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 material information relevant to an assessment of Danaher Corporation’s (“Danaher,” the “Company,” “we,” “us” or “our”) financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. The MD&A is designed to focus specifically on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management’s assessment to have a material impact on future operations. The Company’s MD&A is divided into five sections:
•Information Relating to Forward-Looking Statements
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
You should read this discussion along with the Company’s MD&A and audited financial statements and Notes thereto as of and for the year ended December 31, 2020, included in the Company’s 2020 Annual Report and the Company’s Consolidated Condensed Financial Statements and related Notes as of and for the three and six-month periods ended July 2, 2021 included in this Quarterly Report on Form 10-Q (“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 Report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the U.S. federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, pricing, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions and the integration thereof, divestitures, spin-offs, split-offs or other distributions, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; future regulatory approvals and the timing and conditionality thereof; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; future foreign currency exchange rates and fluctuations in those rates; the potential or anticipated direct or indirect impact of COVID-19 on our business, results of operations and/or financial condition; general economic and capital markets conditions; the anticipated timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that Danaher intends or believes will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.
Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that in some cases have affected us in the past and that in the future could cause actual results to differ materially from those envisaged in the forward-looking statements include the following:
Business and Strategic Risks
•The COVID-19 pandemic has adversely impacted, and continues to pose risks to, certain elements of our business and our financial statements, the nature and extent of which remain highly uncertain and unpredictable.
•Conditions in the global economy, the particular markets we serve and the financial markets can adversely affect our business and financial statements.
•We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce the prices we charge.
•Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation. Our growth can also suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality.
•The health care industry and related industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce (and increase the predictability of) costs, which can adversely affect our business and financial statements.
•International economic, political, legal, compliance, social and business factors (including without limitation the impact of the United Kingdom’s departure from the European Union (“EU”)) can negatively affect our business and financial statements.
•Collaborative partners and other third-parties we rely on for development, supply and marketing of certain products, potential products and technologies can fail to perform sufficiently.
Acquisitions, Divestitures and Investment Risks
•Any inability to consummate acquisitions at our historical rate and at appropriate prices, and to make appropriate investments that support our long-term strategy, could negatively impact our growth rate and stock price. In addition, our acquisition of businesses, investments, joint ventures and other strategic relationships could negatively impact our business and financial statements and our indemnification rights do not always fully protect us from liabilities we may incur related to such transactions.
•Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we or our predecessors have disposed could adversely affect our business and financial statements. For example, we could incur significant liability if any of the split-off or spin-off transactions we have consummated is determined to be a taxable transaction or otherwise pursuant to our indemnification obligations with respect to such transactions.
Operational Risks
•Significant disruptions or vulnerabilities in, or breaches in security of, our information technology systems, controls or data; other losses or disruptions due to catastrophe; and labor disputes can all adversely affect our business and financial statements.
•Defects and unanticipated use or inadequate disclosure with respect to our products or services, or allegations thereof, can adversely affect our business and financial statements.
•If we encounter problems manufacturing products, fail to adjust our manufacturing capacity or related purchases to reflect changing conditions, or suffer disruptions due to sole or limited sources of supply, our business and financial statements may suffer. Adverse changes with respect to key distributors and other channel partners can also adversely affect our business and financial statements.
•Our restructuring actions can have long-term adverse effects on our business and financial statements.
Intellectual Property Risks
•Any inability to adequately protect or avoid third party infringement of our intellectual property, and third party claims that we are infringing their intellectual property rights, can adversely affect our business and financial statements.
Financial and Tax Risks
•Our outstanding debt has increased significantly as a result of the acquisition of Cytiva, and we may incur additional debt in the future as a result of the pending acquisition of Aldevron. Our existing and future indebtedness may limit our operations and our use of our cash flow and negatively impact our credit ratings; and any failure to comply with the covenants that apply to our indebtedness could adversely affect our business and financial statements.
•Our business and financial statements can be adversely affected by foreign currency exchange rates, changes in our tax rates (including as a result of changes in tax laws) or income tax liabilities/assessments, the outcome of tax audits, financial market risks related to our defined benefit pension plans, recognition of impairment charges for our goodwill or other intangible assets, and fluctuations in the cost and availability of commodities.
Legal, Regulatory, Compliance and Reputational Risks
•Our businesses are subject to extensive regulation (including without limitation regulations applicable to the healthcare industry). Failure to comply with those regulations (including without limitation by our employees, agents or business partners) or significant developments or changes in U.S. laws or policies can adversely affect our business and financial statements. Changes in governmental regulations can also reduce demand for our products or services or increase our expenses.
•With respect to the regulated medical devices we offer, certain modifications to such products may require new 510(k) clearances or other marketing authorizations and may require us to recall or cease marketing such products; off-label marketing of such products could result in substantial penalties; and clinical trials we conduct with respect to such products or potential products may have results that are unexpected or are perceived unfavorably by the market, all of which could adversely affect our business and financial statements.
•We are subject to or otherwise responsible for a variety of litigation and other legal and regulatory proceedings in the course of our business that can adversely affect our business and financial statements.
•Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our business and financial statements.
See Part I—Item 1A of the Company’s 2020 Annual Report for further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. Except to the extent required by applicable law, we do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
OVERVIEW
General
As a result of the Company’s geographic and industry diversity, the Company faces a variety of opportunities and challenges, including rapid technological development (particularly with respect to computing, automation, artificial intelligence, mobile connectivity, communications and digitization) in most of the Company’s served markets, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force, consolidation of the Company’s competitors and increasing regulation. The Company operates in a highly competitive business environment in most markets, and the Company’s long-term growth and profitability will depend in particular on its ability to expand its business in high-growth geographies and high-growth market segments, identify, consummate and integrate appropriate acquisitions and identify and consummate appropriate investments and strategic partnerships, develop innovative and differentiated new products and services with higher gross profit margins, expand and improve the effectiveness of the Company’s sales force, continue to reduce costs and improve operating efficiency and quality, and effectively address the demands of an increasingly regulated global environment. The Company is making significant investments, organically and through acquisitions and investments, to
address the rapid pace of technological change in its served markets and to globalize its manufacturing, research and development and customer-facing resources (particularly in high-growth markets) in order to be responsive to the Company’s customers throughout the world and improve the efficiency of the Company’s operations.
Business Performance and Outlook
During the second quarter of 2021, the Company’s overall revenues increased 36.5% compared to the comparable period of 2020. Foreign currency exchange rates contributed 4.0% and acquisitions contributed 1.0% to the increase in revenues. Core sales increased 31.5% in the second quarter of 2021 compared to the prior period. Beginning in the second quarter of 2021, Cytiva sales are included in core sales, and therefore we do not provide the measure “core sales including Cytiva” for quarterly periods beginning with the second quarter of 2021. For the six-month period ended July 2, 2021, overall revenues increased by 46.0%, with foreign currency exchange rates increasing revenues by 3.5%. Acquisitions, primarily driven by Cytiva, contributed 16.0% of the increase in revenues in the six-month period. Core sales increased 26.5% and core sales including Cytiva increased 31.0% in the six-month period ended July 2, 2021 compared to the prior period. For the definition of “core sales” and “core sales including Cytiva” refer to “—Results of Operations” below.
Despite differences in our businesses, on an overall basis, the Company saw continued strong core sales growth in the second quarter of 2021. As the conditions related to the pandemic continued to improve in many geographies, the Company generally experienced increasing demand in the end-markets it serves. In addition to the impact of the improving pandemic conditions, COVID-19 related research and development among biotech and pharmaceutical customers continued to generate strong demand for bioprocessing, filtration, and genomic products in the Company’s life science businesses and COVID-19 related testing generated strong demand in the Company’s molecular diagnostics business.
Geographically, the Company saw increases in core sales in both developed markets and the high-growth markets. Developed markets grew more than 25% during the second quarter of 2021 compared to the second quarter of 2020, driven primarily by North America and Western Europe. High-growth markets increased nearly 35% during the second quarter of 2021 as compared to the comparable period of 2020, led primarily by growth in China. High-growth markets represented approximately 32% of the Company’s total sales in the second quarter of 2021. For additional information regarding the Company’s sales by geographical region during the three and six-month periods ended July 2, 2021 and July 3, 2020, refer to Note 2 to the accompanying Consolidated Condensed Financial Statements.
The Company’s net earnings from continuing operations for the three and six-month periods ended July 2, 2021 totaled approximately $1.7 billion and $3.4 billion, respectively, compared to $927 million and approximately $1.5 billion for the three and six-month periods ended July 3, 2020. Net earnings attributable to common stockholders for the three and six-month periods ended July 2, 2021 totaled approximately $1.7 billion or $2.40 per diluted common share and approximately $3.4 billion or $4.68 per diluted common share, respectively, compared to $892 million or $1.24 per diluted common share and approximately $1.5 billion or $2.06 per diluted common share for the three and six-month periods ended July 3, 2020, respectively. Increased core sales and earnings from Cytiva are the primary drivers of the year-over-year increase in net earnings from continuing operations and diluted net earnings per common share from continuing operations for both the three and six-month periods ended July 2, 2021.
While the ultimate impact of COVID-19 on the Company’s financial performance in future periods remains highly uncertain, the Company expects core sales to grow in the third quarter of 2021 compared to the prior year, but at lower growth rates than experienced in the first half of 2021 as the Company’s growth accelerated in the second half of 2020 compared to the first half of the year. Demand for products supporting customers in the pursuit and production of COVID-19-related treatments and vaccines as well as demand for consumables related to COVID-19-related testing capabilities are expected to continue in the third quarter of 2021. In addition, demand for the Company’s non-COVID-19 related products is expected to continue recovering, driving year-over-year core sales growth in the Company’s other businesses. As discussed below however, an increase of COVID-19 related cases and the re-imposition of significant government required restrictions could have a material negative impact on the Company’s financial statements.
The COVID-19 Pandemic
The global spread of a novel strain of COVID-19 has led to unprecedented restrictions on, and disruptions in, business and personal activities, including as a result of preventive and precautionary measures that we, other businesses, our communities and governments have taken and are taking to mitigate the spread of the virus and to manage its impact. The Company continues to actively monitor the pandemic, including the current spread of certain variants of the virus, and has taken and intends to continue taking steps to identify and mitigate the adverse impacts on, and risks to, the Company’s business (including but not limited to its employees, customers, business partners, manufacturing capabilities and capacity, and supply and distribution channels) posed by the spread of COVID-19 and the governmental and community responses thereto. The Company’s businesses have activated their business continuity plans as a result of this pandemic, including taking steps in an
effort to help keep our workforce healthy and safe, and are assessing and updating those plans on an ongoing basis. As a result of COVID-19 the Company’s businesses have modified certain of their respective business practices and the Company expects to take such further actions as may be required by government authorities or as determined to be in the best interests of our employees, customers and other business partners. The Company has developed and is implementing return-to-workplace protocols designed to help ensure the health and safety of its employees, customers and business partners, for its businesses to apply as and when return-to-workplace is legally permissible and deemed appropriate. Given that the prevalence of COVID-19 and the nature of the response thereto (including the degree to which restrictions are being relaxed or re-imposed) varies significantly by geography, the impact of the pandemic on the Company’s different business locations around the world at any given time also varies significantly.
COVID-19 has also affected the ability of certain suppliers and vendors to provide products and services to certain of our businesses. While we have not experienced significant or widespread disruption to our supply chain, we have seen increased demand and supply constraints for certain components and commodities used in our operations. We are working with our suppliers to understand the existing and potential future impacts to our supply chain and are taking actions in an effort to mitigate such impacts.
We are also deploying our capabilities, expertise and scale to address the critical health needs related to COVID-19. We have developed and made available diagnostic tests for the rapid detection of COVID-19 and a diagnostic test that can detect antibodies in blood to confirm current or past exposure to COVID-19. In addition, our businesses are providing critical support to firms that are developing and producing vaccines and therapeutics for COVID-19, among other support. As and to the extent the COVID-19 pandemic subsides we expect the demand for products and services related to COVID-19 will moderate, though when and to what level remains unclear.
As noted below and subject to the assumptions discussed below, the Company expects core sales to grow in the third quarter of 2021 compared to the prior year, driven by both demand for COVID-19 testing solutions and vaccines and therapeutics development and testing, as well as recovering demand in the Company’s other businesses. Although the conditions related to the pandemic generally appear to be improving, due to the speed with which the COVID-19 situation continues to evolve, the global breadth of its spread, the range of governmental and community responses thereto and our geographic and business line diversity, its further impact on our business remains highly uncertain. Factors that will impact our future performance include, without imitation:
•the timing and extent of continued recovery in the global demand for our products and services;
•the extent to which medical providers continue patient care and testing that is not related to the COVID-19 pandemic, and research performed by laboratories and other institutions return to normal levels, as well as payment and funding dynamics related to the foregoing; and
•the development and rate of adoption of the products we are offering to help address the pandemic and the effects thereof; competitive product launches and related pricing pressure; impacts from changes in our production capacity and the mix of our product offerings; and the degree to which COVID-19 testing solutions and COVID-19 related vaccines and therapeutics are made available and utilized.
Acquisitions
During the six-month period ended July 2, 2021, the Company acquired nine businesses for total consideration of approximately $1.1 billion in cash, net of cash acquired. The businesses acquired complement existing units of each of the Company’s three segments. The aggregate annual sales of the nine businesses acquired in 2021 at the time of their acquisition, in each case based on the company’s revenues for its last completed fiscal year prior to the acquisition, were approximately $93 million.
On June 17, 2021, the Company entered into a definitive agreement to purchase Aldevron for a cash purchase price of approximately $9.6 billion. Aldevron manufactures high-quality plasmid DNA, mRNA and proteins, serving biotechnology and pharmaceutical customers across research, clinical and commercial applications. Aldevron generated revenues of approximately $300 million in 2020. The Company expects to include the Aldevron business within the Life Sciences segment. The acquisition of Aldevron is expected to provide additional sales and earnings opportunities for the Company by expanding product line diversity, including new product offerings supporting genomic medicine. The transaction is subject to customary closing conditions, including receipt of applicable regulatory approvals.
The Company expects to finance the Aldevron Acquisition using cash on hand and/or the proceeds from the issuance of commercial paper. For a description of the Company’s other acquisitions, refer to Note 3 to the accompanying Consolidated Condensed Financial Statements.
Currency Exchange Rates
On a year-over-year basis, currency exchange rates positively impacted reported sales by approximately 4.0% and 3.5% for the three and six-month periods ended July 2, 2021, respectively, compared to the comparable periods of 2020, primarily due to the weakening of the U.S. dollar against most major currencies in the first half of 2021. If the currency exchange rates in effect as of July 2, 2021 were to prevail throughout the remainder of 2021, currency exchange rates would increase the Company’s estimated second half 2021 sales by approximately 0.5% and full year sales by approximately 2.0% on a year-over-year basis. Any strengthening of the U.S. dollar against major currencies would adversely impact the Company’s sales and results of operations for the remainder of the year, and any further weakening of the U.S. dollar against major currencies would positively impact the Company’s sales and results of operations for the remainder of the year.
United Kingdom’s Exit From the EU
The United Kingdom (“UK”) ceased to be a member state of the EU on January 31, 2020 (commonly referred to as “Brexit”), and the parties have agreed to and ratified a trade and cooperation agreement.
The Company continues to monitor the ramifications of Brexit and plan for potential impacts on its business. To mitigate the potential impact of Brexit on the import of goods to the UK, the Company continues to strategically manage its inventory levels and logistical channels with respect to the UK. While the Company experienced only minor disruptions related to Brexit during the six-month period ended July 2, 2021, the ultimate impact of Brexit on the Company’s financial results in future periods is uncertain. For additional information, refer to the “Item 1A-Risk Factors” section of the Company’s 2020 Annual Report.
RESULTS OF OPERATIONS
Non-GAAP Measures
In this report, references to the non-GAAP measures of core sales (also referred to as core revenues or sales/revenues from existing businesses) and core sales including Cytiva refer to sales calculated according to U.S. GAAP, but excluding:
•sales from acquired businesses (as defined below, as applicable); and
•the impact of currency translation.
References to sales or operating profit attributable to acquisitions or acquired businesses refer to sales or operating profit, as applicable, from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales and operating profit, as applicable, attributable to divested product lines not considered discontinued operations prior to the first anniversary of the divestiture; provided that in calculating core sales including Cytiva, Cytiva’s sales (net of the sales of the Company product lines divested in 2020 to obtain regulatory approval to acquire Cytiva, or the “divested product lines”) (“Cytiva sales”) are excluded from the definition of sales attributable to acquisitions or acquired businesses. The portion of revenue attributable to currency translation is calculated as the difference between:
•the period-to-period change in revenue (excluding sales from acquired businesses (as defined above, as applicable)); and
•the period-to-period change in revenue (excluding sales from acquired businesses (as defined above, as applicable)) after applying current period foreign exchange rates to the prior year period.
As noted above, beginning with results for the second quarter of 2020, the Company also presents core sales on a basis that includes Cytiva sales. Prior to the acquisition of Cytiva, Danaher calculated core sales growth solely on a basis that excluded sales from acquired businesses recorded prior to the first anniversary of the acquisition. However, given Cytiva’s significant size and historical core sales growth rate, in each case compared to Danaher’s existing businesses, management believes it is appropriate to also present core sales on a basis that includes Cytiva sales. Management believes this presentation provides useful information to investors by demonstrating the impact Cytiva has on the Company’s current growth profile, rather than waiting to demonstrate such impact 12 months after the acquisition when Cytiva would normally have been included in Danaher’s core sales calculation. Danaher calculates period-to-period core sales growth including Cytiva by adding Cytiva sales to core sales for both the baseline and current periods. Beginning in the second quarter of 2021, Cytiva sales are included in core sales, and therefore we no longer provide the measure “core sales including Cytiva” for quarterly periods beginning with the second quarter of 2021.
Core sales growth (and the related measure of core sales including Cytiva) should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting these non-GAAP financial measures provides useful information to investors by helping
identify underlying growth trends in Danaher’s business and facilitating comparisons of Danaher’s revenue performance with its performance in prior and future periods and to Danaher’s peers. Management also uses these non-GAAP financial measures to measure the Company’s operating and financial performance and uses core sales growth as one of the performance measures in the Company’s executive short-term cash incentive program. The Company excludes the effect of currency translation from these measures because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends, and excludes the effect of acquisitions (other than Cytiva, in the case of core growth including Cytiva) and divestiture-related items because the nature, size, timing and number of acquisitions and divestitures can vary dramatically from period-to-period and between the Company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult.
Throughout this discussion, references to sales volume refer to the impact of both price and unit sales and references to productivity improvements generally refer to improved cost-efficiencies resulting from the ongoing application of the Danaher Business System.
Core Sales Growth and Core Sales Growth Including Cytiva
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% Change Three-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
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% Change Six-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
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|
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Total sales growth (GAAP)
|
36.5
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%
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|
46.0
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%
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Impact of:
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|
Acquisitions/divestitures
|
(1.0)
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%
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|
(16.0)
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%
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|
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Currency exchange rates
|
(4.0)
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%
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|
(3.5)
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%
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|
|
Core sales growth (non-GAAP)
|
31.5
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%
|
|
26.5
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%
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|
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Impact of Cytiva sales growth (net of divested product lines)
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|
|
4.5
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%
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|
|
Core sales growth including Cytiva (non-GAAP)
|
|
|
31.0
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%
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|
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Total Sales Growth
Total sales increased 36.5% and 46.0% during the three and six-month periods ended July 2, 2021 compared to the three and six-month periods ended July 3, 2020, respectively, primarily as a result of the increase in core sales resulting from the factors discussed below by segment, as well as the increase in sales resulting from the Cytiva Acquisition for the six-month period. The impact of currency translation increased reported sales 4.0% and 3.5% on a year-over-year basis during the three and six-month periods ended July 2, 2021, respectively, primarily due to the favorable impact of the weakening of the U.S. dollar in 2021 compared to the comparable periods of 2020.
Operating Profit Performance
Operating profit margins increased 1,190 basis points from 15.9% during the three-month period ended July 3, 2020 to 27.8% for the three-month period ended July 2, 2021.
Second quarter 2021 vs. second quarter 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, continued lower spending levels for business travel and other business activities compared to before the pandemic, an increased proportion of sales of higher margin product lines, incremental year-over-year cost savings associated with continuing productivity improvement initiatives taken in 2020 and the impact of foreign currency exchange rates in the second quarter of 2021, net of incremental year-over-year costs associated with various new product development and sales, service and marketing growth investments - 775 basis points
•Second quarter 2020 acquisition-related fair value adjustments to inventory and deferred revenue, in each case related to the acquisition of Cytiva - 430 basis points
Second quarter 2021 vs. second quarter 2020 operating profit margin comparisons were unfavorably impacted by:
•The incremental dilutive effect in 2021 of acquired businesses, net of product line dispositions which did not qualify as discontinued operations -15 basis points
Operating profit margins increased 1,240 basis points from 16.0% during the six-month period ended July 2, 2021 to 28.4% for the comparable period of 2020.
Year-to-date 2021 vs. year-to-date 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, lower overall spending levels for business travel and other business activities as a result of the pandemic, incremental year-over-year cost savings associated with continuing productivity improvement initiatives taken in 2020 and the impact of foreign currency exchange rates in the first half of 2021, net of incremental year-over-year costs associated with various new product development and sales, service and marketing growth investments - 835 basis points
•First half of 2020 acquisition-related fair value adjustments to inventory and deferred revenue, transaction costs deemed significant and integration preparation costs, net of first half of 2021 acquisition-related fair value adjustments to inventory and deferred revenue in each case related to the acquisition of Cytiva - 250 basis points
•The incremental accretive effect in 2021 of acquired businesses, net of product line dispositions which did not qualify as discontinued operations - 155 basis points
Business Segments
Sales by business segment for each of the periods indicated were as follows ($ in millions):
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Three-Month Period Ended
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Six-Month Period Ended
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July 2, 2021
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July 3, 2020
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July 2, 2021
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July 3, 2020
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Life Sciences
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$
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3,734
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|
|
$
|
2,642
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|
|
$
|
7,280
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|
|
$
|
4,292
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|
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Diagnostics
|
2,336
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|
|
1,660
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|
|
4,514
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|
|
3,287
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|
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|
Environmental & Applied Solutions
|
1,148
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|
|
995
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|
|
2,282
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|
|
2,061
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|
|
|
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Total
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$
|
7,218
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|
|
$
|
5,297
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|
|
$
|
14,076
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|
|
$
|
9,640
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|
|
|
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|
|
|
|
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For information regarding the Company’s sales by geographical region, refer to Note 2 to the accompanying Consolidated Condensed Financial Statements.
LIFE SCIENCES
The Company’s Life Sciences segment offers a broad range of instruments and consumables that are primarily used by customers to study the basic building blocks of life, including genes, proteins, metabolites and cells, in order to understand the causes of disease, identify new therapies, and test and manufacture new drugs and vaccines.
Life Sciences Selected Financial Data
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Three-Month Period Ended
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|
Six-Month Period Ended
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($ in millions)
|
July 2, 2021
|
|
July 3, 2020
|
|
July 2, 2021
|
|
July 3, 2020
|
Sales
|
$
|
3,734
|
|
|
$
|
2,642
|
|
$
|
7,280
|
|
|
$
|
4,292
|
|
Operating profit
|
1,144
|
|
|
412
|
|
2,295
|
|
|
738
|
|
Depreciation
|
64
|
|
|
48
|
|
116
|
|
|
81
|
|
Amortization of intangible assets
|
280
|
|
|
248
|
|
557
|
|
|
338
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|
Operating profit as a % of sales
|
30.6
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%
|
|
15.6
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%
|
|
31.5
|
%
|
|
17.2
|
%
|
Depreciation as a % of sales
|
1.7
|
%
|
|
1.8
|
%
|
|
1.6
|
%
|
|
1.9
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%
|
Amortization as a % of sales
|
7.5
|
%
|
|
9.4
|
%
|
|
7.7
|
%
|
|
7.9
|
%
|
Core Sales Growth and Core Sales Growth Including Cytiva
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
|
|
% Change Six-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
|
|
|
Total sales growth (GAAP)
|
41.5
|
%
|
|
69.5
|
%
|
|
|
Impact of:
|
|
|
|
|
|
Acquisitions/divestitures
|
(2.0)
|
%
|
|
(36.0)
|
%
|
|
|
Currency exchange rates
|
(4.5)
|
%
|
|
(4.0)
|
%
|
|
|
Core sales growth (non-GAAP)
|
35.0
|
%
|
|
29.5
|
%
|
|
|
Impact of Cytiva sales growth (net of divested product lines)
|
|
|
8.5
|
%
|
|
|
Core sales growth including Cytiva (non-GAAP)
|
|
|
38.0
|
%
|
|
|
Price increases in the segment contributed 2.0% and 1.5% to sales growth on a year-over-year basis during the three and six-month periods ended July 2, 2021, respectively, and are reflected as a component of core sales growth (or core sales growth including Cytiva, as applicable).
Total segment sales increased 41.5% and 69.5% during the three and six-month periods, respectively, led by increased core sales resulting from the factors discussed below in both periods and from the increase in sales from the Cytiva Acquisition in the six-month period. The impact of currency translation increased reported sales by 4.5% in the three-month period and by 4.0% in the six-month period on a year-over-year basis primarily due to the favorable impact of the weakening of the U.S. dollar in 2021 compared to the respective periods in 2020. On an overall basis, the Life Sciences segment saw continued strong demand for products supporting customers in the pursuit and production of COVID-19-related treatments and vaccines as well as increased demand for its other businesses in both the three and six-month periods ended July 2, 2021. In the first half of 2021, core sales for filtration, separation and purification technologies increased versus the comparable period in 2020, led by North America, Western Europe and China. Demand for these products was led by the biopharmaceutical and microelectronics end-markets, partially offset by weaker demand in the aerospace end-market. Core sales of microscopy products increased during the three and six-month periods across all major product lines, primarily due to increased demand for equipment in the life sciences research, applied and medical end-markets following the easing of shutdowns and restrictions related to the COVID-19 pandemic. Geographically, demand for microscopy products increased in North America and Western Europe. Demand for the Company’s flow cytometry and particle counting solutions increased in the three and six-month periods across all major geographies and end-markets and the business saw continued demand for genomic sample preparation consumables to support COVID-19 related research and testing. While demand for genomic sample preparation consumables increased on a year-over-year basis in both periods in 2021 compared to the comparable periods of 2020, demand for genomic sample preparation consumables in the second quarter of 2021 was lower sequentially compared to the demand in the first quarter of 2021 as a result of the impact of reduced COVID-19-related demand. Core sales in the mass spectrometry business increased during the three and six-month periods across most major end-markets driven in part by demand for new products. Geographically, demand for these products increased across all major geographies, led by North America, Western Europe, China and Japan. Core sales in the genomics consumables business increased during both the three and six-month periods across all major geographies and product lines. Demand for primer and probe kits related to COVID-19 testing increased on a year-over-year basis in both periods in 2021 compared to the comparable periods of 2020, however, demand was lower sequentially in the second quarter of 2021 compared to the demand in the first quarter of 2021 as a result of the impact of reduced COVID-19-related demand.
The acquisition of Cytiva on March 31, 2020 has provided, and is expected to continue to provide additional sales and earnings growth opportunities for the Company’s Life Sciences segment by expanding the business’ geographic and product line diversity, including new product and service offerings that complement the Company’s biologics workflow solutions. Due to the proximity of the acquisition date to the end of the first quarter of 2020, there are no results of operations for Cytiva included in the Life Sciences segment in the first quarter of 2020. In both the three and six-month periods ended July 2, 2021, Cytiva experienced significant increased demand across all major geographies, driven by continued strong demand for instruments and consumables used in the research and development of COVID-19-related treatments and vaccines and increased demand for non-COVID-19 related products in both periods as well as by the completion of a major project in China for the six-month period.
Depreciation and amortization decreased as a percentage of sales during the three and six-month periods ended July 2, 2021 as compared to the comparable periods of 2020 as a result of the increase in sales, partially offset by the impact of increased depreciation and amortization from the acquisition of Cytiva and increased capital expenditures.
Operating Profit Performance
Operating profit margins increased 1,500 basis points during the three-month period ended July 2, 2021 as compared to the comparable period of 2020.
Second quarter 2021 vs. second quarter 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, continued lower spending levels for business travel and other business activities compared to before the pandemic, year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020, and the impact of foreign currency exchange rates in the second quarter of 2021, net of incremental year-over-year costs associated with various sales, service and marketing growth investments - 670 basis points
•Second quarter 2020 acquisition-related fair value adjustments to inventory and deferred revenue related to the acquisition of Cytiva - 865 basis points
Second quarter 2021 vs. second quarter 2020 operating profit margin comparisons were unfavorably impacted by:
•The incremental dilutive effect in 2021 of acquired businesses, net of product line dispositions which did not qualify as discontinued operations - 35 basis points
Operating profit margins increased 1,430 basis points during the six-month period ended July 2, 2021 as compared to the comparable period of 2020.
Year-to-date 2021 vs. year-to-date 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, lower overall spending levels for business travel and other business activities, year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020 and the impact of foreign currency exchange rates in the first half of 2021, net of incremental year-over-year costs associated with various sales, service and marketing growth investments - 755 basis points
•First half of 2020 acquisition-related fair value adjustments to inventory and deferred revenue, transaction costs deemed significant and integration preparation costs, net of first half of 2021 acquisition-related fair value adjustments to inventory and deferred revenue in each case related to the acquisition of Cytiva - 425 basis points
•The incremental accretive effect in 2021 of acquired businesses, net of product line dispositions which did not qualify as discontinued operations - 250 basis points
DIAGNOSTICS
The Company’s Diagnostics segment offers analytical instruments, reagents, consumables, software and services that hospitals, physicians’ offices, reference laboratories and other critical care settings use to diagnose disease and make treatment decisions.
Diagnostics Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Six-Month Period Ended
|
($ in millions)
|
July 2, 2021
|
|
July 3, 2020
|
|
July 2, 2021
|
|
July 3, 2020
|
Sales
|
$
|
2,336
|
|
|
$
|
1,660
|
|
$
|
4,514
|
|
|
$
|
3,287
|
|
Operating profit
|
649
|
|
|
293
|
|
1,275
|
|
|
544
|
|
Depreciation
|
102
|
|
|
101
|
|
195
|
|
|
195
|
|
Amortization of intangible assets
|
51
|
|
|
52
|
|
102
|
|
|
103
|
|
Operating profit as a % of sales
|
27.8
|
%
|
|
17.7
|
%
|
|
28.2
|
%
|
|
16.6
|
%
|
Depreciation as a % of sales
|
4.4
|
%
|
|
6.1
|
%
|
|
4.3
|
%
|
|
5.9
|
%
|
Amortization as a % of sales
|
2.2
|
%
|
|
3.1
|
%
|
|
2.3
|
%
|
|
3.1
|
%
|
Core Sales Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
|
|
% Change Six-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
|
Total sales growth (GAAP)
|
40.5
|
%
|
|
37.5
|
%
|
Impact of:
|
|
|
|
|
|
|
|
Currency exchange rates
|
(3.5)
|
%
|
|
(3.5)
|
%
|
Core sales growth (non-GAAP)
|
37.0
|
%
|
|
34.0
|
%
|
Price increases in the segment contributed 0.5% to sales growth on a year-over-year basis during both the three and six-month periods ended July 2, 2021 and are reflected as a component of core sales growth.
Total segment sales increased 40.5% and 37.5% during the three and six-month periods, respectively, primarily as a result of increased core sales resulting from the factors discussed below. The impact of currency translation increased reported sales 3.5% on a year-over-year basis in both periods primarily due to the favorable impact of the weakening of the U.S. dollar in the 2021 periods compared to the respective periods in 2020. In the first six months of 2021, the segment experienced higher year-over-year demand for molecular diagnostics tests for COVID-19 and demand across its businesses as non-COVID testing volumes increased as individuals resumed visits to healthcare providers following the easing of shutdowns and restrictions related to the COVID-19 pandemic. Core sales in the segment’s clinical lab business increased on a year-over-year basis across all major geographies in both the three and six-month periods ended July 2, 2021, driven primarily by increased demand in the chemistry and immunoassay product lines. During both the three and six-month periods, core sales in the molecular diagnostics business increased on a year-over-year basis across all major geographies, which contributed significantly to overall segment core sales growth. The business continued to experience strong growth in sales of consumables in both the three and six-month periods ended July 2, 2021, driven by strong demand for diagnostic test solutions for COVID-19 and non-respiratory diseases, partially offset by lower year-over-year instrument demand as a result of the significant COVID-19 related instrument demand in the second quarter of 2020. Core sales in the acute care diagnostic business increased year-over-year in both the three and six-month periods due to continued demand for blood gas and immunoassay consumables, partially offset by lower year-over-year demand for instruments due to strong COVID-19 related demand for blood gas instruments in the second quarter of 2020. Geographically, demand was driven by North America, Western Europe, Japan and China. Core sales in the pathology business grew year-over-year in both the three and six-month periods in all major geographies, led by North America and Western Europe, driven by increased demand for core histology and advanced staining instruments and consumables and pathology imaging products.
Operating Profit Performance
Operating profit margins increased 1,010 basis points during the three-month period ended July 2, 2021 as compared to the comparable period of 2020.
Second quarter 2021 vs. second quarter 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, continued lower spending levels for business travel and other business activities compared to before the pandemic, incremental year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020 and the impact of foreign currency exchange rates in the second quarter of 2021, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments - 1,015 basis points
Second quarter 2021 vs. second quarter 2020 operating profit margin comparisons were unfavorably impacted by:
•The incremental dilutive effect in 2021 of acquired businesses - 5 basis points
Operating profit margins increased 1,160 basis points during the six-month period ended July 2, 2021 as compared to the comparable period of 2020.
Year-to-date 2021 vs. year-to-date 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, lower overall spending levels for business travel and other business activities as a result of the pandemic, incremental year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020 and the impact of foreign currency exchange rates in the first half of 2021, net of incremental year-over-year costs associated with various new product development, sales, service and marketing growth investments - 1,170 basis points
Year-to-date 2021 vs. year-to-date 2020 operating profit margin comparisons were unfavorably impacted by:
•The incremental dilutive effect in 2021 of acquired businesses - 5 basis points
•First quarter 2021 impairment charge related to a trade name, net of a first quarter 2020 impairment charge related to a facility - 5 basis points
Depreciation and amortization of intangible assets both decreased as a percentage of sales during the three and six-month periods ended July 2, 2021, primarily as a result of the increase in sales.
ENVIRONMENTAL & APPLIED SOLUTIONS
The Company’s Environmental & Applied Solutions segment offers products and services that help protect important resources and keep global food and water supplies safe. The Company’s water quality business provides instrumentation, consumables, software, services and disinfection systems to help analyze, treat and manage the quality of ultra-pure, potable, industrial, waste, ground, source and ocean water in residential, commercial, municipal, industrial and natural resource applications. The Company’s product identification business provides instruments, software, services and consumables for various color and appearance management, packaging design and quality management, packaging converting, printing, marking, coding and traceability applications for consumer, pharmaceutical and industrial products.
Environmental & Applied Solutions Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Six-Month Period Ended
|
($ in millions)
|
July 2, 2021
|
|
July 3, 2020
|
|
July 2, 2021
|
|
July 3, 2020
|
Sales
|
$
|
1,148
|
|
|
$
|
995
|
|
$
|
2,282
|
|
|
$
|
2,061
|
|
Operating profit
|
280
|
|
|
222
|
|
565
|
|
|
462
|
|
Depreciation
|
11
|
|
|
11
|
|
22
|
|
|
23
|
|
Amortization of intangible assets
|
16
|
|
|
15
|
|
32
|
|
|
30
|
|
Operating profit as a % of sales
|
24.4
|
%
|
|
22.3
|
%
|
|
24.8
|
%
|
|
22.4
|
%
|
Depreciation as a % of sales
|
1.0
|
%
|
|
1.1
|
%
|
|
1.0
|
%
|
|
1.1
|
%
|
Amortization as a % of sales
|
1.4
|
%
|
|
1.5
|
%
|
|
1.4
|
%
|
|
1.5
|
%
|
Core Sales Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change Three-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
|
|
% Change Six-Month Period Ended July 2, 2021 vs. Comparable 2020 Period
|
Total sales growth (GAAP)
|
15.5
|
%
|
|
10.5
|
%
|
Impact of:
|
|
|
|
Acquisitions/divestitures
|
1.5
|
%
|
|
0.5
|
%
|
Currency exchange rates
|
(4.0)
|
%
|
|
(3.0)
|
%
|
Core sales growth (non-GAAP)
|
13.0
|
%
|
|
8.0
|
%
|
Price increases in the segment contributed 1.5% to sales growth on a year-over-year basis during both the three and six-month periods ended July 2, 2021, and are reflected as a component of core sales growth.
Total segment sales increased 15.5% and 10.5% during the three and six-month periods, respectively, primarily as a result of core sales growth driven by the factors discussed below. The impact of currency translation increased reported sales 4.0% and 3.0% during the three and six-month periods, respectively, primarily due to the favorable impact of the weakening of the U.S. dollar in 2021 compared to the respective periods in 2020. Sales from divestitures, net of acquisitions, decreased reported sales by 1.5% and 0.5% during the three and six-month periods, respectively.
Core sales in the segment’s water quality business increased at a high-single digit rate and a mid-single digit rate during the three and six-month periods ended July 2, 2021, respectively, compared to the comparable periods of 2020. On an overall basis, the water quality business experienced continuing demand for consumables and increased demand for equipment on a year-over-year basis, driven in part by the decline in equipment demand in 2020 as a result of the COVID-19 pandemic. Year-over-year core sales in the analytical instrumentation product line increased in the three-month period, as increased demand in North America and Western Europe more than offset declines in China due to a difficult prior year comparison. In the six-month period, core sales increased driven by demand in North America, Western Europe and China. Core sales in the business’ chemical treatment solutions product line increased during the three and six-month periods, as a result of increased demand in the chemical, transportation, oil and gas, primary metals and food and beverage end-markets. Geographically, the increase in core sales for the chemical treatment solutions was driven by North America in both periods. Year-over-year core sales in the business’ ultraviolet water disinfection product line decreased during the three and six-month periods, as weaker demand and project timing in North America and Western Europe more than offset increased demand in China.
Core sales in the segment’s product identification businesses grew approximately 20% and at a mid-teens rate during the three and six-month periods ended July 2, 2021, respectively, compared to the comparable periods of 2020. Core sales in the marking and coding business increased during the three and six-month periods across all major geographies and major end-markets. In both periods, demand continued for the marking and coding business’ consumables along with an increase in demand for equipment, driven in part by lower equipment volumes in 2020 resulting from the COVID-19 pandemic. For the packaging and color solutions products and services, core sales increased in the three and six-month periods across all major geographies.
Operating Profit Performance
Operating profit margins increased 210 basis points during the three-month period ended July 2, 2021 as compared to the comparable period of 2020.
Second quarter 2021 vs. second quarter 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, an increased proportion of sales of higher margin product lines, continued lower spending levels for business travel and other business activities compared to before the pandemic and incremental year-over-year cost savings associated with continuing productivity improvement initiatives taken in 2020, net of the impact of foreign currency exchange rates in the second quarter of 2021 and incremental year-over-year costs associated with sales, service and marketing growth investments - 200 basis points
•The incremental net accretive effect in 2021 of acquired businesses, net of product line dispositions which did not qualify as discontinued operations - 10 basis points
Operating profit margins increased 240 basis points during the six-month period ended July 2, 2021 as compared to the comparable period of 2020.
Year-to-date 2021 vs. year-to-date 2020 operating profit margin comparisons were favorably impacted by:
•Higher 2021 core sales volumes, lower overall spending levels for business travel and other business activities and incremental year-over-year cost savings associated with continuing productivity improvement initiatives taken in 2020 and the impact of foreign currency exchange rates in the first half of 2021, net of incremental year-over-year costs associated with sales, service and marketing growth investments - 225 basis points
•Impairment charges related to a trade name and other intangible assets in the first quarter of 2020 - 15 basis points
COST OF SALES AND GROSS PROFIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Six-Month Period Ended
|
($ in millions)
|
July 2, 2021
|
|
July 3, 2020
|
|
July 2, 2021
|
|
July 3, 2020
|
Sales
|
$
|
7,218
|
|
|
$
|
5,297
|
|
|
$
|
14,076
|
|
|
$
|
9,640
|
|
Cost of sales
|
(2,821)
|
|
|
(2,445)
|
|
|
(5,426)
|
|
|
(4,345)
|
|
Gross profit
|
$
|
4,397
|
|
|
$
|
2,852
|
|
|
$
|
8,650
|
|
|
$
|
5,295
|
|
Gross profit margin
|
60.9
|
%
|
|
53.8
|
%
|
|
61.5
|
%
|
|
54.9
|
%
|
The year-over-year increase in cost of sales during both the three and six-month periods ended July 2, 2021 as compared to the comparable periods in 2020, was due primarily to the impact of higher year-over-year sales volumes, including sales from recently acquired businesses. This increase was partially offset by lower incremental year-over-year acquisition-related charges associated with fair value adjustments to inventory in connection with the Cytiva Acquisition, which impacted cost of sales by $29 million in the six-month period ended July 2, 2021 compared to $197 million in both the three and six-month periods ended July 3, 2020.
The year-over-year increase in gross profit margins during both the three and six-month periods ended July 2, 2021 as compared to the comparable periods in 2020, was due primarily to higher year-over-year sales volumes, including sales volumes from recently acquired businesses and the impact of the change in mix of sales to higher margin product lines. Lower incremental year-over-year acquisition-related charges associated with fair value adjustments to inventory and deferred revenue in connection with the Cytiva Acquisition also contributed to the increased gross profit margins, as these fair value adjustments negatively impacted gross profit by $46 million in the six-month period ended July 2, 2021 compared to $228 million in both the three and six-month periods ended July 3, 2020. Additionally, the six-month period in 2021 benefited from the inclusion of a full six months of Cytiva sales compared to only three months included in the comparable period in 2020.
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended
|
|
Six-Month Period Ended
|
($ in millions)
|
July 2, 2021
|
|
July 3, 2020
|
|
July 2, 2021
|
|
July 3, 2020
|
Sales
|
$
|
7,218
|
|
$
|
5,297
|
|
$
|
14,076
|
|
|
$
|
9,640
|
|
Selling, general and administrative (“SG&A”) expenses
|
1,966
|
|
1,685
|
|
3,842
|
|
|
3,143
|
|
Research and development (“R&D”) expenses
|
426
|
|
323
|
|
806
|
|
|
610
|
|
SG&A as a % of sales
|
27.2
|
%
|
|
31.8
|
%
|
|
27.3
|
%
|
|
32.6
|
%
|
R&D as a % of sales
|
5.9
|
%
|
|
6.1
|
%
|
|
5.7
|
%
|
|
6.3
|
%
|
SG&A expenses as a percentage of sales declined for both the three and six-month periods ended July 2, 2021 as compared to the comparable periods in 2020 driven by the benefit of increased leverage of the Company’s general and administrative cost base resulting from higher 2021 sales volumes, including sales volumes from recently acquired businesses, incremental year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020 and continued lower spending levels for business travel and other business activities compared to before the pandemic. Lower year-over-year transaction costs related to the Cytiva Acquisition also benefited SG&A as a percentage of sales during the six-month period. These decreases were partially offset by continued investments in sales and marketing growth initiatives in both the three and six-month periods ended July 2, 2021 and impairment charges related to a trade name in the first quarter of 2021, net of impairment charges related to a facility, a trade name and other intangible assets incurred in the first quarter of 2020 for the six-month period.
R&D expenses (consisting principally of internal and contract engineering personnel costs) as a percentage of sales declined during both the three and six-month periods ended July 2, 2021 as compared to the comparable periods of 2020. The decline was primarily due to sales growth rates in 2021 exceeding the spending growth related to the Company's new product development initiatives for both periods as well as lower R&D expenses as a percentage of sales for the six-month period in businesses recently acquired.
OTHER INCOME (EXPENSE), NET
The Company disaggregates the service cost component of net periodic benefit costs of the noncontributory defined benefit pension plans and other postretirement employee benefit plans and presents the other components of net periodic benefit cost in other income (expense), net. These other components include the assumed rate of return on plan assets, partially offset by
amortization of actuarial losses and interest and aggregate to a gain of $11 million and $22 million for the three and six-month periods ended July 2, 2021, respectively, compared to a gain of $5 million and $10 million for the three and six-month periods ended July 3, 2020, respectively.
The Company estimates the fair value of its investments in equity securities using the Fair Value Alternative and records adjustments to fair value within net earnings. Additionally, the Company is a limited partner in partnerships that invest primarily in early stage companies. While the partnerships record these investments at fair value, the Company’s investments in the partnerships are accounted for under the equity method of accounting. During the three and six-month periods ended July 2, 2021, the Company recorded realized and unrealized gains of $86 million (consisting of $11 million realized gains and $75 million unrealized gains) and $202 million (consisting of $38 million realized gains and $164 million unrealized gains), respectively, related to changes in the fair value of the Company’s investments in equity securities and the Company’s equity in earnings of the partnerships that reflect the changes in fair value of the investments of the partnerships. During the three and six-month periods ended July 3, 2020, the Company recorded unrealized losses of $6 million and $13 million, respectively, related to changes in the fair value of these investments including investments in the partnerships.
During the first quarter of 2021, the Company divested certain product lines for a cash purchase price, net of cash transferred and transaction costs, of $26 million and recognized a pretax gain on sale of $13 million ($10 million after-tax). The divested product lines generated revenues of approximately $88 million in the Environmental & Applied Solutions segment in 2020. The divestiture of these product lines did not represent a strategic shift with a major effect on the Company’s operations and financial results and therefore is not reported as a discontinued operation.
As a condition to obtaining certain regulatory approvals for the closing of the Cytiva Acquisition, the Company was required to divest certain of its existing product lines in the Life Sciences segment that in the aggregate generated revenues of approximately $170 million in 2019. On April 30, 2020, the Company completed the sale of the majority of these product lines for a cash purchase price, net of cash transferred and transaction costs, of $826 million (of which $810 million was received in the second quarter of 2020 and the remaining $16 million was received in the third quarter of 2020) and recognized a pretax gain on sale of $455 million ($305 million after-tax) in the second quarter of 2020. The divestiture of these product lines did not represent a strategic shift with a major effect on the Company’s operations and financial results and therefore is not reported as a discontinued operation.
INTEREST COSTS AND FINANCING
For a discussion of the Company’s outstanding indebtedness, refer to Note 7 to the accompanying Consolidated Condensed Financial Statements.
Interest expense of $62 million and $120 million for the three and six-month periods ended July 2, 2021, respectively, was $16 million lower and $5 million lower than the comparable periods of 2020, due primarily to lower average debt balances in the three and six-month periods in 2021 versus the comparable periods of 2020, partially offset by the impact of the weaker U.S. dollar in 2021 on the interest expense for the Company’s foreign currency denominated debt (and U.S. dollar debt that has been converted into a foreign currency through cross-currency swap derivative contracts).
Interest income of $3 million and $7 million for the three and six-month periods ended July 2, 2021, respectively, was $2 million higher and $56 million lower than the comparable periods of 2020, due primarily to lower average cash balances in 2021 due to the use of cash for funding of the Cytiva Acquisition in 2020 and lower interest rates.
INCOME TAXES
The following table summarizes the Company’s effective tax rate:
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Three-Month Period Ended
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Six-Month Period Ended
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July 2, 2021
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July 3, 2020
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July 2, 2021
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July 3, 2020
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Effective tax rate
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16.8
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%
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24.0
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%
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17.6
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%
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21.2
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%
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The effective tax rate for the three-month period ended July 2, 2021 differs from the U.S. federal statutory rate of 21.0% principally due to net discrete benefits of $76 million related primarily to the release of reserves for uncertain tax positions due to the expiration of statutes of limitation, audit settlements and excess tax benefits from stock-based compensation, net of changes in estimates associated with prior period uncertain tax positions. These items decreased the reported tax rate on a net basis by 3.7%.
The effective tax rate for the six-month period ended July 2, 2021 differs from the U.S. federal statutory rate of 21.0% principally due to net discrete benefits of $120 million related primarily to the release of reserves for uncertain tax positions due
to the expiration of statutes of limitation, audit settlements and excess tax benefits from stock-based compensation, net of changes in estimate associated with prior period uncertain tax positions. These items decreased the reported tax rate on a net basis by 2.9%.
The effective tax rate for the three-month period ended July 3, 2020 differs from the U.S. federal statutory rate of 21.0% principally due to a higher tax rate associated with the gain on the divestiture of certain product lines in the Life Sciences segment which incrementally increased the reported tax rate by 4.5%. Changes in estimates associated with prior period uncertain tax positions were offset primarily by excess tax benefits related to stock-based compensation and other items.
The effective tax rate for the six-month period ended July 3, 2020 differs from the U.S. federal statutory rate of 21.0% principally due to a higher tax rate associated with the gain on the divestiture of certain product lines in the Life Sciences segment and changes in estimates associated with prior period uncertain tax positions, partially offset by excess tax benefits related primarily to stock-based compensation, the release of reserves for uncertain tax positions due to the expiration of statutes of limitation and other items, resulting in a net tax charge of $33 million. These items increased the reported tax rate on a net basis by 1.7%.
The Company conducts business globally, and files numerous consolidated and separate income tax returns in federal, state and foreign jurisdictions. In addition to the Company’s significant presence in the U.S., the Company also has a significant presence in China, Denmark, Germany, Singapore, Sweden, Switzerland and the UK. Excluding these jurisdictions, the Company believes that a change in the statutory tax rate of any individual foreign country would not have a material impact on the Company’s financial statements given the geographical dispersion of the Company’s taxable income.
The Company and its subsidiaries are routinely examined by various domestic and international taxing authorities. The Internal Revenue Service (“IRS”) has completed the examinations of substantially all of the Company’s federal income tax returns through 2015 and is currently examining certain of the Company’s federal income tax returns for 2016 through 2018. In addition, the Company has subsidiaries in Austria, Belgium, Canada, China, Denmark, France, Germany, India, Japan, Korea, Switzerland, the UK and various other countries, states and provinces that are currently under audit for years ranging from 2004 through 2018.
Refer to Note 10 to the Consolidated Condensed Financial Statements for discussion regarding the Company’s significant tax matters.
The Company expects its effective tax rate for the remainder of 2021 to be approximately 20.5%. The Company’s effective tax rate could vary as a result of many factors, including but not limited to the following:
•The expected rate for the remainder of 2021 includes the anticipated discrete income tax benefits from excess tax deductions related to the Company’s stock compensation programs, which are reflected as a reduction in tax expense, though the actual benefits (if any) will depend on the Company’s stock price and stock option exercise patterns.
•The actual mix of earnings by jurisdiction could fluctuate from the Company’s projection, particularly given the uncertainties related to the COVID-19 pandemic.
•The tax effects of other discrete items, including accruals related to tax contingencies, the resolution of worldwide tax matters, tax audit settlements, statute of limitations expirations and changes in tax regulations.
•Any future changes in tax law or the implementation of recently proposed increases in tax rates, the impact of future regulations and guidance implementing the Tax Cuts and Jobs Act and any related additional tax planning efforts to address these changes.
As a result of the uncertainty in predicting these items, it is reasonably possible that the actual effective tax rate used for financial reporting purposes will change in future periods.
DISCONTINUED OPERATIONS
On July 2, 2016, the Company completed the separation of its former Test & Measurement segment, Industrial Technologies segment (excluding the product identification businesses) and retail/commercial petroleum business by distributing to Danaher stockholders on a pro rata basis all of the issued and outstanding common stock of Fortive Corporation (“Fortive”), the entity the Company incorporated to hold such businesses. For the three and six-month periods ended July 2, 2021, the Company recorded an income tax benefit of $86 million related to the release of previously provided reserves associated with uncertain tax positions on certain of the Company’s tax returns which were jointly filed with Fortive entities. These reserves were released due to the expiration of statutes of limitations for those returns. This income tax benefit is included in earnings from discontinued operations, net of income taxes in the accompanying Consolidated Condensed Statements of Earnings.
COMPREHENSIVE INCOME
In 2021, comprehensive income increased $577 million for the three-month period and increased $453 million for the six-month period as compared to the comparable periods of 2020, primarily driven by higher net earnings partially offset by the negative impact of foreign currency translation adjustments. Higher cash flow hedge gains in the three-month period in 2021 contributed to the increase in comprehensive income versus 2020 for the period, however, the cash flow hedge gains declined year-over-year for the six-month period. The Company recorded a foreign currency translation gain of $409 million and a loss of $513 million for the three and six-month periods ended July 2, 2021, respectively, as compared to gains of approximately $1.1 billion and $923 million for the three and six-month periods ended July 3, 2020, respectively. The Company recorded a gain of $228 million and $186 million from cash flow hedge adjustments related to the Company’s cross-currency swap derivative contracts for the three and six-month periods ended July 2, 2021, respectively, as compared to a loss of $157 million and a gain of $265 million for the comparable periods of 2020.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company continues to generate substantial cash from operating activities and believes that its operating cash flows, cash on hand and other available sources of liquidity will be sufficient to allow it to continue investing in existing businesses, consummating strategic acquisitions and investments, paying interest and servicing debt, paying dividends, funding restructuring activities and managing its capital structure on a short-term and long-term basis.
The Company has relied primarily on borrowings under its commercial paper program to address liquidity requirements that exceed the capacity provided by its operating cash flows and cash on hand, while also accessing the capital markets from time to time including to secure financing for more significant acquisitions. Subject to any limitations that may result from the COVID-19 pandemic or other market disruptions (such as the disruptions in the financial and capital markets that occurred at times in 2020), the Company anticipates following the same approach in the future, including with respect to the pending Aldevron Acquisition.
Following is an overview of the Company’s cash flows and liquidity ($ in millions):
Overview of Cash Flows and Liquidity
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Six-Month Period Ended
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($ in millions)
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July 2, 2021
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July 3, 2020
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Total operating cash provided by continuing operations
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$
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3,991
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$
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2,271
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Cash paid for acquisitions
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$
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(1,065)
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$
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(20,736)
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Payments for additions to property, plant and equipment
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(556)
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(288)
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Proceeds from sales of property, plant and equipment
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13
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1
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Payments for purchases of investments
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(552)
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(128)
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Proceeds from sale of investment
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56
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—
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Proceeds from sale of product lines
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26
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810
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All other investing activities
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18
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12
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Total cash used in investing activities for continuing operations
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$
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(2,060)
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$
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(20,329)
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Proceeds from the issuance of common stock in connection with stock-based compensation
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$
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25
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$
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69
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Proceeds from the sale of common stock, net of issuance costs
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—
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1,729
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Proceeds from the sale of preferred stock, net of issuance costs
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—
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1,668
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Payment of dividends
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(360)
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(283)
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Net proceeds from (repayments of) borrowings (maturities of 90 days or less)
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13
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(3,377)
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Net proceeds from borrowings (maturities longer than 90 days)
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—
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7,691
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Net repayments of borrowings (maturities longer than 90 days)
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(279)
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(3,750)
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All other financing activities
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13
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(2)
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Total cash (used in) provided by financing activities for continuing operations
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$
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(588)
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$
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3,745
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•Operating cash flows from continuing operations increased approximately $1.7 billion, or 76%, during the six-month period ended July 2, 2021 as compared to the comparable period of 2020, due to higher net earnings from continuing operations (after excluding charges for depreciation, amortization, stock compensation, gain on sale of product lines and unrealized investment gains/losses in both periods). These increases were partially offset by higher cash used in aggregate for accounts receivables, inventories and trade accounts payable and higher cash used for accrued and prepaid expenses in 2021 compared to the prior year.
•Net cash used in investing activities consisted primarily of cash paid for acquisitions, investments and capital expenditures and decreased year-over-year primarily as a result of the Cytiva Acquisition. The Company acquired Cytiva in the first quarter of 2020 for total cash consideration of approximately $20.7 billion (net of approximately $0.1 billion of acquired cash). Refer to Note 3 to the accompanying Consolidated Condensed Financial Statements for additional information on the Company’s acquisitions.
•As of July 2, 2021, the Company held approximately $7.3 billion of cash and cash equivalents.
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impact reported cash flows.
Operating cash flows from continuing operations were approximately $4.0 billion for the first six months of 2021, an increase of approximately $1.7 billion, or 76%, as compared to the comparable period of 2020. The year-over-year change in operating cash flows from 2020 to 2021 was primarily attributable to the following factors:
•2021 operating cash flows reflected an increase of approximately $1.9 billion in net earnings from continuing operations for the first six months of 2021 as compared to the comparable period in 2020.
•Net earnings for the first six months of 2021 also reflected an increase of $339 million of depreciation, amortization (intangible assets and inventory step-up), stock compensation expense and unrealized investment gains/losses as compared to the comparable period of 2020, offset by a decrease in the amortization of the inventory step-up and a decrease in the gain on sale of product lines in 2021 compared to 2020. Amortization expense primarily relates to the amortization of intangible assets and inventory fair value adjustments. Depreciation expense relates to both the Company’s manufacturing and operating facilities as well as instrumentation leased to customers under OTL arrangements. Depreciation, amortization and stock compensation are noncash expenses that decrease earnings without a corresponding impact to operating cash flows. Cash flows from the gain on sale of product lines are reflected in cash flows from investing activities while unrealized investment gains/losses impact net earnings without impacting cash flows.
•The aggregate of trade accounts receivable, inventories and trade accounts payable used $433 million in operating cash flows during the first six months of 2021, compared to $153 million of operating cash flows used in the comparable period of 2020. The amount of cash flow generated from or used by the aggregate of trade accounts receivable, inventories and trade accounts payable depends upon how effectively the Company manages the cash conversion cycle, which effectively represents the number of days that elapse from the day it pays for the purchase of raw materials and components to the collection of cash from its customers and can be significantly impacted by the timing of collections and payments in a period.
•The aggregate of prepaid expenses and other assets and accrued expenses and other liabilities provided $75 million of operating cash flows during the first six months of 2021, compared to $293 million of operating cash flows provided in the comparable period of 2020. The timing of cash payments for income taxes, various employee-related liabilities, customer funding and changes in accrued expenses, drove the majority of this change.
Dynamics relating to the COVID-19 pandemic could have an adverse impact on the Company’s operating cash flow if demand for the Company’s products related to COVID-19 declines or if the measures to contain and mitigate the spread of COVID-19 adversely impact the Company’s sales and earnings, the collections of accounts receivable, including delays in collections and increases in uncollectible receivables, and/or adversely impact our supply chain and inventory levels.
Investing Activities
Cash flows relating to investing activities consist of cash used for acquisitions and capital expenditures, including instruments leased to customers, cash used for investments and cash proceeds from divestitures of businesses or assets.
Net cash used in investing activities decreased approximately $18.3 billion in the six-month period ended July 2, 2021 compared to the comparable period of 2020, primarily as a result of the Company’s acquisition of Cytiva in the first quarter of 2020. For a discussion of the Company’s acquisitions and divestitures during the first six months of 2021 refer to “—Overview”. In addition, for a description of the Company’s pending Aldevron Acquisition, refer to Note 3 to the accompanying Consolidated Condensed Financial Statements.
Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development, improving information technology systems and the manufacture of instruments that are used in OTL arrangements that certain of the Company’s businesses enter into with customers. Capital expenditures increased $268 million on a year-over-year basis for the six-month period ended July 2, 2021 compared to the comparable period in 2020, due primarily to incremental capital expenditures to increase capacity for diagnostic testing and biopharma products (including to address increased COVID-19 related demand) as well as incremental capital expenditures as a result of the Cytiva Acquisition. For the full year 2021, the Company forecasts capital spending to be approximately $1.5 billion, driven primarily by continued expenditures related to capacity expansion for diagnostic testing and biopharma products. Actual expenditures will ultimately depend on business conditions, including COVID-19 related demand, regulatory requirements, and the capability of suppliers to support increased production.
Financing Activities and Indebtedness
Cash flows relating to financing activities typically consist primarily of cash flows associated with the issuance and repayments of commercial paper, issuance and repayment of notes payable and long-term debt, borrowings under committed credit facilities, issuance and repurchases of common stock, issuance of preferred stock and payments of cash dividends to shareholders. Financing activities used cash of $588 million during the six-month period ended July 2, 2021 compared to approximately $3.7 billion of cash provided in the comparable period of 2020. The year-over-year decrease in cash provided by financing activities was due primarily to cash provided in 2020 by the sale of common and preferred stock and borrowings incurred to finance the remaining amounts needed to acquire Cytiva and for general corporate purposes.
For a description of the Company’s outstanding debt as of July 2, 2021 and the Company’s commercial paper programs and credit facility, refer to Note 7 to the accompanying Consolidated Condensed Financial Statements. As of July 2, 2021, the Company was in compliance with all of its respective debt covenants.
For a description of the Company’s financing of the Cytiva Acquisition, refer to Note 11 in the Company’s 2020 Annual Report. For a description of the Company’s anticipated financing of the pending Aldevron Acquisition, refer to Note 3 to the accompanying Consolidated Condensed Financial Statements.
Stock Repurchase Program
For information regarding the Company’s stock repurchase program, refer to Part II—Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds”.
Dividends
Aggregate cash payments for dividends on Company common stock during the six-month period ended July 2, 2021 were $278 million and aggregate cash payments for dividends on the Company’s MCPS Shares during the six-month period ended July 2, 2021 were $82 million. The increase in dividend payments over the comparable period of 2020 primarily relates to dividends paid on the MCPS Series A and MCPS Series B, which were issued March 1, 2019 and May 12, 2020, respectively, as well as an increase in the quarterly dividend rate for common stock beginning with respect to the dividend paid in the second quarter of 2020.
In the second quarter of 2021, the Company declared a regular quarterly dividend of $0.21 per share of Company common stock payable on July 30, 2021 to holders of record as of June 25, 2021. In addition, the Company declared a quarterly cash dividend of $11.875 per MCPS Series A that was paid on July 15, 2021 to holders of record as of June 30, 2021 and quarterly cash dividend of $12.50 per MCPS Series B that was paid on July 15, 2021 to holders of record as of June 30, 2021.
Cash and Cash Requirements
As of July 2, 2021, the Company held approximately $7.3 billion of cash and cash equivalents that were held on deposit with financial institutions or invested in highly liquid investment-grade debt instruments with a maturity of 90 days or less. Of the cash and cash equivalents, $111 million was held within the United States and approximately $7.2 billion was held outside of the United States. The Company will continue to have cash requirements to support general corporate purposes, which may include working capital needs, capital expenditures and acquisitions (including the Aldevron Acquisition), paying interest and servicing debt, paying taxes and any related interest or penalties, funding its restructuring activities and pension plans as required, paying dividends to shareholders, repurchasing shares of the Company’s common stock and supporting other business needs.
The Company generally intends to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required (including if applicable in connection with the Aldevron Acquisition), the Company may also borrow under its commercial paper programs (if available) or borrow under the Company’s Five-Year Facility, enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under its commercial paper programs (if available) and/or access the capital markets (if available). The Company also may from time to time seek to access the capital markets to take advantage of favorable interest rate environments or other market conditions. With respect to the commercial paper scheduled to mature during the remainder of 2021, the Company expects to repay the principal amounts when due using cash on hand, proceeds from new issuances of commercial paper (if available), drawing on its Five-Year Facility and/or proceeds from other debt issuances.
While repatriation of some cash held outside the United States may be restricted by local laws, most of the Company’s foreign cash could be repatriated to the United States. Following enactment of the Tax Cuts and Jobs Act and the associated Transition Tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax; however, repatriation
of cash could subject the Company to non-U.S. taxes on distributions. The cash that the Company’s non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes, if any, applicable to such earnings including basis differences in our foreign subsidiaries are not readily determinable. As of July 2, 2021, management believes that it has sufficient sources of liquidity to satisfy its cash needs, including its cash needs in the United States.
During 2021, the Company’s cash contribution requirements for its non-U.S. defined benefit pension plans are forecasted to be approximately $50 million. The Company is forecasting no cash contributions for its U.S. defined benefit pension plan in 2021. 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.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to the Company’s critical accounting estimates as described in the 2020 Annual Report.