ITEM 7. 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’s financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. The MD&A is designed to focus specifically on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management’s assessment to have a material impact on future operations. The Company’s MD&A is divided into five sections:
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
•New Accounting Standards
This discussion and analysis should be read together with Danaher’s audited financial statements and related Notes thereto as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 included in this Annual Report. Management's discussion and analysis of financial condition and results of operations for 2018 is included in Item 7 of the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission and should be referred to for information regarding this period.
Unless otherwise indicated, all financial results in this report refer to continuing operations.
OVERVIEW
General
Refer to “Item 1. Business—General” for a discussion of Danaher’s strategic objectives and methodologies for delivering long-term shareholder value. Danaher is a multinational business with global operations. During 2020, approximately 61% of Danaher’s sales were derived from customers outside the United States. As a diversified, global business, Danaher’s operations are affected by worldwide, regional and industry-specific economic and political factors. Danaher’s geographic and industry diversity, as well as the range of its products, software and services, help limit the impact of any one industry or the economy of any single country on its consolidated operating results. The Company’s individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future.
As a result of the Company’s geographic and industry diversity, the Company faces a variety of opportunities and challenges, including rapid technological development (particularly with respect to computing, automation, artificial intelligence, mobile connectivity, communications and digitization) in most of the Company’s served markets, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force, consolidation of the Company’s competitors and increasing regulation. The Company operates in a highly competitive business environment in most markets, and the Company’s long-term growth and profitability will depend in particular on its ability to expand its business in high-growth geographies and high-growth market segments, identify, consummate and integrate appropriate acquisitions and identify and consummate appropriate investments and strategic partnerships, develop innovative and differentiated new products and services with higher gross profit margins, expand and improve the effectiveness of the Company’s sales force, continue to reduce costs and improve operating efficiency and quality, and effectively address the demands of an increasingly regulated global environment. The Company is making significant investments, organically and through acquisitions and investments, to address the rapid pace of technological change in its served markets and to globalize its manufacturing, research and development and customer-facing resources (particularly in high-growth markets) in order to be responsive to the Company’s customers throughout the world and improve the efficiency of the Company’s operations.
The COVID-19 Pandemic
The global spread of a novel strain of coronavirus (COVID-19) has led to unprecedented restrictions on, and disruptions in, business and personal activities, including as a result of preventive and precautionary measures that we, other businesses, our communities and governments have taken and are taking to mitigate the spread of the virus and to manage its impact. The Company continues to actively monitor the pandemic and has taken and intends to continue taking steps to identify and mitigate
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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 in response to the pandemic, including taking steps in an effort to help keep our workforce healthy and safe, and are assessing and updating those plans on an ongoing basis. As a result of COVID-19 the Company’s businesses have modified certain of their respective business practices (including in many cases with respect to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and the Company expects to take such further actions as may be required by government authorities or as determined to be in the best interests of our employees, customers and other business partners. The Company has developed return-to-work protocols designed to help ensure the health and safety of its employees, customers and business partners, for its businesses to apply as and when return-to-work is legally permissible and deemed appropriate. We are also working with our suppliers to understand the existing and potential future negative impacts to our supply chain and take actions in an effort to mitigate such impacts. To date we have not experienced any significant supply chain disruptions. Given that the prevalence of COVID-19 and the nature of the response thereto (including the degree to which restrictions are being relaxed or re-imposed) varies significantly by geography, the impact of the pandemic on the Company’s different business locations around the world at any given time also varies significantly.
We are also deploying our capabilities, expertise and scale to address the critical health needs related to COVID-19. We have developed and made available a diagnostic test for the rapid detection of COVID-19 and a diagnostic test that can detect antibodies in blood to confirm current or past exposure to COVID-19. In addition, our businesses, including the recently acquired Cytiva business (the Cytiva Acquisition is described below), are providing critical support to firms that are developing and producing vaccines for COVID-19, among other support. Cytiva, net of the product line divestitures required for regulatory approval of the acquisition, contributed approximately 1,800 basis points to the increase in the Company’s total sales in 2020 compared to 2019. We estimate that COVID-19 related demand contributed between approximately 700 to 750 basis points to the Company’s core sales growth including Cytiva in 2020 compared to 2019 (for the definition of “core sales including Cytiva,” refer to “—Results of Operations” below). As and to the extent the COVID-19 pandemic subsides we expect the demand for products and services related to COVID-19 will also subside. As further discussed below, while COVID-19 has positively impacted revenues for certain of our businesses, the pandemic and response thereto had a material negative impact on revenues and profitability in other of our businesses in 2020 and, while conditions overall improved sequentially from the second quarter through the end of 2020, the global demand for many of our products and services may remain depressed at least in the near-term if not longer.
As noted below and subject to the assumptions discussed below, the Company expects core sales and core sales including Cytiva to grow in the first quarter of 2021 compared to the prior year. However, due to the speed with which the COVID-19 situation continues to evolve, the global breadth of its spread, the range of governmental and community responses thereto and our geographic and business line diversity, its further impact on our business remains highly uncertain, but may be materially negative and will depend on future developments including but not limited to:
•the duration of weaknesses in the macroeconomic environment and the timing and extent of recovery in the global demand for our products and services;
•the pace at which medical providers resume patient care and testing that is not related to the COVID-19 pandemic, the timing of when research performed by laboratories and other institutions return to normal levels, and payment and funding dynamics related to the foregoing; and
•the development and rate of adoption of the products we are offering to help address the pandemic and the effects thereof; competitive product launches and related pricing pressure; impacts from changes in the mix of our product offerings; and the degree to which COVID-19 testing solutions and vaccines are made available and utilized.
For additional information on the risks of COVID-19 to the Company’s operations, refer to the “Item 1A—Risk Factors” section of this Annual Report.
Business Performance
Consolidated sales for the year ended December 31, 2020 increased 24.5% as compared to 2019. Acquisitions, primarily Cytiva, contributed 18.0% to the increase in sales in 2020. While differences exist among the Company’s businesses, on an overall basis, demand for the Company’s products and services increased on a year-over-year basis in 2020 as compared to 2019. This demand, together with the Company’s continued investments in sales growth initiatives and the other business-specific factors discussed below, contributed to year-over-year core sales growth of 6.5% and core sales growth including Cytiva of 9.5% (for the definition of “core sales” refer to “—Results of Operations” below). From the date of Danaher’s acquisition of Cytiva on March 31, 2020 through December 31, 2020, Cytiva’s core sales grew more than 30% (compared to the comparable 2019 period when the Cytiva business was owned by General Electric Company (“GE”)) reflecting strength in
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its served markets and its support in helping its customers develop and produce vaccines for COVID-19. Geographically, both high-growth and developed markets contributed to year-over-year core sales growth during 2020. Core sales in developed markets grew at a low-double digit rate in 2020 as compared to 2019 and were driven by North America and Western Europe. Core sales in high-growth markets grew at a mid-single digit rate in 2020 as compared to 2019 as growth in China and other high-growth markets in the second half of 2020 more than offset declines in China during the first quarter due to the impact of the COVID-19 pandemic. High-growth markets represented approximately 30% of the Company’s total sales in 2020.
The Company’s net earnings from continuing operations for the year ended December 31, 2020 totaled approximately $3.6 billion, compared to approximately $2.4 billion for the year ended December 31, 2019. Net earnings attributable to common stockholders for the year ended December 31, 2020 totaled approximately $3.5 billion or $4.89 per diluted common share compared to approximately $2.9 billion or $4.05 per diluted common share for the year ended December 31, 2019. The increase in net earnings in 2020 as compared to 2019 was driven by net earnings from increased sales in the Company’s existing businesses, net earnings from Cytiva, the 2020 gain on sale of product lines, and the provision for uncertain tax positions recorded in the first quarter of 2019 discussed below in “—Results of Operations—Income Taxes”, partially offset by the 2019 gain on the disposition of Envista Holdings Corporation. Refer to “—Results of Operations” for further discussion of the year-over-year changes in net earnings and diluted net earnings per common share for the year ended December 31, 2020.
While the ultimate impact of COVID-19 on future periods is highly uncertain, the Company expects core sales and core sales including Cytiva to grow in the first quarter of 2021, assuming the negative impact of the pandemic does not increase in the United States and internationally. Demand for instruments and consumables related to COVID-19-related testing capabilities as well as supporting customers in pursuit of new COVID-19-related treatments and vaccines are expected to continue to drive growth in 2021 while the performance of the Company’s other businesses is expected to continue to improve. As discussed above, an increase of the COVID-19 infection rate and the re-imposition of government required restrictions could have a material negative impact on the Company’s financial statements.
Acquisitions and Dispositions
On March 31, 2020, the Company acquired the Biopharma business of GE’s Life Sciences division, now known as Cytiva, for a cash purchase price of approximately $20.7 billion (net of approximately $0.1 billion of acquired cash) and the assumption of approximately $0.4 billion of pension liabilities (the “Cytiva Acquisition”). Cytiva is a leading provider of instruments, consumables and software that support the research, discovery, process development and manufacturing workflows of biopharmaceutical drugs. Cytiva is included in the Company’s Life Sciences segment results beginning in the second quarter of 2020. The acquisition has provided and is expected to provide additional sales and earnings growth opportunities for the Company’s Life Sciences segment by expanding the business’ geographic and product line diversity, including new product and service offerings that complement the Company’s current biologics workflow solutions.
Refer to Note 3 to the Consolidated Financial Statements for discussion regarding the Company’s acquisitions.
Envista Disposition
On September 20, 2019, Envista Holdings Corporation (“Envista”), a Danaher subsidiary at the time, completed an underwritten IPO of 30.8 million shares of its common stock, (the “IPO”), which represented 19.4% of Envista’s outstanding shares at the time of the offering, at a public offering price of $22.00 per share. In connection with the completion of the IPO, through a series of equity and other transactions, the Company transferred its dental businesses to Envista (the “Separation”). On December 18, 2019, Danaher completed the disposition of its remaining 80.6% ownership of Envista common stock through a split-off exchange offer, which resulted in Danaher’s repurchase of 22.9 million shares of Danaher common stock in exchange for the remaining shares of Envista common stock held by Danaher (the “Split-Off”). The IPO, Separation and Split-Off are collectively referred to as the “Envista Disposition”. As a result, the Company recognized a gain on the disposition of $451 million in the fourth quarter of 2019 equal to the difference between the fair value of the Danaher common stock tendered in the exchange offer and the carrying value of Envista common stock. The accounting requirements for reporting Envista as a discontinued operation were met when the Split-Off was completed.
Refer to Note 4 to the Consolidated Financial Statements for further discussion.
UK’s referendum decision to exit the EU (“Brexit”)
For a discussion of Brexit and certain risks and implications thereof for the Company, refer to “Item 1A—Risk Factors”.
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RESULTS OF OPERATIONS
In this report, references to the non-GAAP measures of core sales (also referred to as core revenues or sales/revenues from existing businesses) and core sales including Cytiva refer to sales from continuing operations calculated according to generally accepted accounting principles in the United States (“GAAP”) but excluding:
•sales from acquired businesses (as defined below, as applicable); and
•the impact of currency translation.
References to sales or operating profit attributable to acquisitions or acquired businesses refer to sales or operating profit, as applicable, from acquired businesses recorded prior to the first anniversary of the acquisition less 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 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 to the baseline period sales Cytiva’s historical sales from such period (when it was owned by GE), net of the sales of the divested product lines, and also adding the Cytiva sales to the current period.
Core sales growth (and the related measure of core sales including Cytiva) should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting these non-GAAP financial measures provides useful information to investors by helping identify underlying growth trends in Danaher’s business and facilitating comparisons of Danaher’s revenue performance with its performance in prior and future periods and to Danaher’s peers. Management also uses these non-GAAP financial measures to measure the Company’s operating and financial performance, and uses core sales growth as one of the performance measures in the Company’s executive short-term cash incentive program. The Company excludes the effect of currency translation from these measures because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends, and excludes the effect of acquisitions (other than Cytiva sales, in the case of core sales growth including Cytiva) and divestiture-related items because the nature, size, timing and number of acquisitions and divestitures can vary dramatically from period-to-period and between the Company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult.
Throughout this discussion, references to sales growth or decline refer to the impact of both price and unit sales and references to productivity improvements generally refer to improved cost efficiencies resulting from the ongoing application of DBS.
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Core Sales Growth and Core Sales Growth Including Cytiva
Total sales growth (GAAP) 24.5 % 5.0 %
Impact of:
Acquisitions/divestitures (18.0) % (1.0) %
Currency exchange rates — % 2.0 %
Core sales growth (non-GAAP) 6.5 % 6.0 %
Impact of Cytiva sales growth (net of divested product lines) 3.0 %
Core sales growth including Cytiva (non-GAAP) 9.5 %
2020 Compared to 2019
Total sales increased 24.5% on a year-over-year basis in 2020 primarily as a result of an increase in sales from acquired businesses, net of divestitures, primarily due to the acquisition of Cytiva, as well as an increase in core sales resulting from the factors discussed below by segment. The impact of currency translation did not have a significant impact on reported sales on a year-over-year basis in 2020 as the negative impact of a stronger U.S. dollar in the first half of 2020 was offset by the favorable impact of the weakening of the U.S. dollar in the second half of 2020.
Operating Profit Performance
Operating profit margins were 19.0% for the year ended December 31, 2020 as compared to 18.3% in 2019. The following factors impacted year-over-year operating profit margin comparisons.
2020 vs. 2019 operating profit margin comparisons were favorably impacted by:
•Higher 2020 core sales volumes, lower overall spending levels for business travel and other business activities as a result of the pandemic and incremental year-over-year cost savings associated with the continued productivity improvement initiatives taken in 2020 and 2019, net of incremental year-over-year costs associated with various new product development and sales, service and marketing growth investments - 170 basis points
•The incremental accretive effect in 2020 of acquired businesses (including Cytiva), net of product line dispositions which did not qualify as discontinued operations - 125 basis points
2020 vs. 2019 operating profit margin comparisons were unfavorably impacted by:
•Acquisition-related fair value adjustments to inventory and deferred revenue, and incremental transaction costs deemed significant and integration preparation costs, in each case related to the acquisition of Cytiva - 215 basis points. The Company deems acquisition-related transaction costs incurred in a given period to be significant (generally relating to the Company’s larger acquisitions) if it determines that such costs exceed the range of acquisition-related transaction costs typical for Danaher in a given period.
•Impairment charges related to trade names in the Environmental & Applied Solutions segment incurred in the third quarter of 2020 - 5 basis points
•Impairment charges related to a facility in the Diagnostics segment and a trade name and other intangible assets in the Environmental & Applied Solutions segment incurred in the first quarter of 2020 - 5 basis points
Business Segments
Sales by business segment for the years ended December 31 are as follows ($ in millions):
For information regarding the Company’s sales by geographical region, refer to Note 2 to the accompanying Consolidated Financial Statements.
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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
Year Ended December 31
Operating profit as a % of sales 19.4 % 20.2 % 19.0 %
Depreciation as a % of sales 1.7 % 1.9 % 2.0 %
Amortization as a % of sales 8.2 % 5.1 % 5.3 %
Core Sales Growth and Core Sales Growth Including Cytiva
Total sales growth (GAAP) 52.0 % 7.5 %
Impact of:
Acquisitions/divestitures (46.5) % (2.5) %
Currency exchange rates — % 2.0 %
Core sales growth (non-GAAP) 5.5 % 7.0 %
Impact of Cytiva sales growth (net of divested product lines) 7.5 %
Core sales growth including Cytiva (non-GAAP) 13.0 %
2020 Compared to 2019
Price increases in the segment contributed 1.0% to revenue growth on a year-over-year basis during 2020 as compared with 2019 and are reflected as a component of the change in core revenue growth.
During 2020, total sales in the segment increased 52.0% primarily as a result of increased sales from acquisitions, net of divestitures and increased core sales resulting from the factors discussed below. Currency exchange rates had a negligible impact on total sales in 2020 compared to 2019. During 2020, increased demand for instruments and consumables used for COVID-19 related applications in the bioprocessing end-market was partially offset by lower demand in certain non-COVID-19 applications as a result of the response to the pandemic. The Company saw lower demand for equipment late in the first quarter and in the second quarter as the COVID-19 pandemic spread around the world, academic research labs closed late in the first quarter of 2020 and customers deferred purchases of larger instruments. The Company saw the gradual reopening of certain research labs later in 2020 as the pandemic subsided, although the recurrence of the pandemic in certain geographies has required certain labs to remain closed or operate at a lower capacity. Core sales for filtration, separation and purification technologies increased across most major geographies on a year-over-year basis led by Western Europe, China and North America. Demand for filtration, separation and purification technologies was led by COVID-19 related demand in the biopharmaceutical end-market, partially offset by weaker demand in the fluid technology and asset protection and aerospace end-markets. Core sales of microscopy products decreased on a year-over-year basis across all major product lines, primarily due to lower demand in the medical, industrial, and life science research end-markets. Geographically, demand for microscopy products decreased across all major geographies and end-markets, as shutdown measures to curb COVID-19 reduced year-over-year demand for equipment in particular. Year-over-year core sales for flow cytometry and particle counting solutions increased in 2020 across all major geographies and most end-markets due to increased demand for genomic sample preparation consumables and automation products resulting from the COVID-19 pandemic. Core sales of the business’ broad range of mass spectrometers declined on a year-over-year basis due to lower demand in the clinical and pharmaceutical end-markets in the first half of the year as a result of the COVID-19 pandemic. Demand for mass spectrometer products improved sequentially throughout the second half of 2020. Geographically, the decrease in demand was led by North America, Western Europe and China. Core sales in the genomics consumables business increased across all major geographies and product lines, driven primarily by demand for primer and probe kits related to COVID-19 testing.
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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, there are no results of operations for Cytiva included in the Life Sciences segment in the first quarter of 2020. Beginning in the second quarter of 2020, Cytiva is included in the Life Sciences segment results. In the last nine months of 2020, Cytiva experienced significant increased demand across all major geographies and end-markets, driven by demand for instruments and consumables used in the research and development of COVID-19-related treatments and vaccines.
Operating Profit Performance
Operating profit margins declined 80 basis points during 2020 as compared to 2019. The following factors impacted year-over-year operating profit margin comparisons.
2020 vs. 2019 operating profit margin comparisons were favorably impacted by:
•Higher 2020 core sales volumes, 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 continued productivity improvement initiatives taken in 2020 and 2019 and the impact of foreign currency exchange rates in 2020, net of incremental year-over-year costs associated with various new product development and sales and marketing growth investments - 200 basis points
•The incremental accretive effect in 2020 of acquired businesses, net of product line dispositions which did not qualify as discontinued operations - 200 basis points
2020 vs. 2019 operating profit margin comparisons were unfavorably impacted by:
•Acquisition-related fair value adjustments to inventory and deferred revenue related to the acquisition of Cytiva - 480 basis points
Depreciation and amortization increased during 2020 as compared to 2019 due primarily to the impact of the acquisition of Cytiva.
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
Year Ended December 31
Operating profit as a % of sales 20.8 % 17.3 % 17.2 %
Depreciation as a % of sales 5.4 % 5.7 % 6.1 %
Amortization as a % of sales 2.8 % 3.1 % 3.4 %
Core Sales Growth
Total sales growth (GAAP) 13.0 % 5.0 %
Impact of:
Currency exchange rates 0.5 % 2.0 %
Core sales growth (non-GAAP) 13.5 % 7.0 %
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2020 Compared to 2019
Price increases in the segment did not have a significant impact on sales growth on a year-over-year basis during 2020 as compared with 2019.
During 2020, total sales in the segment increased 13.0%, driven by the factors discussed below related to core sales growth, net of a modest negative impact from currency exchange rates. During 2020, increased demand for molecular diagnostics and acute care instruments and consumables to support the response to the COVID-19 pandemic was partially offset by lower demand for instruments and consumables in the clinical lab businesses as a result of shutdowns and restrictions related to the pandemic. While patient volumes remained down year-over-year, the Company saw sequential improvement in patient volume from the second quarter of 2020 through the end of the year. Core sales in the segment’s clinical lab business decreased on a year-over-year basis driven by lower demand across all major product lines. Geographically, shutdown measures to curb COVID-19 reduced core laboratory testing volumes year-over-year across all major geographies. Core sales increased in the molecular diagnostics business on a year-over-year basis in both developed and high-growth markets and contributed significantly to overall segment core sales growth. The molecular diagnostics business experienced particularly strong growth in sales of instruments and consumables in the infectious disease product line driven by the development and commercialization of diagnostic test solutions for COVID-19. Core sales in the acute care diagnostic business increased year-over-year primarily due to higher demand for blood gas instruments and consumables, driven in part by increased hospitalizations as a result of the COVID-19 pandemic. Geographically, demand was strong across all major geographies. Core sales in the pathology business grew year-over-year driven by increased demand for advanced staining consumables and pathology imaging products. Geographically, core sales growth in the pathology business was led by North America and Western Europe, partially offset by soft demand in China.
Operating Profit Performance
Operating profit margins increased 350 basis points during 2020 as compared to 2019. The following factors impacted year-over-year operating profit margin comparisons.
2020 vs. 2019 operating profit margin comparisons were favorably impacted by:
•Higher 2020 core sales volumes, lower overall spending levels for business travel and other business activities as a result of the pandemic and incremental year-over-year cost savings associated with the continued productivity improvement initiatives taken in 2020 and 2019, net of incremental year-over-year costs associated with various new product development and sales and marketing growth investments and the impact of foreign currency exchange rates in 2020 - 355 basis points
2020 vs. 2019 operating profit margin comparisons were unfavorably impacted by:
•Impairment charges related to a facility incurred in the first quarter of 2020 - 5 basis points
Depreciation and amortization as a percentage of sales decreased during 2020 as compared with 2019 largely due to the impact of increased sales in 2020.
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.
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Environmental & Applied Solutions Selected Financial Data
Year Ended December 31
Amortization of intangible assets 63 62 62
Operating profit as a % of sales 22.7 % 23.9 % 22.9 %
Depreciation as a % of sales 1.1 % 1.1 % 1.1 %
Amortization as a % of sales 1.5 % 1.4 % 1.4 %
Core Sales (Decline) Growth
Total sales (decline) growth (GAAP) (2.0) % 2.0 %
Impact of:
Acquisitions/divestitures — % (0.5) %
Currency exchange rates 0.5 % 2.0 %
Core sales (decline) growth (non-GAAP) (1.5) % 3.5 %
2020 Compared to 2019
Price increases in the segment contributed 1.5% to sales growth on a year-over-year basis during 2020 as compared with 2019 and are reflected as a component of the change in core revenue growth.
During 2020, total sales in the segment decreased 2.0% primarily as a result of the factors discussed below related to core sales declines, as well as from the negative impact of currency exchange rates. Core sales in the segment’s water quality businesses increased slightly during 2020 as compared with 2019 as increased demand for consumables was mostly offset by lower over-year demand for equipment as a result of the COVID-19 pandemic. While demand for equipment decreased on a year-over-year basis in 2020, the Company saw sequential improvement in the demand for equipment from the second quarter of 2020 through the end of the year. Year-over-year core sales in the analytical instrumentation product line increased in 2020, as increases in Western Europe and China more than offset decreases in North America and the Middle East. In the business’ chemical treatment solutions product line, increased demand in the food and beverage, commercial and industrial, and power end-markets was offset by lower demand in the oil and gas, primary metals, transportation and chemical end-markets. Geographically, year-over-year core sales in the chemical treatment solutions product line increased in North America and decreased in Latin America. Core sales in the business’ ultraviolet water disinfection product line increased in 2020, as increased demand in North America and Western Europe more than offset weaker demand in the high-growth markets.
Core sales in the segment’s product identification businesses decreased at a mid-single digit rate during 2020 as compared with 2019 driven by lower demand for equipment as a result of the COVID-19 pandemic. While demand for equipment decreased on a year-over-year basis in 2020, the Company saw sequential improvement in the demand for equipment from the second quarter of 2020 through the end of the year. Core sales in the marking and coding business decreased year-over-year, as increased demand in North America was more than offset by weaker demand in Western Europe and the high-growth markets. Demand for marking and coding equipment decreased in 2020, offsetting increased demand for consumables in the food and beverage, consumer-packaged goods and pharmaceutical end-markets. For packaging and color solutions products and services, core sales decreased year-over-year, driven by lower demand for equipment in North America, Western Europe and the high-growth markets. The Company saw continued improvement in demand for packaging and color management solutions in the second half of 2020 compared to the first half of the year.
Operating Profit Performance
Operating profit margins declined 120 basis points during 2020 as compared to 2019. Year-over-year operating profit margin comparisons were unfavorably impacted by:
•Lower 2020 core sales volumes and incremental year-over-year costs associated with sales, service and marketing growth investments, net of 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 continued productivity improvement initiatives taken in 2020 and 2019 and the impact of foreign currency exchange rates in 2020 - 65 basis points
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•Impairment charges related to trade names incurred in the third quarter of 2020 - 35 basis points
•Impairment charges related to a trade name and other intangible assets incurred in the first quarter of 2020 - 5 basis points
•The incremental net dilutive effect in 2020 of acquired businesses - 15 basis points
COST OF SALES AND GROSS PROFIT
Year Ended December 31
The year-over-year increase in cost of sales during 2020 as compared with 2019 was due primarily to the impact of higher year-over-year sales volumes, including sales volumes from recently acquired businesses, and 2020 acquisition-related charges associated with fair value adjustments to inventory in connection with the Cytiva Acquisition, which increased cost of sales by $457 million in 2020.
The year-over-year increase in gross profit margin during 2020 as compared with 2019 was due primarily to higher year-over-year sales volumes, including sales volumes from recently acquired businesses, and higher gross profit margins of recently acquired businesses, partially offset by the impact of 2020 acquisition-related charges associated with fair value adjustments to inventory and deferred revenue in connection with the Cytiva Acquisition, which adversely impacted gross profit margin comparisons by approximately 215 basis points in 2020 compared to 2019.
OPERATING EXPENSES
Year Ended December 31
Selling, general and administrative (“SG&A”) expenses (6,896) (5,589) (5,391)
Research and development (“R&D”) expenses (1,348) (1,126) (1,059)
R&D as a % of sales 6.0 % 6.3 % 6.2 %
SG&A expenses as a percentage of sales declined 30 basis points on a year-over-year basis for 2020 compared with 2019. The decline was driven by the benefit of increased leverage of the Company’s general and administrative cost base resulting from higher 2020 sales volumes, including sales volumes from recently acquired companies, incremental year-over-year cost savings associated with the continuing productivity improvement initiatives taken in 2020 and 2019, lower travel expenses in 2020 and lower year-over-year transaction costs related to the Cytiva Acquisition. These decreases were partially offset by incremental year-over-year amortization charges which adversely impacted SG&A as a percentage of sales by approximately 160 basis points, primarily related to the Cytiva Acquisition in 2020, as well as impairment charges related to a facility in the Diagnostics segment and trade name and other intangible assets in the Environmental & Applied solutions segment incurred in the first and third quarters of 2020 and continued investments in sales and marketing growth initiatives.
R&D expenses (consisting principally of internal and contract engineering personnel costs) as a percentage of sales declined in 2020 as compared with 2019, primarily due to lower R&D expenses as a percentage of sales in businesses recently acquired as well as the impact of sales growth rates in 2020 exceeding the spending growth related to the Company's new product development initiatives.
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NONOPERATING INCOME (EXPENSE)
The Company disaggregates the service cost component of net periodic benefit costs of noncontributory defined benefit pension plans and other postretirement employee benefit plans and presents the other components of net periodic benefit cost in other (expense) income, net. These other components include the assumed rate of return on plan assets, partially offset by amortization of actuarial losses and interest and aggregated to a gain of $16 million, $12 million and $35 million as of December 31, 2020, 2019 and 2018, respectively. The Company’s net periodic pension cost for the year ended December 31, 2019 includes a settlement loss of $7 million ($6 million after tax or $0.01 per diluted common share) as a result of the transfer of a portion of its non-U.S. pension liabilities related to one defined benefit plan to a third party.
The Company estimates the fair value of investments in equity securities using the Fair Value Alternative and records adjustments to fair value within net earnings. Additionally, the Company is a limited partner in a partnership that invests in early stage companies. While the partnership records these investments at fair value, the Company’s investment in the partnership is accounted for under the equity method of accounting. During the year ended December 31, 2020, the Company recorded net realized and unrealized gains of $18 million related to changes in the fair value of these investments. In addition, the Company recorded other income of $5 million related to certain other transactions during 2020. These items are reflected in other income (expense), net in the Company’s Consolidated Statement of Earnings. No significant realized or unrealized gains or losses were recorded in either 2019 or 2018 with respect to these investments.
GAIN ON SALE OF PRODUCT LINES
As a condition to obtaining certain regulatory approvals for the closing of the Cytiva Acquisition, the Company was required to divest certain of its existing product lines in the Life Sciences segment that in the aggregate generated revenues of approximately $170 million in 2019. On April 30, 2020, the Company completed the sale of these product lines for a cash purchase price, net of cash transferred and transaction costs, of $826 million and recognized a pretax gain on sale of $455 million ($305 million after-tax or $0.42 per diluted common share) in the second quarter of 2020. The divestiture of these product lines did not represent a strategic shift with a major effect on the Company’s operations and financial results and therefore is not reported as a discontinued operation.
LOSS ON EARLY EXTINGUISHMENT OF BORROWINGS
In the fourth quarter of 2020, the Company redeemed the €800 million aggregate principal amount of 1.7% senior unsecured notes due 2022 at a redemption price equal to the outstanding principal amount and a make-whole premium as specified in the applicable indenture, plus accrued and unpaid interest. The Company recorded a loss on early extinguishment of these borrowings of $26 million ($20 million after-tax or $0.03 per diluted common share) related to the payment of make-whole premiums in connection with the redemption. The Company funded the redemption using available cash balances, including proceeds from the fourth quarter 2020 issuance of the 2.6% senior unsecured notes due 2050.
In the fourth quarter of 2019, the Company redeemed the $500 million aggregate principal amount of 2.4% senior unsecured notes due 2020 and the $375 million aggregate principal amount of 5.0% senior unsecured notes due 2020 at a redemption price equal to the outstanding principal amount and a make-whole premium as specified in the applicable indenture, plus accrued and unpaid interest. The Company recorded a loss on extinguishment of these borrowings of $7 million ($5 million after-tax or $0.01 per diluted common share) related to the payment of make-whole premiums in connection with the redemption. The Company funded the redemption using a portion of the cash distribution it received in connection with the Envista Disposition.
INTEREST COSTS
Interest expense of $275 million for 2020 was $167 million higher than in 2019, due primarily to the impact of higher average debt balances as a result of the issuances of debt in 2019 and 2020 (primarily to fund the Cytiva Acquisition) and 2020 borrowings under the Company’s $5.0 billion unsecured revolving credit facility with a syndicate of banks that expires on August 27, 2024, subject to a one-year extension option at the request of the Company with the consent of the lenders (the “Five-Year Facility”) and the Company’s $5.0 billion 364-day unsecured revolving credit facility with a syndicate of banks that was scheduled to expire on August 26, 2020 (the “Superseded 364-Day Facility”), prior to the subsequent repayment of such credit facility borrowings. Proceeds from these borrowings as well as available cash balances were used to fund the acquisition of Cytiva and for general corporate purposes. Interest income of $71 million for 2020 was $68 million lower than in 2019, due primarily to lower interest rates and lower average cash balances in 2020 due to the funding of the Cytiva Acquisition.
In January 2019, the Company entered into approximately $1.9 billion of cross-currency swap derivative contracts on its U.S. dollar-denominated bonds to effectively convert the Company’s U.S. dollar-denominated bonds to obligations denominated in Danish kroner, Japanese yen, euro and Swiss franc and reduce the interest rate from the stated interest rates on the U.S. dollar-denominated debt to the interest rates of the swaps. In addition, in 2020, the Company entered into approximately $1.0 billion of cross-currency swap derivative contracts on its U.S. dollar-denominated bonds to effectively convert the Company’s U.S.
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dollar-denominated bonds to obligations denominated in euro and reduce the interest rate from the stated interest rates on the U.S. dollar-denominated debt to the interest rates of the swaps. As of December 31, 2020, approximately $2.0 billion of the cross-currency swap derivative contracts remained outstanding. For a further description of the Company’s debt and cross-currency swap derivative contracts related to the debt as of December 31, 2020 refer to Notes 11 and 12 to the Consolidated Financial Statements.
INCOME TAXES
General
Income tax expense and deferred tax assets and liabilities reflect management’s assessment of future taxes expected to be paid on items reflected in the Company’s Consolidated Financial Statements. The Company records the tax effect of discrete items and items that are reported net of their tax effects in the period in which they occur.
The Company’s effective tax rate can be affected by changes in the mix of earnings in countries with different statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, accruals related to contingent tax liabilities and period-to-period changes in such accruals, the results of audits and examinations of previously filed tax returns (as further discussed below), the expiration of statutes of limitations, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities and changes in tax laws and regulations, such as the TCJA and legislative policy changes that may result from the OECD’s initiative on Base Erosion and Profit Shifting or the change in the U.S. administration. For a description of the tax treatment of earnings that are planned to be reinvested indefinitely outside the United States, refer to “—Liquidity and Capital Resources—Cash and Cash Requirements” below.
The amount of income taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis. Based on these reviews, which take into account the results of discussions and resolutions of matters with certain tax authorities and the other factors referenced in the prior paragraph, reserves for contingent tax liabilities are accrued or adjusted as necessary. For a discussion of risks related to these and other tax matters, refer to “Item 1A. Risk Factors”.
Year-Over-Year Changes in the Tax Provision and Effective Tax Rate
Year Ended December 31
Effective tax rate from continuing operations 18.9 % 26.4 % 18.8 %
The Company’s effective tax rate for 2020 and 2019 differs from the U.S. federal statutory rate of 21.0%, due principally to the Company’s earnings outside the United States that are indefinitely reinvested and taxed at rates different than the U.S. federal statutory rate. Refer to Note 15 to the Consolidated Financial Statements for a discussion of the Company’s effective tax rate.
The Company conducts business globally, and files numerous consolidated and separate income tax returns in the U.S. federal, state and foreign jurisdictions. The non-U.S. countries in which the Company has a significant presence include China, Denmark, Germany, Singapore, Sweden, Switzerland and the United Kingdom. Excluding these jurisdictions, the Company believes that a change in the statutory tax rate of any individual foreign country would not have a material effect on the Company’s Consolidated Financial Statements given the geographic dispersion of the Company’s taxable income.
The Company and its subsidiaries are routinely examined by various domestic and international taxing authorities. The IRS has completed substantially all of the examinations of the Company’s federal income tax returns through 2015 and is currently examining certain of the Company’s federal income tax returns for 2016 through 2018. In addition, the Company has subsidiaries in Austria, Belgium, Canada, China, Denmark, France, Germany, India, Japan, Korea, Switzerland, the United Kingdom and various other countries, states and provinces that are currently under audit for years ranging from 2004 through 2018.
In the fourth quarter of 2018 and the first quarter of 2019, the IRS proposed significant adjustments to the Company’s taxable income for the years 2012 through 2015 with respect to the deferral of tax on certain premium income related to the Company’s self-insurance programs. For income tax purposes, the recognition of premium income has been deferred in accordance with U.S. tax laws related to insurance. The IRS challenged the deferral of premiums for certain types of the Company’s self-insurance policies. These proposed adjustments would have increased the Company’s taxable income over the 2012 through 2015 period by approximately $2.7 billion. In the third quarter of 2020, the Company settled the 2012 through 2015 audit period with the IRS, including the resolution of these proposed adjustments. The settlement was not material to the Company’s financial statements, including its cash flows and effective tax rate. As the settlement with the IRS was specific to the audit period, the settlement does not preclude the IRS from proposing similar adjustments to the Company’s self-insurance programs
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in current or future audits. In connection with its examination of the Company’s federal income tax returns for 2016, 2017 and 2018, the IRS has requested additional information on the Company’s self-insurance programs. Due to the enactment of the TCJA in 2017 and the resulting reduction in the U.S. corporate tax rate for years after 2017, the Company revalued its deferred tax liabilities related to the temporary differences associated with this deferred premium income from 35.0% to 21.0%. If the IRS proposes adjustments related to the Company’s self-insurance premiums with respect to years subsequent to 2015 and prior to adoption of the TCJA and the Company is unsuccessful in defending its position, any taxes owed to the IRS may be computed under the previous 35.0% statutory tax rate and the Company may be required to revalue the related deferred tax liabilities from 21.0% to 35.0%, which in addition to any interest due on the amounts assessed, would require a charge to future earnings. Management believes the positions the Company has taken in its U.S. tax returns are in accordance with the relevant tax laws.
Tax authorities in Denmark have raised significant issues related to interest accrued by certain of the Company’s subsidiaries. On December 10, 2013, the Company received assessments from the Danish tax authority (“SKAT”) of approximately DKK 1.9 billion including interest through December 31, 2020 (approximately $309 million based on exchange rates as of December 31, 2020) imposing withholding tax relating to interest accrued in Denmark on borrowings from certain of the Company’s subsidiaries for the years 2004 through 2009. The Company appealed these assessments to the Danish National Tax Tribunal in 2014. The appeal is pending, awaiting the final outcome of other, preceding withholding tax cases that were appealed to the Danish courts and subsequently to the Court of Justice of the European Union (“CJEU”). In February 2019, the CJEU decided several of these cases and ruled that the exemption of interest payments from withholding taxes provided in the applicable EU directive should be denied where taxpayers use the directive for abusive or fraudulent purposes, and that it is up to the national courts to make this determination. This decision of the CJEU now awaits application by the Danish High Court in the other, preceding withholding tax cases. SKAT has maintained a similar position related to withholding tax on interest accrued in Denmark on borrowings from certain of the Company’s subsidiaries with respect to tax years 2010 through 2015. In 2019, the Company received aggregate assessments for these matters of approximately DKK 1.8 billion including interest through December 31, 2020 (approximately $302 million based on the exchange rate as of December 31, 2020). The Company is appealing these assessments as well.
Management believes the positions the Company has taken in Denmark are in accordance with the relevant tax laws and is vigorously defending its positions. The Company intends on pursuing this matter through the Danish High Court should the appeal to the Danish National Tax Tribunal be unsuccessful. The Company will continue to monitor decisions of both the Danish courts and the CJEU and evaluate the impact of these court rulings on the Company’s tax positions in Denmark. The ultimate resolution of this matter is uncertain, could take many years, and could result in a further material adverse impact to the Company’s financial statements, including its cash flow and effective tax rate.
On June 24, 2020, SKAT issued a press release to announce that it has misapplied Denmark’s interest rules in some assessments concerning withholding tax and overcharged interest. Subsequent to year end, the Company received a notice from SKAT dated January 15, 2021 that includes a significant reduction in the interest amounts due related to the assessments discussed above. The Company is reviewing the notice and the revised interest calculations received from SKAT.
The Company expects its 2021 effective tax rate to be approximately 20.5% which is higher than the 2020 rate due primarily to the geographic mix of earnings anticipated for 2021. Any future legislative changes in the United States and/or potential tax reform in other jurisdictions, could cause the Company’s effective tax rate to differ from this estimate. Refer to Note 15 to the Consolidated Financial Statements for additional information related to income taxes.
DISCONTINUED OPERATIONS
As further discussed in Note 4 to the Consolidated Financial Statements, discontinued operations include the results of Envista which was disposed of during the fourth quarter of 2019. In 2019, earnings from discontinued operations, net of income taxes, were $576 million and reflect the operating results of Envista prior to the Envista Disposition and a gain on the disposition of Envista of $451 million, net of certain costs associated with the Envista Disposition including costs related to establishing Envista as a stand-alone entity and legal, accounting and investment banking fees.
COMPREHENSIVE INCOME
Comprehensive income increased by approximately $3.6 billion in 2020 as compared to 2019, primarily due to a gain on foreign currency translation adjustments in 2020 compared to a loss in 2019, higher net earnings and a decrease in the loss from cash flow hedge adjustments in 2020 compared to 2019, partially offset by an increase in losses from pension and postretirement plan benefit adjustments in 2020 compared to 2019. The Company recorded a foreign currency translation gain of approximately $2.9 billion for 2020 compared to a translation loss of $75 million for 2019. The Company recorded a pension and postretirement plan benefit loss of $147 million for 2020 compared to a loss of $90 million for 2019. The
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Company recorded losses from cash flow hedge adjustments related to the Company’s cross-currency swap derivative contracts in 2020 of $72 million compared to losses of $113 million in 2019.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, equity prices and commodity prices as well as credit risk, each of which could impact its Consolidated Financial Statements. The Company generally addresses its exposure to these risks through its normal operating and financing activities. The Company also periodically uses derivative financial instruments to manage foreign exchange risks and interest rate risks. In addition, the Company’s broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its financial statements as a whole.
Interest Rate Risk
The Company manages interest cost using a mixture of fixed-rate and variable-rate debt. A change in interest rates on fixed rate debt impacts the fair value of the debt but not the Company’s earnings or cash flow because the interest on such debt is fixed. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. As of December 31, 2020, an increase of 100 basis points in interest rates would have decreased the fair value of the Company’s fixed-rate long-term debt (excluding the LYONs, which have not been included in this calculation as the value of this convertible debt was primarily derived from the value of its underlying common stock) by approximately $2.0 billion.
As of December 31, 2020, the Company’s variable-rate debt obligations consisted primarily of euro-based commercial paper borrowings (refer to Note 11 to the Consolidated Financial Statements for information regarding the Company’s outstanding commercial paper balances as of December 31, 2020). As a result, the Company’s primary interest rate exposure results from changes in short-term interest rates. As these shorter duration obligations mature, the Company may issue additional short-term commercial paper obligations to refinance all or part of these borrowings, to the extent commercial paper markets are available. In 2020, the average annual interest rate associated with the Company’s outstanding commercial paper borrowings was approximately negative 6 basis points. A hypothetical increase of this average to positive 13 basis points would have increased the Company’s annual interest expense by $5 million. The hypothetical increase used is the actual amount by which the Company’s commercial paper interest rates fluctuated during 2020.
Refer to “Results of Operations—Interest Costs” for discussion of the Company’s cross-currency swap derivative contracts and interest rate swap agreements.
Currency Exchange Rate Risk
The Company faces transactional exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than Danaher’s functional currency or the functional currency of its applicable subsidiary. The Company also faces translational exchange rate risk related to the translation of financial statements of its foreign operations into U.S. dollars, Danaher’s functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, the Company is exposed to movements in the exchange rates of various currencies against the U.S. dollar. In particular, the Company has more sales in European currencies than it has expenses in those currencies. Therefore, when European currencies strengthen or weaken against the U.S. dollar, operating profits are increased or decreased, respectively. The effect of a change in currency exchange rates on the Company’s net investment in international subsidiaries is reflected in the accumulated other comprehensive income (loss) component of stockholders’ equity.
Currency exchange rates did not have a significant impact on 2020 reported sales on a year-over-year basis. If the currency exchange rates in effect as of December 31, 2020 were to prevail throughout 2021, currency exchange rates would increase 2021 estimated sales relative to 2020 sales by approximately 3.0%. Strengthening of the U.S. dollar against other major currencies compared to the exchange rates in effect as of December 31, 2020 would adversely impact the Company’s sales and results of operations on an overall basis. Any weakening of the U.S. dollar against other major currencies compared to the exchange rates in effect as of December 31, 2020 would positively impact the Company’s sales and results of operations.
The Company has generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this transactional exchange risk, although the Company has used foreign currency-denominated debt and cross-currency swaps to hedge a portion of its net investments in foreign operations against adverse movements in exchange rates. Both positive and negative movements in currency exchange rates against the U.S. dollar will continue to affect the reported amount of sales and net earnings in the Company’s Consolidated Financial Statements. In addition, the Company has assets and liabilities held in foreign currencies. A 10% depreciation in major currencies relative to the U.S. dollar as of December 31,
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2020 would have reduced foreign currency-denominated net assets and stockholders’ equity by approximately $1.5 billion. As of December 31, 2020, the Company had $2.0 billion of cross-currency swap derivative contracts outstanding as hedges of its net investment in foreign operations. These contracts effectively convert the Company’s U.S. dollar-denominated bonds to obligations denominated in Danish kroner, Japanese yen, euro and Swiss franc, and partially offset the impact of changes in currency rates on foreign currency-denominated net assets during the term of the swap. The Company also uses cross-currency swap derivative contracts to hedge U.S. dollar-denominated long-term debt issuances in a foreign subsidiary whose functional currency is the euro against adverse movements in exchange rates between the U.S. dollar and the euro. For a further description of the Company’s cross-currency swap derivative contracts as of December 31, 2020 refer to Note 12 to the Consolidated Financial Statements.
Equity Price Risk
The Company’s investment portfolio from time to time includes publicly-traded equity securities that are sensitive to fluctuations in market price, though as of December 31, 2020, the Company held no available-for-sale marketable equity securities. The Company holds non-marketable equity investments in privately held companies that may be impacted by equity price risks. These non-marketable equity investments are accounted for under the Fair Value Alternative method with changes in fair value recorded in earnings. Volatility in the equity markets or other fair value considerations could affect the value of these investments and require charges or gains to be recognized in earnings.
Commodity Price Risk
For a discussion of risks relating to commodity prices, refer to “Item 1A. Risk Factors.”
Credit Risk
The Company is exposed to potential credit losses in the event of nonperformance by counterparties to its financial instruments. Financial instruments that potentially subject the Company to credit risk consist of cash and temporary investments, receivables from customers and derivatives. The Company places cash and temporary investments with various high-quality financial institutions throughout the world and exposure is limited at any one institution. Although the Company typically does not obtain collateral or other security to secure these obligations, it does regularly monitor the third-party depository institutions that hold its cash and cash equivalents. The Company’s emphasis is primarily on safety and liquidity of principal and secondarily on maximizing yield on those funds.
In addition, concentrations of credit risk arising from receivables from customers are limited due to the diversity of the Company’s customers. The Company’s businesses perform credit evaluations of their customers’ financial conditions as deemed appropriate and also obtain collateral or other security when deemed appropriate.
The Company enters into derivative transactions infrequently and typically with high-quality financial institutions, so that exposure at any one institution is limited.
LIQUIDITY AND CAPITAL RESOURCES
Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company continues to generate substantial cash from operating activities and believes that its operating cash flow and other sources of liquidity will be sufficient to allow it to continue investing in existing businesses, consummating strategic acquisitions and investments, paying interest and servicing debt, funding restructuring activities and managing its capital structure on a short and long-term basis.
Notwithstanding the foregoing, the Company continues to monitor the impact of the COVID-19 pandemic on the Company’s liquidity and capital resources and has taken actions intended to mitigate adverse impacts. Historically, the Company has generally relied on borrowings under its commercial paper program to address liquidity requirements that exceed the capacity provided by its operating cash flows and cash on hand, while also accessing the capital markets from time to time to secure financing for more significant acquisitions. The COVID-19 pandemic adversely affected the availability of new borrowings in the commercial paper markets at times during 2020. Therefore, in the first half of 2020, the Company engaged in the following financing transactions:
•The Company borrowed $2.5 billion under the Five-Year Facility and $2.5 billion under the Superseded 364-Day Facility for general corporate purposes (including payment of a portion of the purchase price for the Cytiva Acquisition and repayment of certain commercial paper obligations as they matured). The Company replaced the Superseded 364-Day Facility with a new $2.5 billion 364-Day Facility, which was terminated on December 31, 2020. All amounts borrowed under the credit facilities referenced above were repaid in 2020. As of December 31, 2020,
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after taking into account amounts backstopping outstanding commercial paper, the Company had availability under the Five-Year Credit Facility of approximately $4.4 billion for direct borrowings or to backstop the issuance of additional commercial paper to the extent available.
•The Company issued approximately €2.5 billion (approximately $2.7 billion based on currency exchange rates as of the respective dates of the pricing of the notes) aggregate principal amount of euro-denominated senior unsecured notes, the proceeds of which have been and are being used for general corporate purposes (including repayment of the borrowings under the Superseded 364-Day Facility and the Five-Year Facility, and repayment of certain commercial paper obligations as they mature).
•The Company completed the 2020 Common Stock Offering and 2020 MCPS Offering and received net proceeds of approximately $1.73 billion and $1.67 billion, respectively, which have been and will be used for general corporate purposes.
•In October 2020, the Company issued $1.0 billion aggregate principal amount of U.S. dollar-denominated senior unsecured notes, the proceeds of which have been and will be used for general corporate purposes, including the redemption of the 2022 Euronotes in the fourth quarter of 2020.
Following is an overview of the Company’s cash flows and liquidity for the years ended December 31:
Overview of Cash Flows and Liquidity
Payments for additions to property, plant and equipment (791) (636) (584)
Proceeds from sales of property, plant and equipment 2 13 6
Payments for purchases of investments (342) (241) (146)
Proceeds from sales of investments 13 — 22
Proceeds from sale of product lines 826 — —
All other investing activities 24 29 1
Total investing cash used in discontinued operations — (72) (75)
Net cash used in investing activities $ (21,239) $ (1,238) $ (2,949)
Proceeds from borrowings (maturities longer than 90 days) 8,670 12,113 —
Repayments of borrowings (maturities longer than 90 days) (5,933) (1,565) (508)
Make-whole premiums to redeem borrowings prior to maturity (26) (7) —
All other financing activities (3) (43) (18)
Cash distributions to Envista Holdings Corporation, net — (224) —
Net cash provided by (used in) financing activities $ 1,006 $ 16,365 $ (797)
•Operating cash flows from continuing operations increased approximately $2.6 billion, or approximately 70%, during 2020 as compared to 2019, due to higher net earnings (and excluding noncash impairment charges and fair value adjustments related to certain long-lived assets in 2020, noncash charges for depreciation, amortization and stock compensation in both periods, and noncash discrete tax charges in 2019), higher cash provided by trade accounts payable, prepaid expenses and other assets, and accrued expenses and other liabilities during the 2020 period
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compared to the prior year, partially offset by higher cash used for trade accounts receivable and inventories in 2020 compared to the prior year.
•Net cash used in investing activities increased approximately $20.0 billion during 2020 as compared to 2019 and consisted primarily of cash paid for acquisitions, primarily the Cytiva Acquisition, and to a lesser extent investments. Refer to Notes 3 and 9 to the Consolidated Financial Statements included in this Annual Report for a discussion of the Company’s acquisitions and investments.
•Refer to the discussion at the beginning of the “Liquidity and Capital Resources” section for a summary of the Company’s 2020 financing activities.
•As of December 31, 2020, the Company held approximately $6.0 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 and productivity improvement initiatives, pension funding and other items impact reported cash flows.
Operating cash flows from continuing operations were approximately $6.2 billion for 2020, an increase of approximately $2.6 billion, or approximately 70%, as compared to 2019. The year-over-year change in operating cash flows from 2019 to 2020 was primarily attributable to the following factors:
•2020 operating cash flows benefited from higher net earnings in 2020 as compared to 2019. Partially offsetting the impact of this increase is the fact that 2019 net earnings from continuing operations included $215 million of net discrete noncash tax charges compared to a net discrete noncash tax benefit of $85 million in 2020. In addition, net earnings from continuing operations in 2020 included $22 million of noncash impairment charges and $6 million of fair value adjustment gains related to certain long-lived assets and investments. These noncash charges and gains impacted earnings without a corresponding impact to operating cash flows.
•Net earnings for 2020 reflected an increase of approximately $1.1 billion of depreciation, amortization (intangible assets and inventory step-up) and stock compensation expense as compared to 2019. Amortization expense primarily relates to the amortization of intangible assets and inventory fair value adjustments. Depreciation expense relates to both the Company’s manufacturing and operating facilities as well as instrumentation leased to customers under operating-type lease arrangements. The increase in depreciation and amortization in 2020 compared to 2019 is primarily due to the Cytiva Acquisition in 2020. Depreciation, amortization and stock compensation are noncash expenses that decrease earnings without a corresponding impact to operating cash flows.
•The aggregate of trade accounts receivable, inventories and trade accounts payable used $160 million in operating cash flows during 2020, compared to $161 million of operating cash flows used in 2019. The amount of cash flow generated from or used by the aggregate of trade accounts receivable, inventories and trade accounts payable depends upon how effectively the Company manages the cash conversion cycle, which effectively represents the number of days that elapse from the day it pays for the purchase of raw materials and components to the collection of cash from its customers and can be significantly impacted by the timing of collections and payments in a period.
•The aggregate of prepaid expenses and other assets, deferred income taxes and accrued expenses and other liabilities provided $765 million in operating cash flows during 2020, compared to $38 million provided in 2019. The timing of cash payments for taxes, various employee-related liabilities, customer funding and accrued expenses drove the majority of this change.
Investing Activities
Cash flows relating to investing activities consist primarily of cash used for acquisitions and capital expenditures, including instruments leased to customers, cash used for investments and cash proceeds from divestitures of businesses or assets.
Net cash used in investing activities was approximately $21.2 billion during 2020 compared to approximately $1.2 billion of net cash used in 2019.
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Acquisitions, Divestitures and Sale of Investments
For a discussion of the Company’s 2020 acquisitions and divestitures refer to “—Overview” and Note 3 to the Consolidated Financial Statements. In addition, in 2020 and 2019, the Company invested $342 million and $241 million, respectively, in non-marketable equity securities and partnerships.
During 2019, the Company acquired five businesses for total consideration of $331 million 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 these businesses at the time of their acquisition, in each case based on the companies’ revenues for its last completed fiscal year prior to the acquisition, were $72 million.
Refer to Note 4 to the Consolidated Financial Statements for additional information regarding the Company’s transfer of its former dental business to Envista Holdings Corporation.
Capital Expenditures
Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development, improving information technology systems and the manufacture of instruments that are used in operating-type lease arrangements that certain of the Company’s businesses enter into with customers. Capital expenditures totaled $791 million in 2020 and $636 million in 2019. The year-over-year increase in capital spending in 2020 was primarily due to capital expenditures to support production of products supporting customers’ efforts related to testing, treatment and vaccine production for COVID-19 and capital expenditures at Cytiva, partially offset by declines in expenditures for instruments used in OTL arrangements. In 2021, the Company expects to incur higher capital spending than the prior year, to primarily support production of products related to testing, treatment and vaccine production for COVID-19. The Company’s actual expenditures will ultimately depend on business conditions, including demand for the Company’s products related to COVID-19, regulatory requirements, and the capability of suppliers to support increased production. As a result, the Company estimates capital expenditures in 2021 to be between approximately $1.0 billion and $1.2 billion.
Financing Activities
Cash flows from financing activities consist primarily of cash flows associated with the issuance and repayments of commercial paper, issuance and repayment of long-term debt, issuance and repurchases of common stock, issuance of preferred stock and payments of cash dividends to shareholders. Financing activities provided cash of approximately $1.0 billion during 2020 compared to approximately $16.4 billion of cash provided during 2019. The year-over-year decrease in cash provided by financing activities was due primarily to the significant borrowings incurred in 2019 to finance the Cytiva Acquisition, partially offset by borrowings incurred in 2020 to finance the remaining amounts needed to acquire Cytiva and for general corporate purposes.
Total debt was approximately $21.2 billion and $21.7 billion as of December 31, 2020 and 2019, respectively, and notes payable and current portion of long-term debt was $11 million and $212 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020 the Company had the ability to incur approximately $4.4 billion of additional indebtedness in direct borrowings or under the outstanding commercial paper facilities based on the amounts available under the Company’s $5.0 billion Five-Year Facility which were not being used to backstop outstanding commercial paper balances. As of December 31, 2020, the Company has classified $611 million of its borrowings outstanding under the euro-denominated commercial paper program and $290 million of borrowings outstanding under the 2021 Yen Notes as long-term debt in the accompanying Consolidated Balance Sheet as the Company has the intent and ability, as supported by availability under the Five-Year Facility, to refinance these borrowings for at least one year from the balance sheet date. As commercial paper obligations mature, the Company may issue additional short-term commercial paper obligations to refinance all or part of these borrowings, to the extent commercial paper markets are available.
Under the Company’s U.S. and euro-denominated commercial paper program, the notes are typically issued at a discount from par, generally based on the ratings assigned to the Company by credit rating agencies at the time of the issuance and prevailing market rates measured by reference to LIBOR or EURIBOR. Additionally, the Company’s floating rate senior unsecured notes due 2022 pay interest based upon the three-month EURIBOR plus 0.3%. In July 2017, the head of the United Kingdom Financial Conduct Authority announced the intent to phase out the use of LIBOR by the end of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities. The Company has evaluated the anticipated impact of the transition from LIBOR and does not expect the transition to be material to the Company’s financial position.
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Refer to Note 11 to the Consolidated Financial Statements for additional information regarding the Company’s financing activities and indebtedness, including the Company’s outstanding debt as of December 31, 2020, and the Company’s commercial paper program and Five-Year Facility.
Common Stock Offering and MCPS Offering
For a description of the 2019 Common Stock and MCPS Series A Offerings and the 2020 Common Stock and MCPS Series B Offerings, refer to Note 19 to the Consolidated Financial Statements.
Shelf Registration Statement
The Company has filed a “well-known seasoned issuer” shelf registration statement on Form S-3 with the SEC that registers an indeterminate amount of debt securities, common stock, preferred stock, warrants, depositary shares, purchase contracts and units for future issuance. The Company expects to use net proceeds realized by the Company from future securities sales off this shelf registration statement for general corporate purposes, including without limitation repayment or refinancing of debt or other corporate obligations, acquisitions, capital expenditures, share repurchases and dividends and/or working capital.
Stock Repurchase Program
Please see Note 19 to the Consolidated Financial Statements for a description of the Company’s stock repurchase program.
Dividends
The Company declared a regular quarterly dividend of $0.18 per share of Company common stock that was paid on January 29, 2021 to holders of record on December 28, 2020. In addition, the Company declared quarterly cash dividends of $11.875 per MCPS Series A and $12.50 per MCPS Series B that were paid on January 15, 2021 to holders of record as of December 31, 2020. Aggregate 2020 and 2019 cash payments for dividends on Company common stock were $500 million and $478 million, respectively, and aggregate 2020 and 2019 cash payments for the dividends on the Company’s MCPS were $115 million and $49 million, respectively. The year-over-year increase in dividend payments in 2020 primarily relates to dividends paid on the MCPS Series A and MCPS Series B, which were issued in March 2019 and May 2020, respectively, and an increase in the quarterly dividend rate on common stock effective with respect to the dividend paid in the second quarter of 2020.
Cash and Cash Requirements
As of December 31, 2020, the Company held approximately $6.0 billion of cash and cash equivalents that were on deposit with financial institutions or invested in highly liquid investment-grade debt instruments with a maturity of 90 days or less with an approximate weighted average annual interest rate of 0.2%. Of this amount, approximately $1.5 billion was held within the United States and approximately $4.5 billion was held outside of the United States. The Company will continue to have cash requirements to support working capital needs, capital expenditures, acquisitions and investments, pay interest and service debt, pay taxes and any related interest or penalties, fund its restructuring activities and pension plans as required, pay dividends to shareholders, repurchase shares of the Company’s common stock as applicable and support other business needs. The Company generally intends to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions, the Company may also borrow under its commercial paper programs or 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 program and/or issue debt and/or equity in the capital markets, in each case to the extent such sources of capital remain available. The Company also may from time to time access the capital markets to take advantage of favorable interest rate environments or other market conditions.
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 TCJA 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. jurisdictional taxes on distributions. The cash that the Company’s non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations, investments and acquisitions. The income taxes applicable to repatriating such earnings are not readily determinable. As of December 31, 2020, principally all of the Company’s non-U.S. earnings are indefinitely reinvested and management believes that the Company has sufficient liquidity to satisfy its cash needs, including its cash needs in the United States.
During 2020, the Company contributed $140 million to its U.S. defined benefit pension plans and $51 million to its non-U.S. defined benefit pension plans. During 2021, the Company’s cash contribution requirements for its U.S. and its non-U.S. defined benefit pension plans are expected to be approximately $10 million and $44 million, respectively. The ultimate
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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.
Contractual and Other Obligations
For a description of the Company’s debt and lease obligations, commitments, and litigation and contingencies, refer to Notes 5, 11, 17, and 18 to the Consolidated Financial Statements.
Legal Proceedings
Refer to “Item 3. Legal Proceedings” and Note 18 to the Consolidated Financial Statements for information regarding legal proceedings and contingencies, and for a discussion of risks related to legal proceedings and contingencies, refer to “Item 1A. Risk Factors.”
CRITICAL ACCOUNTING ESTIMATES
Management’s discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases these estimates and judgments on historical experience, the current economic environment and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates and judgments.
The Company believes the following accounting estimates are most critical to an understanding of its financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the estimate is made, and (2) material changes in the estimate are reasonably likely from period-to-period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 1 to the Consolidated Financial Statements.
Acquired Intangibles—The Company’s business acquisitions, including the Cytiva Acquisition, typically result in the recognition of goodwill, developed technology and other intangible assets, which affect the amount of future period amortization expense and possible impairment charges that the Company may incur. The fair values of acquired intangibles are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”), growth rates, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. The Company engages third-party valuation specialists who review the Company’s critical assumptions and calculations of the fair value of acquired intangible assets in connection with significant acquisitions. In connection with acquisitions during the year ended December 31, 2020, the Company recognized aggregate goodwill of approximately $10.4 billion and intangible assets of approximately $10.7 billion. Refer to Notes 1, 3 and 8 to the Consolidated Financial Statements for a description of the Company’s policies relating to goodwill, acquired intangibles and acquisitions.
In performing its goodwill impairment testing, the Company estimates the fair value of its reporting units primarily using a market-based approach which relies on current trading multiples of forecasted EBITDA for companies operating in businesses similar to each of the Company’s reporting units to calculate an estimated fair value of each reporting unit. In evaluating the estimates derived by the market-based approach, management makes judgments about the relevance and reliability of the multiples by considering factors unique to its reporting units, including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data as well as judgments about the comparability of the market proxies selected. There are inherent uncertainties related to these assumptions and management’s judgment in applying them to the analysis of goodwill impairment.
As of December 31, 2020, the Company had five reporting units for goodwill impairment testing. Reporting units resulting from recent acquisitions generally present the highest risk of impairment. Management believes the impairment risk associated with these reporting units generally decreases as these businesses are integrated into the Company and better positioned for potential future earnings growth. The Company’s annual goodwill impairment analysis in 2020 indicated that in all instances, the fair values of the Company’s reporting units exceeded their carrying values and consequently did not result in an impairment charge. The excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of the Company’s reporting units as of the annual testing date ranged from approximately 80% to approximately 695%. In order to evaluate the sensitivity of the fair value calculations used in the goodwill impairment
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test, the Company applied a hypothetical 10% decrease to the fair values of each reporting unit and compared those hypothetical values to the reporting unit carrying values. Based on this hypothetical 10% decrease, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of the Company’s reporting units ranged from approximately 60% to approximately 615%.
The Company reviews identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred for finite-lived intangibles requires a comparison of the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. These analyses require management to make judgments and estimates about future revenues, expenses, market conditions and discount rates related to these assets. Indefinite-lived intangibles are subject to impairment testing at least annually or more frequently if events or changes in circumstances indicate that potential impairment exists. Determining whether an impairment loss occurred for indefinite-lived intangible assets involves calculating the fair value of the indefinite-lived intangible assets and comparing the fair value to their carrying value. If the fair value is less than the carrying value, the difference is recorded as an impairment loss. Refer to Note 8 to the Consolidated Financial Statements for a description of intangible assets impairment charges recorded during 2020.
If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may be overstated and a charge would need to be taken against net earnings which would adversely affect the Company’s financial statements. Historically, the Company’s estimates of goodwill and intangible assets have been materially correct.
Contingent Liabilities—As discussed in “Item 3. Legal Proceedings” and Note 18 to the Consolidated Financial Statements, the Company is, from time to time, subject to a variety of litigation and similar contingent liabilities incidental to its business (or the business operations of previously owned entities). The Company recognizes a liability for any legal contingency that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors, including those discussed in Note 18 to the Consolidated Financial Statements. If the reserves established by the Company with respect to these contingent liabilities are inadequate, the Company would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect the Company’s financial statements.
Revenue Recognition—The Company derives revenues from the sale of products and services. Revenue is recognized when control over the promised products or services is transferred to the customer in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. In determining if control has transferred, the Company considers whether certain indicators of the transfer of control are present, such as the transfer of title, present right to payment, significant risks and rewards of ownership and customer acceptance when acceptance is not a formality. To determine the consideration that the customer owes the Company, the Company must make judgments regarding the amount of customer allowances and rebates, as well as an estimate for product returns. The Company also enters into lease arrangements with customers which requires the Company to determine whether the arrangements are operating or sales-type leases. Refer to Notes 1 and 2 to the Consolidated Financial Statements for a description of the Company’s revenue recognition policies.
If the Company’s judgments regarding revenue recognition prove incorrect, the Company’s reported revenues in particular periods may be incorrect. Historically, the Company’s estimates of revenue have been materially correct.
Pension and Other Postretirement Benefits—For a description of the Company’s pension and other postretirement benefit accounting practices, refer to Notes 13 and 14 to the Consolidated Financial Statements. Calculations of the amount of pension and other postretirement benefit costs and obligations depend on the assumptions used in the actuarial valuations, including assumptions regarding discount rates, expected return on plan assets, rates of salary increases, health care cost trend rates, mortality rates and other factors. If the assumptions used in calculating pension and other postretirement benefits costs and obligations are incorrect or if the factors underlying the assumptions change (as a result of differences in actual experience, changes in key economic indicators or other factors) the Company’s financial statements could be materially affected. A 50 basis point reduction in the discount rates used for the plans would have increased the U.S. net obligation by $144 million ($110 million on an after-tax basis) and the non-U.S. net obligation by $191 million ($147 million on an after-tax basis) from the amounts recorded in the Consolidated Financial Statements as of December 31, 2020. A 50 basis point increase in the discount rates used for the plans would have decreased the U.S. net obligation by $133 million ($101 million on an after-tax basis) and the non-U.S. net obligation by $175 million ($135 million on an after-tax basis) from the amounts recorded in the Consolidated Financial Statements as of December 31, 2020.
For 2020, the estimated long-term rate of return for the U.S. plans was 7.0%, and the Company intends to use an assumption of 6.75% for 2021. The estimated long-term rate of return for the non-U.S. plans was determined on a plan-by-plan basis based on
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the nature of the plan assets and ranged from 0.5% to 5.0%. If the expected long-term rate of return on plan assets for 2020 was reduced by 50 basis points, pension expense for the U.S. and non-U.S. plans for 2020 would have increased $9 million ($7 million on an after-tax basis) and $6 million ($4 million on an after-tax basis), respectively.
For a discussion of the Company’s 2020 and anticipated 2021 defined benefit pension plan contributions, refer to “—Liquidity and Capital Resources—Cash and Cash Requirements”.
Income Taxes—For a description of the Company’s income tax accounting policies, refer to Notes 1 and 15 to the Consolidated Financial Statements. The Company establishes valuation allowances for its deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. This requires management to make judgments and estimates regarding: (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies. Future changes to tax rates would also impact the amounts of deferred tax assets and liabilities and could have an adverse impact on the Company’s financial statements.
The Company provides for unrecognized tax benefits when, based upon the technical merits, it is “more likely than not” that an uncertain tax position will not be sustained upon examination. Judgment is required in evaluating tax positions and determining income tax provisions. The Company re-evaluates the technical merits of its tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (1) a tax audit is completed; (2) applicable tax laws change, including a tax case ruling or legislative guidance; or (3) the applicable statute of limitations expires.
In addition, certain of the Company’s tax returns are currently under review by tax authorities including in Denmark and the United States (refer to “—Results of Operations—Income Taxes” and Note 15 to the Consolidated Financial Statements). Management believes the positions taken in these returns are in accordance with the relevant tax laws. However, the outcome of these audits is uncertain and could result in the Company being required to record charges for prior year tax obligations which could have a material adverse impact to the Company’s financial statements, including its effective tax rate.
An increase of 1.0% in the Company’s 2020 nominal tax rate would have resulted in an additional income tax provision for continuing operations for the year ended December 31, 2020 of $45 million.
NEW ACCOUNTING STANDARDS
For a discussion of the new accounting standards impacting the Company, refer to Note 1 to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management on Danaher Corporation’s Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework” (2013 framework). Based on this assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting is effective.
The Company completed the acquisition of Cytiva on March 31, 2020. Since the Company has not yet fully incorporated the internal controls and procedures of Cytiva into the Company’s internal control over financial reporting, management excluded Cytiva from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. Cytiva constituted 36% of the Company’s total assets as of December 31, 2020 and 15% of the Company’s total revenues for the year then ended.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report dated February 24, 2021 appears on pages 60-61 of this Form 10-K.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Danaher Corporation
Opinion on Internal Control over Financial Reporting
We have audited Danaher Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Danaher Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
As indicated in the accompanying Report of Management on Danaher Corporation’s Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Cytiva, which is included in the 2020 consolidated financial statements of the Company and constituted 36% of total assets as of December 31, 2020 and 15% of the Company’s total revenue for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Cytiva.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Danaher Corporation’s Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 24, 2021
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Danaher Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Danaher Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Uncertain Tax Positions
Accounting for the Acquisition of Cytiva
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Tysons, Virginia
February 24, 2021
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DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in millions, except per share amount)
As of December 31
ASSETS
Current assets:
Prepaid expenses and other current assets 1,430 865
Property, plant and equipment, net 3,262 2,302
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 11 $ 212
Accrued expenses and other liabilities 5,342 3,205
Stockholders’ equity:
Accumulated other comprehensive income (loss) (368) (3,068)
Noncontrolling interests 11 11
Total liabilities and stockholders’ equity $ 76,161 $ 62,082
See the accompanying Notes to the Consolidated Financial Statements.
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DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
Year Ended December 31
Operating costs:
Selling, general and administrative expenses (6,896) (5,589) (5,391)
Nonoperating income (expense):
Other income (expense), net 39 12 35
Gain on sale of product lines 455 — —
Loss on early extinguishment of borrowings (26) (7) —
Earnings from continuing operations before income taxes 4,495 3,305 2,962
Earnings from discontinued operations, net of income taxes — 576 245
Mandatory convertible preferred stock dividends (136) (68) —
Net earnings attributable to common stockholders $ 3,510 $ 2,940 $ 2,651
Net earnings per common share from continuing operations:
Net earnings per common share from discontinued operations:
Net earnings per common share:
Average common stock and common equivalent shares outstanding:
* Net earnings per common share amount does not add due to rounding.
See the accompanying Notes to the Consolidated Financial Statements.
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DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
Year Ended December 31
Other comprehensive income (loss), net of income taxes:
Foreign currency translation adjustments 2,918 (75) (632)
Pension and postretirement plan benefit adjustments (147) (90) (13)
Unrealized gain (loss) on available-for-sale securities 1 1 (1)
Cash flow hedge adjustments (72) (113) —
Total other comprehensive income (loss), net of income taxes 2,700 (277) (646)
See the accompanying Notes to the Consolidated Financial Statements.
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DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
($ in millions)
Year Ended December 31
Preferred stock:
Balance, beginning of period $ 1,600 $ — $ —
Issuance of Mandatory Convertible Preferred Stock 1,668 1,600 —
Balance, end of period $ 3,268 $ 1,600 $ —
Common stock:
Balance, beginning of period $ 8 $ 8 $ 8
Common stock-based award activity 1 — —
Issuance of common stock — — —
Balance, end of period $ 9 $ 8 $ 8
Additional paid-in capital:
Common stock issued in connection with acquisitions — — 24
Common stock issued in connection with LYONs’ conversions 53 33 19
Sale of Envista Holdings Corporation common stock — (60) —
Retained earnings:
Adoption of accounting standards (8) — 154
Common stock dividends declared (509) (484) (449)
Mandatory Convertible Preferred Stock dividends declared (136) (68) —
Accumulated other comprehensive income (loss):
Adoption of accounting standards — — (151)
Other comprehensive income (loss) 2,700 (277) (646)
Noncontrolling interests:
Balance, beginning of period $ 11 $ 12 $ 10
Activity related to Envista Holdings Corporation — (3) —
Change in noncontrolling interests — 2 2
Balance, end of period $ 11 $ 11 $ 12
See the accompanying Notes to the Consolidated Financial Statements.
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DANAHER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Year Ended December 31
Cash flows from operating activities:
Less: earnings from discontinued operations, net of income taxes — 576 245
Noncash items:
Amortization of acquisition-related inventory fair value step-up 457 — —
Pretax gain on sale of product lines (455) — —
Change in deferred income taxes 518 (415) (252)
Change in trade accounts receivable, net (264) (157) (55)
Change in trade accounts payable 227 18 229
Change in prepaid expenses and other assets 102 48 78
Change in accrued expenses and other liabilities 145 405 56
Total operating cash provided by continuing operations 6,215 3,657 3,644
Total operating cash (used in) provided by discontinued operations (7) 295 378
Cash flows from investing activities:
Payments for additions to property, plant and equipment (791) (636) (584)
Proceeds from sales of property, plant and equipment 2 13 6
Payments for purchases of investments (342) (241) (146)
Proceeds from sales of investments 13 — 22
Proceeds from sale of product lines 826 — —
All other investing activities 24 29 1
Total investing cash used in continuing operations (21,239) (1,166) (2,874)
Total investing cash used in discontinued operations — (72) (75)
Cash flows from financing activities:
Proceeds from borrowings (maturities longer than 90 days) 8,670 12,113 —
Repayments of borrowings (maturities longer than 90 days) (5,933) (1,565) (508)
Make-whole premiums to redeem borrowings prior to maturity (26) (7) —
All other financing activities (3) (43) (18)
Cash distributions to Envista Holdings Corporation, net — (224) —
Net cash provided by (used in) financing activities 1,006 16,365 (797)
Effect of exchange rate changes on cash and equivalents 148 45 (118)
Beginning balance of cash and equivalents 19,912 788 630
Ending balance of cash and equivalents $ 6,035 $ 19,912 $ 788
Supplemental disclosure:
See the accompanying Notes to the Consolidated Financial Statements.
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DANAHER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business—Danaher Corporation (“Danaher” or the “Company”) designs, manufactures and markets professional, medical, industrial and commercial products and services, which are typically characterized by strong brand names, innovative technology and major market positions. As of December 31, 2020, the Company operates in three business segments: Life Sciences; Diagnostics; and Environmental & Applied Solutions.
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.
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.
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.
Refer to Notes 3 and 4 for a discussion of significant acquisitions, discontinued operations and other dispositions.
Accounting Principles—The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. The Consolidated Financial Statements also reflect the impact of noncontrolling interests. Noncontrolling interests do not have a significant impact on the Company’s consolidated results of continuing operations, therefore earnings attributable to noncontrolling interests for continuing operations are not presented separately in the Company’s Consolidated Statements of Earnings. Earnings attributable to noncontrolling interests have been reflected in selling, general and administrative expenses and were insignificant in all periods presented. Reclassifications of certain prior year amounts have been made to conform to the current year presentation.
Use of Estimates—The preparation of these financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases these estimates on historical experience, the current economic environment and on various other assumptions that are believed to be reasonable under the circumstances. However, uncertainties associated with these estimates exist and actual results may differ materially from these estimates.
Cash and Equivalents—The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Accounts Receivable and Allowances for Doubtful Accounts—All trade accounts, contract and finance receivables are reported on the accompanying Consolidated Balance Sheets adjusted for any write-offs and net of allowances for doubtful accounts. The allowances for doubtful accounts represent management’s best estimate of the expected future credit losses from the Company’s trade accounts, contract and finance receivable portfolios. Determination of the allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, therefore, net earnings. The Company regularly performs detailed reviews of its portfolios to determine if an impairment has occurred and evaluates the collectability of receivables based on a combination of various financial and qualitative factors that may affect customers’ ability to pay, including customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected. Additions to the allowances for doubtful accounts are charged to current period earnings, amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered on previously written-off accounts increase the allowances. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves would be
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required. The Company does not believe that trade accounts receivable represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographical areas. On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses(Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective transition method and recorded a net increase to the allowance for doubtful accounts of $10 million due to the cumulative impact of adoption. As a result of the adoption of the ASU, the Company’s allowance for doubtful accounts as of December 31, 2020 reflects the Company’s best estimate of the expected future losses for its accounts receivables based on economic conditions; however, as a result of the uncertainty caused by the coronavirus (COVID-19) pandemic and other factors, these estimates may change and future actual losses may differ from the Company’s estimates. The Company will continue to monitor economic conditions and will revise the estimates of the expected future losses for accounts receivable as necessary. The Company recorded $31 million, $30 million and $31 million of expense associated with doubtful accounts for the years ended December 31, 2020, 2019 and 2018, respectively.
Included in the Company’s trade accounts receivable and other long-term assets as of December 31, 2020 and 2019 are $254 million and $244 million of net aggregate financing receivables, respectively. All financing receivables are evaluated for impairment based on individual customer credit profiles.
Inventory Valuation—Inventories include the costs of material, labor and overhead. Domestic inventories are stated at the lower of cost and net realizable value primarily using the first-in, first-out (“FIFO”) method with certain businesses applying the last-in, first-out method (“LIFO”) to value inventory. Inventories held outside the United States are stated at the lower of cost or market primarily using the FIFO method.
Property, Plant and Equipment—Property, plant and equipment are carried at cost. The provision for depreciation has been computed principally by the straight-line method based on the estimated useful lives of the depreciable assets as follows:
Category Useful Life
Buildings 30 years
Machinery and equipment 3 – 10 years
Customer-leased instruments 5 – 7 years
Estimated useful lives are periodically reviewed and, when appropriate, changes to estimates are made prospectively.
Investments—Investments over which the Company has a significant influence but not a controlling interest, are accounted for using the equity method of accounting which requires the Company to record its initial investment at cost and adjust the balance each period for the Company’s share of the investee’s income or loss and dividends paid. The Company also invests in start-up companies where the Company has neither control of nor significant influence over the investee. The Company measures these non-marketable equity securities at fair value and recognizes changes in fair value in net earnings. For securities without readily available fair values, the Company has elected the measurement alternative to record these investments at cost and to adjust for impairments and observable price changes with a same or similar security from the same issuer within net earnings (the “Fair Value Alternative”). Additionally, the Company is a limited partner in a partnership that invests in start-up companies. While the partnership records these investments at fair value, the Company’s investment in the partnership is accounted for under the equity method of accounting. The Company made minority investments in non-marketable equity securities and equity method investments totaling $342 million in 2020 and $241 million in 2019, including investments in a partnership of $172 million in 2020 and $189 million in 2019. During 2020, the Company recorded net realized and unrealized gains of $18 million, related to changes in the fair value of these investments which is reflected in other income (expense), net, in the Consolidated Statement of Earnings. No significant realized or unrealized gains or losses were recorded in 2019 or 2018 with respect to these investments.
Other Assets—Other assets principally include noncurrent financing receivables, noncurrent deferred tax assets and other investments.
Fair Value of Financial Instruments—The Company’s financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, investments in equity securities, available-for-sale debt securities and cross-currency swaps, nonqualified deferred compensation plans, obligations under trade accounts payable and short and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable and trade accounts payable approximate fair value. Refer to Note 9 for the fair values of the Company’s investments in equity securities, available-for-sale debt securities and cross-currency swaps and other obligations.
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Goodwill and Other Intangible Assets—Goodwill and other intangible assets result from the Company’s acquisition of existing businesses. In accordance with accounting standards related to business combinations, goodwill is not amortized; however, certain finite-lived identifiable intangible assets, primarily customer relationships and acquired technology, are amortized over their estimated useful lives. Intangible assets with indefinite lives are not amortized. In-process research and development (“IPR&D”) is initially capitalized at fair value and when the IPR&D project is complete, the asset is considered a finite-lived intangible asset and amortized over its estimated useful life. If an IPR&D project is abandoned, an impairment loss equal to the value of the intangible asset is recorded in the period of abandonment. The Company reviews identified intangible assets and goodwill for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company also tests intangible assets with indefinite lives and goodwill for impairment at least annually. Refer to Notes 3 and 8 for additional information about the Company’s goodwill and other intangible assets.
Revenue Recognition—The Company derives revenues primarily from the sale of Life Sciences, Diagnostics and Environmental & Applied Solutions products and services. Revenue is recognized when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. For equipment, consumables and most software licenses sold by the Company, control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is not a formality, the customer must have accepted the product or service. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB Shipping Point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. If a performance obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition for that performance obligation is deferred until such commitments have been fulfilled. Returns for products sold are estimated and recorded as a reduction of revenue at the time of sale. Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are recorded as a reduction of revenue at the time of sale because these allowances reflect a reduction in the transaction price. Product returns, customer allowances and rebates are estimated based on historical experience and known trends. For extended warranty, service, post contract support (“PCS”), software-as-a-service (“SaaS”) and other long-term contracts, control transfers to the customer over the term of the arrangement. Revenue for extended warranty, service, PCS, SaaS and certain software licenses is recognized based upon the period of time elapsed under the arrangement. Revenue for other long-term contracts is generally recognized based upon the cost-to-cost measure of progress, provided that the Company meets the criteria associated with transferring control of the good or service over time.
Certain of the Company’s revenues relate to operating-type lease (“OTL”) arrangements. Leases are outside the scope of ASC 606 and are therefore accounted for in accordance with ASC 842, Leases (orASC 840, Leases (“ASC 840”) prior to January 1, 2019). Equipment lease revenue for OTL agreements is recognized on a straight-line basis over the life of the lease, and the cost of customer-leased equipment is recorded within property, plant and equipment in the accompanying Consolidated Balance Sheets and depreciated over the equipment’s estimated useful life. Depreciation expense associated with the leased equipment under OTL arrangements is reflected in cost of sales in the accompanying Consolidated Statements of Earnings. The OTLs are generally not cancellable until after an initial term and may or may not require the customer to purchase a minimum number of consumables or tests throughout the contract term. The Company also enters into sales-type lease (“STL”) arrangements with customers which result in earlier recognition of equipment lease revenue as compared to an OTL.
For a contract with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers; however, when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price. Allocation of the transaction price is determined at the contracts’ inception.
Shipping and Handling—Shipping and handling costs are included as a component of cost of sales. Revenue derived from shipping and handling costs billed to customers is included in sales.
Advertising—Advertising costs are expensed as incurred.
Research and Development—The Company conducts research and development activities for the purpose of developing new products, enhancing the functionality, effectiveness, ease of use and reliability of the Company’s existing products and
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expanding the applications for which uses of the Company’s products are appropriate. Research and development costs are expensed as incurred.
Income Taxes—The Company’s income tax expense represents the tax liability for the current year, the tax benefit or expense for the net change in deferred tax liabilities and assets during the year, as well as reserves for unrecognized tax benefits and return to provision adjustments. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the Company’s tax return in future years for which the tax benefit has already been reflected on the Company’s Consolidated Statements of Earnings. The Company establishes valuation allowances for its deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. Deferred tax liabilities generally represent items that have already been taken as a deduction on the Company’s tax return but have not yet been recognized as an expense in the Company’s Consolidated Statements of Earnings. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date. The Company provides for unrecognized tax benefits when, based upon the technical merits, it is “more likely than not” that an uncertain tax position will not be sustained upon examination. Judgment is required in evaluating tax positions and determining income tax provisions. The Company re-evaluates the technical merits of its tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (1) a tax audit is completed; (2) applicable tax laws change, including a tax case ruling or legislative guidance; or (3) the applicable statute of limitations expires. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions in income tax expense. Refer to Note 15 for additional information and discussion of the impact of the enactment of the Tax Cuts and Jobs Act (“TCJA”) in the United States.
Productivity Improvement and Restructuring—The Company periodically initiates productivity improvement and restructuring activities to appropriately position the Company’s cost base relative to prevailing economic conditions and associated customer demand as well as in connection with certain acquisitions. Costs associated with productivity improvement and restructuring actions can include one-time termination benefits and related charges in addition to facility closure, contract termination and other related activities. The Company records the cost of the productivity improvement and restructuring activities when the associated liability is incurred.
Foreign Currency Translation—Exchange rate adjustments resulting from foreign currency transactions are recognized in net earnings, whereas effects resulting from the translation of financial statements are reflected as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using year end exchange rates and income statement accounts are translated at weighted average rates. Net foreign currency transaction gains or losses were not material in any of the years presented. As discussed below, the Company uses its foreign currency-denominated debt and cross-currency swap arrangements whereby existing U.S. dollar-denominated borrowings are effectively converted to foreign currency borrowings to partially hedge its net investments in foreign operations against adverse movements in exchange rates.
Derivative Financial Instruments—The Company is neither a dealer nor a trader in derivative instruments. The Company has generally accepted the exposure to transactional exchange rate movements without using derivative instruments to manage this risk, although the Company from time to time partially hedges its net investments in foreign operations against adverse movements in exchange rates through foreign currency-denominated debt and cross-currency swaps. The Company will periodically enter into foreign currency forward contracts to mitigate a portion of its foreign currency exchange risk and forward starting swaps to mitigate interest rate risk related to the Company’s debt. The Company also uses cross-currency swap derivative contracts to hedge long-term debt issuances in a foreign currency other than the functional currency of the borrower. When utilized, the derivative instruments are recorded on the Consolidated Balance Sheets as either an asset or liability measured at fair value. To the extent the derivative instrument qualifies as an effective hedge, changes in fair value are recognized in accumulated other comprehensive income (loss) in stockholders’ equity. Changes in the value of the foreign currency denominated debt and cross-currency swaps designated as hedges of the Company’s net investment in foreign operations based on spot rates are recognized in accumulated other comprehensive income (loss) in stockholders’ equity and offset changes in the value of the Company’s foreign currency denominated operations. Refer to Note 12 for additional information.
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Accumulated Other Comprehensive Income (Loss)—Accumulated other comprehensive income (loss) refers to certain gains and losses that under U.S. GAAP are included in comprehensive income (loss) but are excluded from net earnings as these amounts are initially recorded as an adjustment to stockholders’ equity. Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions). Foreign currency translation adjustments generally relate to indefinite investments in non-U.S. subsidiaries, as well as the impact from the Company’s hedges of its net investment in foreign operations, including the Company’s cross-currency swap derivatives, net of any tax impacts.
Other comprehensive income (loss) before reclassifications:
Income tax impact — 9 — — 9
Amounts reclassified from accumulated other comprehensive income (loss):
Increase — 30 (a) — — 30
Income tax impact — (7) — — (7)
Other comprehensive income (loss) before reclassifications:
Amounts reclassified from accumulated other comprehensive income (loss):
Income tax impact — (9) — — (9)
Other comprehensive income (loss) before reclassifications:
Amounts reclassified from accumulated other comprehensive income (loss):
Income tax impact — (11) — (1) (12)
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension and postretirement cost (refer to Notes 13 and 14 for additional details).
(b) Reflects reclassification to earnings related to remeasurement of certain long-term debt (refer to Note 12 for additional details).
(c) Reflects reclassification to earnings related to the Envista Disposition (refer to Note 4 for additional details).
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Accounting for Stock-Based Compensation—The Company accounts for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted, including stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”), based on the fair value of the award as of the grant date. Equity-based compensation expense is recognized net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award, except that in the case of RSUs, compensation expense is recognized using an accelerated attribution method. Refer to Note 19 for additional information on the stock-based compensation plans in which certain employees of the Company participate.
Pension and Postretirement Benefit Plans—The Company measures its pension and postretirement plans’ assets and its obligations that determine the respective plan’s funded status as of the end of the Company’s fiscal year, and recognizes an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in its balance sheet. Changes in the funded status of the plans are recognized in the year in which the changes occur and reported in comprehensive income (loss). Refer to Notes 13 and 14 for additional information on the Company’s pension and postretirement plans including a discussion of the actuarial assumptions, the Company’s policy for recognizing the associated gains and losses and the method used to estimate service and interest cost components.
Accounting Standards Recently Adopted—In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU Update No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. On January 1, 2020, the Company adopted the ASU and the ASU did not have a significant impact on the Company’s Consolidated Financial Statements. Refer to Note 9 for the Company’s fair value measurement disclosures.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715, Compensation—Retirement Benefits, to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. Adoption of the ASU resulted in elimination of the following disclosures (a) the amounts expected to be amortized from accumulated other comprehensive income and reported as a component of net periodic benefit cost during the following fiscal year, and (b) the effects of a one-percentage-point change in the assumed health care cost trend rates on the aggregate projected service and interest cost and accumulated postretirement benefit obligation; and additional disclosures explaining the reasons for significant gains and losses related to the change in benefit obligations for the period. Refer to Notes 13 and 14 for the Company’s pension and other postretirement employee benefit plan disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses(Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which provided additional implementation guidance on the previously issued ASU. On January 1, 2020, the Company adopted the ASU using the modified retrospective transition method. The Company recorded a decrease to beginning retained earnings of $8 million, net of tax, as of January 1, 2020 due to the cumulative impact of adopting Topic 326. The impact to retained earnings was primarily the result of an increase in the Company’s allowance for doubtful accounts as a result of Topic 326’s requirement to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables.
Accounting Standards Not Yet Adopted—In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments which include beneficial conversion features or cash conversion features by removing certain separation models in Subtopic 470-20. Additionally, the ASU will require entities to use the “if-converted” method when calculating diluted earnings per share for convertible instruments. The ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Management has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements.
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NOTE 2. REVENUE
The following table presents the Company’s revenues disaggregated by geographical region and revenue type ($ in millions). Sales taxes and other usage-based taxes collected from customers are excluded from revenues. The Company defines high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which include Eastern Europe, the Middle East, Africa, Latin America and Asia (with the exception of Japan, Australia and New Zealand). The Company defines developed markets as all markets of the world that are not high-growth markets.
Life Sciences Diagnostics Environmental & Applied Solutions Total
Geographical region:
Revenue type:
Geographical region:
Revenue type:
Geographical region:
Revenue type:
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