018 and 2017.
NOTE 4. DISCONTINUED OPERATIONS AND DENTAL SEPARATION
Discontinued Operations
On July 2, 2016 (the “Distribution Date”), the Company completed the separation (the “Fortive Separation”) of Fortive Corporation (“Fortive”). For additional details on the Fortive Separation reference is made to the financial statements as of and for the year ended December 31, 2017 and Note 3 thereto included in the Company’s 2017 Annual Report. The accounting requirements for reporting the Fortive Separation as a discontinued operation were met when the Fortive Separation was completed. Accordingly, the accompanying Consolidated Condensed Financial Statements for all periods presented reflect this business as a discontinued operation.
In the nine-month period ended September 29, 2017, the Company 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. This income tax benefit was included in earnings from discontinued operations in the accompanying Consolidated Condensed Statement of Earnings.
Dental Separation
In July 2018, the Company announced its intention to spin-off its Dental business into an independent publicly traded company (the “Dental Separation”). The Dental business had sales for the year-ended December 31, 2017 of $2.8 billion. The transaction is expected to be tax-free to the Company’s shareholders. The Company is targeting to complete the Dental Separation in the second half of 2019, subject to the satisfaction of certain conditions, including obtaining final approval from the Danaher Board of Directors, satisfactory completion of financing, receipt of tax opinions, receipt of favorable rulings from the IRS and receipt of other regulatory approvals.
NOTE 5. GOODWILL
The following is a rollforward of the Company’s goodwill ($ in millions):
|
| | | |
Balance, December 31, 2017 | $ | 25,138.6 |
|
Attributable to 2018 acquisitions | 1,310.4 |
|
Adjustments due to finalization of purchase price allocations | 7.6 |
|
Foreign currency translation and other | (421.6 | ) |
Balance, September 28, 2018 | $ | 26,035.0 |
|
The carrying value of goodwill by segment is summarized as follows ($ in millions):
|
| | | | | | | |
| September 28, 2018 | | December 31, 2017 |
Life Sciences | $ | 13,378.9 |
| | $ | 12,335.5 |
|
Diagnostics | 6,952.4 |
| | 7,079.5 |
|
Dental | 3,331.5 |
| | 3,370.0 |
|
Environmental & Applied Solutions | 2,372.2 |
| | 2,353.6 |
|
Total | $ | 26,035.0 |
| | $ | 25,138.6 |
|
The Company has not identified any “triggering” events which indicate an impairment of goodwill in the nine-month period ended September 28, 2018.
NOTE 6. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where the Company’s assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation. Level 3 inputs are unobservable inputs based on the Company’s assumptions. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Financial assets and liabilities that are measured at fair value on a recurring basis were as follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
September 28, 2018: | | | | | | | |
Assets: | | | | | | | |
Available-for-sale debt securities | $ | — |
| | $ | 40.3 |
| | $ | — |
| | $ | 40.3 |
|
Liabilities: | | | | | | | |
Deferred compensation plans | — |
| | 65.4 |
| | — |
| | 65.4 |
|
| | | | | | | |
December 31, 2017: | | | | | | | |
Assets: | | | | | | | |
Available-for-sale debt securities | $ | — |
| | $ | 45.4 |
| | $ | — |
| | $ | 45.4 |
|
Liabilities: | | | | | | | |
Deferred compensation plans | — |
| | 62.9 |
| | — |
| | 62.9 |
|
Available-for-sale debt securities, which are included in other long-term assets in the accompanying Consolidated Condensed Balance Sheets, are measured at quoted prices reported by investment brokers and dealers based on the underlying terms of the security and comparison to similar securities traded on an active market.
The Company has established nonqualified deferred compensation programs that permit officers, directors and certain management employees to defer a portion of their compensation, on a pretax basis, until at or after their termination of employment (or board service, as applicable). All amounts deferred under such plans are unfunded, unsecured obligations of the Company and are presented as a component of the Company’s compensation and benefits accrual included in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within the Company’s 401(k) program. Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates. Amounts unilaterally contributed to participant accounts by the Company are based on the value of the Company’s common stock and future distributions of such contributions will be made solely in shares of common stock. As a result, Company contributions to this program are not reflected in the above amounts.
Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments were as follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| September 28, 2018 | | December 31, 2017 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | | | | | | |
Available-for-sale debt securities | $ | 40.3 |
| | $ | 40.3 |
| | $ | 45.4 |
| | $ | 45.4 |
|
Liabilities: | | | | | | | |
Notes payable and current portion of long-term debt | 59.8 |
| | 59.8 |
| | 194.7 |
| | 194.7 |
|
Long-term debt | 10,558.0 |
| | 10,893.3 |
| | 10,327.4 |
| | 10,847.1 |
|
As of September 28, 2018 and December 31, 2017, available-for-sale debt securities were categorized as Level 2, as indicated above, and short and long-term borrowings were categorized as Level 1.
The fair value of long-term borrowings was based on quoted market prices. The difference between the fair value and the carrying amounts of long-term borrowings (other than the Company’s Liquid Yield Option Notes due 2021 (the “LYONs”)) is attributable to changes in market interest rates and/or the Company’s credit ratings subsequent to the incurrence of the borrowing. In the case of the LYONs, differences in the fair value from the carrying value are attributable to changes in the price of the Company’s common stock due to the LYONs’ conversion features. The fair values of borrowings with original maturities of one year or less, as well as cash and cash equivalents, trade accounts receivable, net and trade accounts payable approximate their carrying amounts due to the short-term maturities of these instruments.
NOTE 7. FINANCING
As of September 28, 2018, the Company was in compliance with all of its debt covenants. The components of the Company’s debt were as follows ($ in millions):
|
| | | | | | | |
| September 28, 2018 | | December 31, 2017 |
U.S. dollar-denominated commercial paper | $ | — |
| | $ | 436.9 |
|
Euro-denominated commercial paper (€2.9 billion and €1.7 billion, respectively) | 3,324.3 |
| | 1,993.9 |
|
1.65% senior unsecured notes due 2018 (the “2018 U.S. Notes”) | — |
| | 499.2 |
|
1.0% senior unsecured notes due 2019 (€600.0 million aggregate principal amount) (the “2019 Euronotes”) | 695.6 |
| | 718.4 |
|
2.4% senior unsecured notes due 2020 | 498.3 |
| | 497.7 |
|
5.0% senior unsecured notes due 2020 (the “2020 Assumed Pall Notes”) | 390.5 |
| | 394.6 |
|
Zero-coupon Liquid Yield Option Notes (LYONs) due 2021 | 58.3 |
| | 69.1 |
|
0.352% senior unsecured notes due 2021 (¥30.0 billion aggregate principal amount) (the “2021 Yen Notes”) | 263.5 |
| | 265.5 |
|
1.7% senior unsecured notes due 2022 (€800.0 million aggregate principal amount) (the “2022 Euronotes”) | 924.8 |
| | 955.6 |
|
Floating rate senior unsecured notes due 2022 (€250.0 million aggregate principal amount) (the “Floating Rate 2022 Euronotes”) | 289.4 |
| | 299.1 |
|
0.5% senior unsecured bonds due 2023 (CHF 540.0 million aggregate principal amount) (the “2023 CHF Bonds”) | 551.8 |
| | 555.5 |
|
2.5% senior unsecured notes due 2025 (€800.0 million aggregate principal amount) (the “2025 Euronotes”) | 924.4 |
| | 955.6 |
|
3.35% senior unsecured notes due 2025 | 496.7 |
| | 496.3 |
|
0.3% senior unsecured notes due 2027 (¥30.8 billion aggregate principal amount) (the “2027 Yen Notes”) | 270.1 |
| | 272.2 |
|
1.2% senior unsecured notes due 2027 (€600.0 million aggregate principal amount) (the “2027 Euronotes”) | 690.8 |
| | 714.1 |
|
1.125% senior unsecured bonds due 2028 (CHF 210.0 million aggregate principal amount) (the “2028 CHF Bonds”) | 218.6 |
| | 220.3 |
|
0.65% senior unsecured notes due 2032 (¥53.2 billion aggregate principal amount) (the “2032 Yen Notes”) | 466.4 |
| | 470.2 |
|
4.375% senior unsecured notes due 2045 | 499.3 |
| | 499.3 |
|
Other | 55.0 |
| | 208.6 |
|
Total debt | 10,617.8 |
| | 10,522.1 |
|
Less: currently payable | 59.8 |
| | 194.7 |
|
Long-term debt | $ | 10,558.0 |
| | $ | 10,327.4 |
|
For additional details regarding the Company’s debt financing, reference is made to Note 9 of the Company’s financial statements as of and for the year ended December 31, 2017 included in the Company’s 2017 Annual Report.
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, and the 364-Day Facility described below. As of September 28, 2018, no borrowings were outstanding under the Credit Facility or the 364-Day Facility, and the Company was in compliance with all covenants thereunder. In addition to the Credit Facility and the 364-Day Facility, the Company has also entered into reimbursement agreements with various commercial banks to support the issuance of letters of credit.
As of September 28, 2018, borrowings outstanding under the Company’s euro-denominated commercial paper program had a weighted average annual interest rate of negative 0.3% and a weighted average remaining maturity of approximately 45 days and no borrowings were outstanding under the Company’s U.S. dollar denominated paper program.
The Company has classified the €600 million of 2019 Euronotes and approximately $3.3 billion of its borrowings outstanding under the commercial paper programs as of September 28, 2018 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.
Debt discounts, premiums and debt issuance costs totaled $20 million and $25 million as of September 28, 2018 and December 31, 2017, respectively, and have been netted against the aggregate principal amounts of the related debt in the components of debt table above.
364-Day Revolving Credit Facility
On March 23, 2018, the Company entered into a $1.0 billion 364-day revolving credit facility (the “364-Day Facility”) to provide liquidity support for the issuance of additional commercial paper to fund a portion of the IDT acquisition (refer to Note 3 for information about the acquisition). The 364-Day Facility expires on March 22, 2019 (the “Scheduled Termination Date”). The Company may elect, upon the payment of a fee equal to 0.75% of the principal amount of the loans then outstanding and, upon the satisfaction of certain conditions, to convert any loans outstanding on the Scheduled Termination Date into term loans that are due and payable one year following the Scheduled Termination Date.
Borrowings under the 364-Day Facility bear interest as follows: (1) Eurodollar Rate Loans bear interest at a variable rate per annum equal to the London inter-bank offered rate plus 81.5 basis points; and (2) Base Rate Loans bear interest at a variable rate per annum equal to the highest of (a) the Federal funds rate (as published by the Federal Reserve Bank of New York from time to time) plus 0.5%, (b) the rate of interest in effect for such day as publicly announced by Bank of America, N.A. as its “prime rate,” and (c) the Eurodollar Rate plus 1.0%. In addition, the Company is required to pay a per annum facility fee of six basis points based on the aggregate commitments under the 364-Day Facility, regardless of usage.
The 364-Day Facility requires the Company to maintain a consolidated leverage ratio (as defined in the facility) of .65 to 1.00 or less. Borrowings under the 364-Day Facility are prepayable at the Company’s option at any time in whole or in part without premium or penalty.
The Company’s obligations under the 364-Day Facility are unsecured. The Company has unconditionally and irrevocably guaranteed the obligations of each of its subsidiaries in the event a subsidiary is named a borrower under the 364-Day Facility. The 364-Day Facility contains customary representations, warranties, conditions precedent, events of default, indemnities and affirmative and negative covenants.
2018 Long-Term Debt Repayments
The $500 million of 2018 U.S. Notes were repaid with accrued interest upon their maturity in September 2018 using available cash and proceeds from commercial paper borrowings.
Guarantors of Debt
The Company has guaranteed long-term debt and commercial paper issued by certain of its wholly-owned subsidiaries. The 2019 Euronotes, 2022 Euronotes, Floating Rate 2022 Euronotes, 2025 Euronotes and 2027 Euronotes were issued by DH Europe Finance S.A. (“Danaher International”). The 2023 CHF Bonds and 2028 CHF Bonds were issued by DH Switzerland Finance S.A. (“Danaher Switzerland”). The 2021 Yen Notes, 2027 Yen Notes and 2032 Yen Notes were issued by DH Japan Finance S.A. (“Danaher Japan”). Each of Danaher International, Danaher Switzerland and Danaher Japan are wholly-owned finance subsidiaries of Danaher Corporation. All of the securities issued by each of these entities, as well as the 2020 Assumed Pall Notes, are fully and unconditionally guaranteed by the Company and these guarantees rank on parity with the Company’s unsecured and unsubordinated indebtedness.
LYONs Redemption
During the nine-month period ended September 28, 2018, holders of certain of the Company’s LYONs converted such LYONs into an aggregate of approximately 487 thousand shares of the Company’s common stock, par value $0.01 per share. The Company’s deferred tax liability associated with the book and tax basis difference in the converted LYONs of $4 million was transferred to additional paid-in capital as a result of the conversions.
NOTE 8. DEFINED BENEFIT PLANS
The following sets forth the components of the Company’s net periodic benefit cost of the noncontributory defined benefit pension plans ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
U.S. pension benefits: | | | | | | | |
Service cost | $ | (1.2 | ) | | $ | (1.9 | ) | | $ | (5.4 | ) | | $ | (5.7 | ) |
Interest cost | (20.3 | ) | | (20.1 | ) | | (60.7 | ) | | (62.1 | ) |
Expected return on plan assets | 33.0 |
| | 32.4 |
| | 99.2 |
| | 98.2 |
|
Amortization of actuarial loss | (8.0 | ) | | (5.9 | ) | | (23.6 | ) | | (19.1 | ) |
Amortization of prior service cost | (0.2 | ) | | — |
| | (0.7 | ) | | — |
|
Net periodic pension benefit | $ | 3.3 |
|
| $ | 4.5 |
|
| $ | 8.8 |
|
| $ | 11.3 |
|
| | | | | | | |
Non-U.S. pension benefits: | | | | | | | |
Service cost | $ | (8.6 | ) | | $ | (8.1 | ) | | $ | (26.2 | ) | | $ | (23.7 | ) |
Interest cost | (6.3 | ) | | (6.7 | ) | | (19.6 | ) | | (19.5 | ) |
Expected return on plan assets | 11.6 |
| | 10.8 |
| | 35.6 |
| | 31.5 |
|
Amortization of actuarial loss | (1.5 | ) | | (2.0 | ) | | (4.5 | ) | | (5.8 | ) |
Amortization of prior service credit | 0.2 |
| | 0.1 |
| | 0.4 |
| | 0.3 |
|
Settlement loss recognized | 1.2 |
| | — |
| | 0.8 |
| | — |
|
Net periodic pension cost | $ | (3.4 | ) | | $ | (5.9 | ) | | $ | (13.5 | ) | | $ | (17.2 | ) |
The following sets forth the components of the Company’s net periodic benefit cost of the other postretirement employee benefit plans ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Service cost | $ | — |
| | $ | (0.1 | ) | | $ | (0.3 | ) | | $ | (0.5 | ) |
Interest cost | (1.2 | ) | | (1.1 | ) | | (3.5 | ) | | (3.7 | ) |
Amortization of prior service credit | 0.6 |
| | 0.8 |
| | 1.8 |
| | 2.4 |
|
Net periodic benefit cost | $ | (0.6 | ) | | $ | (0.4 | ) | | $ | (2.0 | ) | | $ | (1.8 | ) |
In the first quarter of 2018, the Company adopted ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires the Company to disaggregate the service cost component from other components of net periodic benefit costs and report the service cost component in the same line item as other compensation costs and the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and outside a subtotal of operating income. As this ASU requires application on a retrospective basis, the Company restated the prior period presentation for the adoption of this ASU, resulting in a decrease in operating profit and an increase in other income, net of $8.3 million and $22.2 million for the three and nine-month periods ended September 29, 2017. The net periodic benefit cost of the noncontributory defined benefit pension plans and other postretirement employee benefit plans incurred during the three and nine-month periods ended September 28, 2018 and September 29, 2017 are reflected in the following captions in the accompanying Consolidated Condensed Statements of Earnings ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Service cost: | | | | | | | |
Cost of sales | $ | (1.6 | ) | | $ | (2.1 | ) | | $ | (7.0 | ) | | $ | (6.2 | ) |
Selling, general and administrative expenses | (8.2 | ) | | (8.0 | ) | | (24.9 | ) | | (23.7 | ) |
Total service cost | (9.8 | ) | | (10.1 | ) | | (31.9 | ) | | (29.9 | ) |
Other net periodic benefit costs: | | | | | | | |
Other income, net | 9.1 |
| | 8.3 |
| | 25.2 |
| | 22.2 |
|
Total | $ | (0.7 | ) | | $ | (1.8 | ) | | $ | (6.7 | ) | | $ | (7.7 | ) |
Employer Contributions
During 2018, the Company’s cash contribution requirements for its U.S. and non-U.S. defined benefit pension plans are forecasted to be approximately $30 million and $50 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.
NOTE 9. INCOME TAXES
The following table summarizes the Company’s effective tax rate from continuing operations:
|
| | | | | | | | | | | |
| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Effective tax rate from continuing operations | 17.2 | % | | 21.6 | % | | 19.0 | % | | 17.7 | % |
The effective tax rate for 2018 includes the benefit of a lower U.S. corporate income tax rate of 21.0% from the enactment of the TCJA, partially offset by a new minimum tax on certain non-U.S. earnings. In addition, the Company’s effective tax rate benefits from the impact of earnings outside the United States which overall are taxed at rates lower than the U.S. federal rate. The effective tax rate for the three-month period ended September 28, 2018 includes net tax benefits of $23 million ($0.03 per diluted share) related primarily to the release of valuation allowances associated with certain foreign operating losses and excess tax benefits from stock-based compensation, which in aggregate reduced the reported tax rate by 2.9%. The effective tax rate for the nine-month period ended September 28, 2018 also includes these benefits, in addition to net tax benefits of $9 million ($0.01 per diluted share) recorded in the second quarter of 2018 related to the release of reserves upon the expiration of statutes of limitation and excess tax benefits from stock-based compensation, which were partially offset by increases in estimates associated with prior period uncertain tax positions.
The Company’s effective tax rate for 2017 differed from the then-effective U.S. federal statutory rate of 35.0% due principally to the Company’s earnings outside the United States which overall are taxed at rates lower than such U.S. federal 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%.
On December 22, 2017, the TCJA was enacted, substantially changing the U.S. tax system and affecting the Company in a number of ways. Notably, the TCJA:
| |
• | establishes a flat corporate income tax rate of 21.0% on U.S. earnings; |
| |
• | imposes a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition Tax”); |
| |
• | imposes a new minimum tax on certain non-U.S. earnings, irrespective of the territorial system of taxation, and generally allows for the repatriation of future earnings of foreign subsidiaries without incurring additional U.S. taxes by transitioning to a territorial system of taxation (Global Intangible Low-Taxed Income or “GILTI Tax”); |
| |
• | subjects certain payments made by a U.S. company to a related foreign company to certain minimum taxes (Base Erosion Anti-Abuse Tax); |
| |
• | eliminates certain prior tax incentives for manufacturing in the United States and creates an incentive for U.S. companies to sell, lease or license goods and services abroad by allowing for a reduction in taxes owed on earnings related to such sales; |
| |
• | allows the cost of investments in certain depreciable assets acquired and placed in service after September 27, 2017 to be immediately expensed; and |
| |
• | reduces deductions with respect to certain compensation paid to specified executive officers. |
As U.S. GAAP accounting for income taxes requires the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date, the Company recognized an estimate of the impact of the TCJA in the year ended December 31, 2017. As a result of the TCJA, the Company recognized a provisional tax liability of approximately $1.2 billion in 2017 for the Transition Tax, which is payable over a period of eight years. The Company also remeasured U.S. deferred tax assets and liabilities based on the income tax rates at which the deferred tax assets and liabilities are expected to reverse in the future (generally 21.0%), resulting in an income tax benefit of approximately $1.2 billion in 2017. For a description of the impact of the TCJA for the year ended December 31, 2017 reference is made to Note 12 of the Company’s financial statements as of and for the year ended December 31, 2017 included in the Company’s 2017 Annual Report.
Due to the complexities involved in accounting for the enactment of the TCJA, SAB No. 118 allowed the Company to record provisional amounts in earnings for the year ended December 31, 2017. SAB No. 118 provides that where reasonable estimates can be made, the provisional accounting should be based on such estimates and when no reasonable estimate can be made, the provisional accounting may be based on the tax law in effect before the TCJA. During the three and nine-month periods ended September 28, 2018, there were no changes made to the provisional amounts recognized in 2017. The Company continues to analyze the effects of the TCJA on its Consolidated Condensed Financial Statements. Additional impacts from the enactment of the TCJA will be recorded as they are identified during the measurement period as provided for in SAB No. 118, which extends up to one year from the enactment date. The final impact of the TCJA may differ from the provisional amounts that have been recognized, possibly materially, due to, among other things, changes in the Company’s interpretation of the TCJA, legislative or administrative actions to clarify the intent of the statutory language provided that differ from the Company’s current interpretation, any changes in accounting standards for income taxes or related interpretations in response to the TCJA, or any updates or changes to estimates utilized to calculate the impacts, including changes to current year earnings estimates and applicable foreign exchange rates. Additionally, the Company’s U.S. tax returns for 2017 will be filed during the fourth quarter of 2018 and any changes to the tax positions reflected in those returns compared to the estimates recorded in the Company’s earnings for the year ended December 31, 2017 will result in an adjustment of the estimated tax provision recorded as of December 31, 2017.
The Company also continues to evaluate the impact of the GILTI provisions under the TCJA which are complex and subject to continuing regulatory interpretation by the U.S. Internal Revenue Service (“IRS”). The Company is required to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s accounting policy election with respect to the new GILTI Tax rules will depend, in part, on analyzing its global income to determine whether it can reasonably estimate the tax impact. While the Company has included an estimate of GILTI in its estimated effective tax rate for 2018, it has not completed its analysis and has not determined which method to elect. Adjustments related to the amount of GILTI Tax recorded in its Consolidated Condensed Financial Statements may be required based on the outcome of this election.
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 1.6 billion including interest through September 28, 2018 (approximately $247 million based on the exchange rate as of September 28, 2018), 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 939 million including interest through September 28, 2018 (approximately $146 million based on the exchange rate as of September 28, 2018). 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 consolidated financial statements, including its effective tax rate.
NOTE 10. NONOPERATING INCOME (EXPENSE)
As described in Note 1 and Note 8, in the first quarter of 2018, the Company adopted ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires the Company to disaggregate the service cost component from the other components of net periodic benefit costs and requires the Company to present the other components of net periodic benefit cost in other income, net. The ASU also requires application on a retrospective basis. The other components of net periodic benefit costs included in other income, net for the three and nine-month periods ended September 28, 2018 were $9 million and $25 million, respectively, compared to $8 million and $22 million for the three and nine-month periods ended September 29, 2017, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES
For a description of the Company’s litigation and contingencies, reference is made to Note 16 of the Company’s financial statements as of and for the year ended December 31, 2017 included in the Company’s 2017 Annual Report.
The Company generally accrues estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from 90 days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of the Company’s accrued warranty liability ($ in millions):
|
| | | |
Balance, December 31, 2017 | $ | 79.0 |
|
Accruals for warranties issued during the period | 44.8 |
|
Settlements made | (44.1 | ) |
Effect of foreign currency translation | (1.7 | ) |
Balance, September 28, 2018 | $ | 78.0 |
|
NOTE 12. STOCK TRANSACTIONS AND STOCK-BASED COMPENSATION
Neither the Company nor any “affiliated purchaser” repurchased any shares of Company common stock during the nine-month period ended September 28, 2018. On July 16, 2013, the Company’s Board of Directors approved a repurchase program (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. As of September 28, 2018, 20 million shares remained available for repurchase pursuant to the Repurchase Program.
For a full description of the Company’s stock-based compensation programs, reference is made to Note 17 of the Company’s financial statements as of and for the year ended December 31, 2017 included in the Company’s 2017 Annual Report. As of September 28, 2018, approximately 59 million shares of the Company’s common stock were reserved for issuance under the 2007 Omnibus Incentive Plan.
The following summarizes the components of the Company’s stock-based compensation expense ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Restricted stock units (“RSUs”)/performance stock units (“PSUs”): | | | | | | | |
Pretax compensation expense | $ | 24.0 |
| | $ | 21.9 |
| | $ | 69.6 |
| | $ | 67.6 |
|
Income tax benefit | (5.0 | ) | | (6.6 | ) | | (14.6 | ) | | (20.7 | ) |
RSU/PSU expense, net of income taxes | 19.0 |
| | 15.3 |
| | 55.0 |
| | 46.9 |
|
Stock options: | | | | | | | |
Pretax compensation expense | 14.2 |
| | 11.5 |
| | 42.0 |
| | 37.2 |
|
Income tax benefit | (3.0 | ) | | (3.6 | ) | | (8.9 | ) | | (11.8 | ) |
Stock option expense, net of income taxes | 11.2 |
| | 7.9 |
| | 33.1 |
| | 25.4 |
|
Total stock-based compensation: | | | | | | | |
Pretax compensation expense | 38.2 |
| | 33.4 |
| | 111.6 |
| | 104.8 |
|
Income tax benefit | (8.0 | ) | | (10.2 | ) | | (23.5 | ) | | (32.5 | ) |
Total stock-based compensation expense, net of income taxes | $ | 30.2 |
| | $ | 23.2 |
| | $ | 88.1 |
| | $ | 72.3 |
|
Stock-based compensation has been recognized as a component of selling, general and administrative expenses in the accompanying Consolidated Condensed Statements of Earnings. As of September 28, 2018, $171 million of total unrecognized compensation cost related to RSUs/PSUs is expected to be recognized over a weighted average period of approximately two years. As of September 28, 2018, $151 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of approximately three years. Future compensation amounts will be adjusted for any changes in estimated forfeitures.
NOTE 13. NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Basic net earnings per share (“EPS”) from continuing operations is calculated by dividing net earnings from continuing operations by the weighted average number of common shares outstanding for the applicable period. Diluted net EPS from continuing operations is computed based on the weighted average number of common shares outstanding increased by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and reduced by the number of shares the Company could have repurchased with the proceeds from the issuance of the potentially dilutive shares. For the three-month period ended September 28, 2018, no options to purchase shares were excluded from the diluted EPS from continuing operations calculation. For the nine-month period ended September 28, 2018, one million options to purchase shares were not included in the diluted EPS from continuing operations calculation as the impact of their inclusion would have been anti-dilutive. For both the three and nine-month periods ended September 29, 2017, approximately four million options to purchase shares were not included in the diluted EPS from continuing operations calculation as the impact of their inclusion would have been anti-dilutive.
Information related to the calculation of net earnings per share from continuing operations is summarized as follows ($ and shares in millions, except per share amounts):
|
| | | | | | | | | | |
| Net Earnings from Continuing Operations (Numerator) | | Shares (Denominator) | | Per Share Amount |
For the Three-Month Period Ended September 28, 2018: | | | | | |
Basic EPS | $ | 663.7 |
| | 701.4 |
| | $ | 0.95 |
|
Adjustment for interest on convertible debentures | 0.6 |
| | — |
| | |
Incremental shares from assumed exercise of dilutive options and vesting of dilutive RSUs and PSUs | — |
| | 6.9 |
| | |
Incremental shares from assumed conversion of the convertible debentures | — |
| | 2.3 |
| | |
Diluted EPS from continuing operations | $ | 664.3 |
| | 710.6 |
| | $ | 0.93 |
|
| | | | | |
For the Three-Month Period Ended September 29, 2017: | | | | | |
Basic EPS | $ | 572.1 |
| | 696.2 |
| | $ | 0.82 |
|
Adjustment for interest on convertible debentures | 0.6 |
| | — |
| | |
Incremental shares from assumed exercise of dilutive options and vesting of dilutive RSUs and PSUs | — |
| | 6.5 |
| | |
Incremental shares from assumed conversion of the convertible debentures | — |
| | 2.9 |
| | |
Diluted EPS from continuing operations | $ | 572.7 |
| | 705.6 |
| | $ | 0.81 |
|
| | | | | |
For the Nine-Month Period Ended September 28, 2018: | | | | | |
Basic EPS | $ | 1,904.1 |
| | 700.1 |
| | $ | 2.72 |
|
Adjustment for interest on convertible debentures | 1.7 |
| | — |
| | |
Incremental shares from assumed exercise of dilutive options and vesting of dilutive RSUs and PSUs | — |
| | 7.3 |
| | |
Incremental shares from assumed conversion of the convertible debentures | — |
| | 2.5 |
| | |
Diluted EPS from continuing operations | $ | 1,905.8 |
| | 709.9 |
| | $ | 2.68 |
|
| | | | | |
For the Nine-Month Period Ended September 29, 2017: | | | | | |
Basic EPS | $ | 1,613.2 |
| | 695.3 |
| | $ | 2.32 |
|
Adjustment for interest on convertible debentures | 1.6 |
| | — |
| | |
Incremental shares from assumed exercise of dilutive options and vesting of dilutive RSUs and PSUs | — |
| | 7.3 |
| | |
Incremental shares from assumed conversion of the convertible debentures | — |
| | 2.9 |
| | |
Diluted EPS from continuing operations | $ | 1,614.8 |
| | 705.5 |
| | $ | 2.29 |
|
NOTE 14. SEGMENT INFORMATION
The Company operates and reports its results in four separate business segments consisting of the Life Sciences, Diagnostics, Dental and Environmental & Applied Solutions segments. When determining the reportable segments, the Company
aggregated operating segments based on their similar economic and operating characteristics. Operating profit represents total revenues less operating expenses, excluding nonoperating income and expense, interest and income taxes. Intersegment amounts are not significant and are eliminated to arrive at consolidated totals. Operating profit amounts in the Other segment consist of unallocated corporate costs and other costs not considered part of management’s evaluation of reportable segment operating performance. There has been no material change in total assets or liabilities by segment since December 31, 2017, with the exception of the inclusion of IDT in the Life Sciences segment in April 2018 (refer to Note 3 for additional information).
Segment results are shown below ($ in millions):
|
| | | | | | | | | | | | | | | |
| Three-Month Period Ended | | Nine-Month Period Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Sales: | | | | | | | |
Life Sciences | $ | 1,596.7 |
| | $ | 1,392.6 |
| | $ | 4,677.9 |
| | $ | 4,085.0 |
|
Diagnostics | 1,502.5 |
| | 1,448.7 |
| | 4,573.1 |
| | 4,216.0 |
|
Dental | 679.5 |
| | 694.0 |
| | 2,085.5 |
| | 2,052.1 |
|
Environmental & Applied Solutions | 1,074.4 |
| | 992.9 |
| | 3,193.0 |
| | 2,890.9 |
|
Total | $ | 4,853.1 |
| | $ | 4,528.2 |
| | $ | 14,529.5 |
| | $ | 13,244.0 |
|
| | | | | | | |
Operating profit: | | | | | | | |
Life Sciences | $ | 312.8 |
| | $ | 246.8 |
| | $ | 875.6 |
| | $ | 680.0 |
|
Diagnostics | 235.1 |
| | 242.7 |
| | 757.4 |
| | 554.9 |
|
Dental | 86.1 |
| | 102.2 |
| | 241.8 |
| | 301.4 |
|
Environmental & Applied Solutions | 254.3 |
| | 222.8 |
| | 732.5 |
| | 666.0 |
|
Other | (57.6 | ) | | (55.3 | ) | | (166.1 | ) | | (149.4 | ) |
Total | $ | 830.7 |
| | $ | 759.2 |
| | $ | 2,441.2 |
| | $ | 2,052.9 |
|
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 five sections:
| |
• | Information Relating to Forward-Looking Statements |
| |
• | Liquidity and Capital Resources |
| |
• | Critical Accounting Estimates |
You should read this discussion along with the Company’s MD&A and audited financial statements as of and for the year ended December 31, 2017 and Notes thereto, included in the Company’s 2017 Annual Report on Form 10-K filed on February 21, 2018 and the Company’s Consolidated Condensed Financial Statements and related Notes as of and for the three and nine-month periods ended September 28, 2018 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, 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, pro