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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the Quarter ended June 28, 2002
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission File Number: 1-8089
DANAHER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-1995548
---------------------- ----------------------
(State of incorporation) (I.R.S. Employer
Identification number)
2099 Pennsylvania Ave., N.W.
Washington, D.C. 20006
- ---------------------------------------- ---------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 202-828-0850
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
The number of shares of common stock outstanding at July 15, 2002 was
151,215,745.
DANAHER CORPORATION
INDEX
FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
at June 28, 2002 and December 31, 2001 1
Consolidated Condensed Statements of
Earnings for the three months and
six months ended June 28, 2002 and
June 29, 2001 2
Consolidated Condensed Statements of
Stockholders' Equity for the six
months ended June 28, 2002 3
Consolidated Condensed Statements of
Cash Flow for the six months ended
June 28, 2002 and June 29, 2001 4
Notes to Consolidated Condensed
Financial Statements 5-12
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures 20
About Market Risk
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of 21
Security Holders
Item 6. Exhibits and Reports on Form 8K 21
DANAHER CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(000's omitted)
June 28, December 31,
2002 2001
---- ----
(unaudited) (Note 1)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 705,075 $ 706,559
Accounts receivable, net 746,405 585,318
Inventories:
Finished goods 157,849 131,316
Work in process 112,277 95,119
Raw material and supplies 206,783 181,801
---------- ----------
Total inventories 476,909 408,236
Prepaid expenses and other
current assets 202,594 174,502
---------- ----------
Total current assets 2,130,983 1,874,615
Property, plant and equipment, net
of accumulated depreciation of
$782,000 and $731,000,
respectively 572,555 533,572
Other assets 71,291 119,639
Excess of cost over net assets of
acquired companies, net 2,869,972 2,292,657
---------- ----------
Total assets $5,644,801 $4,820,483
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable and current
portion of long-term debt $ 108,832 $ 72,356
Accounts payable 328,117 235,501
Accrued expenses 881,357 709,437
---------- ----------
Total current liabilities 1,318,306 1,017,294
Other liabilities 476,056 455,270
Long-term debt 1,112,649 1,119,333
Stockholders' equity:
Common stock-$.01 par value 1,652 1,573
Additional paid-in capital 863,024 375,279
Retained earnings 1,928,077 1,921,470
Accumulated other comprehensive
income (54,963) (69,736)
---------- ----------
Total stockholders' equity 2,737,790 2,228,586
---------- ----------
Total liabilities and
stockholders' equity $5,644,801 $4,820,483
========== ==========
See notes to consolidated condensed financial statements.
1
DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(000's omitted except per share amounts)
(unaudited)
Quarter Ended Six Months Ended
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $1,146,326 $ 956,641 $2,150,533 $1,961,924
Operating costs and expenses:
Cost of sales 701,908 581,300 1,330,092 1,209,698
Selling, general and
administrative expenses 273,576 203,347 509,629 427,209
Goodwill and other
amortization 1,267 15,381 _4,016 29,986
--------- --------- ---------- ----------
Total operating expenses 976,751 800,028 1,843,737 1,666,893
--------- --------- ---------- ----------
Operating profit 169,575 156,613 306,796 295,031
Interest expense, net 11,308 5,845 22,216 12,141
--------- --------- ---------- ----------
Earnings before income taxes
and effect of accounting
change 158,267 150,768 284,580 282,890
Income taxes 54,602 56,538 98,180 106,083
--------- --------- ---------- ----------
Net earnings, before effect
of accounting change 103,665 94,230 186,400 176,807
Effect of accounting change,
net of tax, adoption of SFAS
No. 142 -- -- (173,750) --
--------- --------- ---------- ----------
Net earnings $ 103,665 $ 94,230 $ 12,650 $ 176,807
========== ========= ========== ==========
Per share amounts before
accounting change
Basic earnings per share $ .69 $ .65 $1.26 $1.23
========== ========= ========== ==========
Weighted average shares
outstanding - Basic 151,274 144,016 148,223 143,445
========== ========= ========== ==========
Diluted earnings per share $ .66 $ .63 $1.21 $1.19
========== ========= ========== ==========
Weighted average shares
outstanding - Diluted 160,045 152,642 156,994 151,554
========== ========= ========== ==========
Per share amounts after
accounting change
Basic earnings per share $ .69 $ .65 $ .09 $1.23
Diluted earnings per share $ .66 $ .63 $ .11 $1.19
Per share effect of accounting
change - Basic -- -- $1.17 --
Per share effect of accounting
change - Diluted -- -- $1.10 --
See notes to consolidated condensed financial statements.
2
DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(000's omitted)
(unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive Comprehensive
Shares Amount Capital Earnings Income Income
-------------------------------------------------------------------------------
Balance, December 31, 2001 157,327 $1,573 $375,279 $1,921,470 $(69,736) --
Net earnings for the period -- -- -- 12,650 -- $12,650
Dividends declared -- -- -- (6,043) -- --
Sale of common stock 6,900 69 466,936
Common stock issued for
options exercised 992 10 20,809 -- -- --
Increase (decrease)from
translation of foreign
financial statements -- -- -- -- 14,773 14,773
------- ------ -------- ---------- --------- --------
Balance, June 28, 2002 165,219 $1,652 $863,024 $1,928,077 $(54,963) $ 27,423
======= ====== ======== ========== ========= ========
See notes to consolidated condensed financial statements.
3
DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(000's omitted)
(unaudited)
Six Months Ended
June 28, June 29,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings from operations $ 12,650 $ 176,807
Effect of change in accounting
principle 173,750 --
--------- ---------
186,400 176,807
Noncash items, depreciation
and amortization 65,684 86,117
Change in accounts receivable 32,916 52,015
Change in inventories 42,985 10,915
Change in accounts payable 29,292 (6,365)
Change in other assets and liabilities 36,169 (8,236)
--------- ---------
Total operating cash flows 393,446 311,253
--------- ---------
Cash flows from investing activities:
Payments for additions to property,
plant, and equipment, net (16,506) (39,418)
Cash paid for acquisitions, net (827,282) (193,578)
--------- ---------
Net cash used in investing activities (843,788) (232,996)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 487,824 23,449
Proceeds from (repayments of) debt, net (45,084) 403,072
Payment of dividends (6,043) (5,700)
--------- ---------
Net cash provided by financing
activities 436,697 420,821
--------- ---------
Effect of exchange rate changes on cash 12,161 (692)
--------- ---------
Net change in cash and cash equivalents (1,484) 498,386
Beginning balance of cash and cash
equivalents 706,559 176,924
--------- ---------
Ending balance of cash and cash
equivalents $ 705,075 $ 675,310
========= =========
Supplemental disclosures:
Cash interest payments $ 13,514 $ 13,014
========= =========
Cash income tax payments $ 7,868 $ 15,992
========= =========
See notes to consolidated condensed financial statements.
4
DANAHER CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. GENERAL
The consolidated condensed financial statements included
herein have been prepared by Danaher Corporation (the Company) without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. The condensed financial
statements included herein should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2001 Annual Report on
Form 10-K.
In the opinion of the registrant, the accompanying financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company at
June 28, 2002 and December 31, 2001, its results of operations for the three
months and six months ended June 28, 2002 and June 29, 2001, and its cash flows
for the six months ended June 28, 2002 and June 29, 2001.
Total comprehensive income was as follows:
2002 2001
------ ------
(millions)
Quarter $117.1 $ 76.0
Six Months $ 27.4 $159.5
Total comprehensive income for all periods represents net income and the change
in cumulative foreign translation adjustment.
NOTE 2. SEGMENT INFORMATION
Segment information is presented consistently with the basis
described in the 2001 Annual Report. There has been no material change in total
assets or liabilities by segment, except for 2002 acquisitions and divestitures
(see Note 4) and the write down of $200 million of goodwill taken in the first
quarter of 2002 related to the Company's power quality business units, as more
fully explained in Note 6. Segment results for 2002 and 2001 are shown below:
5
Sales-Quarter Sales-Six Months
2002 2001 2002 2001
---- ---- ---- ----
Process/Environmental Controls $ 843,527 $666,948 $1,577,756 $1,391,118
Tool and Components 302,799 289,693 572,777 570,806
---------- -------- ---------- ----------
$1,146,326 $956,641 $2,150,533 $1,961,924
========== ======== ========== ==========
Op Profit-Quarter Op Profit-Six Months
2002 2001 2002 2001
---- ---- ---- ----
Process/Environmental Controls $130,228 $117,356 $237,672 $233,126
Tool and Components 45,453 43,342 80,233 71,420
Other (6,106) (4,085) (11,109) (9,515)
-------- -------- -------- --------
$169,575 $156,613 $306,796 $295,031
======== ======== ======== ========
NOTE 3. EARNINGS PER SHARE
Basic EPS is calculated by dividing earnings by the weighted
average number of common shares outstanding for the applicable period. Diluted
EPS is calculated after adjusting the numerator and the denominator of the basic
EPS calculation for the effect of all potential dilutive common shares
outstanding during the period. Information related to the calculation of
earnings per share of common stock before the effect of the Company's first
quarter goodwill write down is summarized as follows:
Earnings
Before Effect of
Accounting Change Shares Per Share
(Numerator) (Denominator) Amount
----------------------------------------------
For the Three Months Ended
June 28, 2002
Basic EPS: $103,665 151,274 $.69
Adjustment for interest
on convertible debentures: 1,969 -
Incremental shares from
assumed exercise of
dilutive options: - 2,740
Incremental shares from
assumed conversion of the
convertible debenture: - 6,031
--------------------------
Diluted EPS: $105,634 160,045 $.66
======== ======= ====
6
Net Earnings Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
For the Three Months Ended
June 29, 2001
Basic EPS: $ 94,230 144,016 $.65
Adjustment for interest
on convertible debentures 1,691
Incremental shares from
assumed exercise of
dilutive options: - 2,595
Incremental shares from
assumed conversion of
of convertible debentures - 6,031
-------------------------
Diluted EPS: $ 95,921 152,642 $.63
======== ======= ====
Earnings
Before Effect of
Accounting Change Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------- ---------
For the Six Months Ended
June 28, 2002
Basic EPS: $186,400 148,223 $1.26
Adjustment for interest
on convertible debentures: 3,927 -
Incremental shares from
assumed exercise of
dilutive options: - 2,740
Incremental shares from
assumed conversion of the
convertible debenture: - 6,031
-------------------------
Diluted EPS: $190,327 156,994 $1.21
======== ======= =====
7
Net Earnings Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
For the Six Months Ended
June 29, 2001
Basic EPS: $176,807 143,445 $1.23
Adjustment for interest
on convertible debentures 3,368
Incremental shares from
assumed exercise of
dilutive options: - 2,938
Incremental shares from
assumed conversion of the
convertible debentures - 5,171
-----------------------
Diluted EPS: $180,175 151,554 $1.19
======== ======= =====
NOTE 4. ACQUISITIONS AND DIVESTITURES
In connection with its acquisitions, the Company assesses and formulates a
plan related to the future integration of the acquired entity. This process
begins during the due diligence process and is concluded within twelve months of
the acquisition. The Company accrues estimates for certain costs related to
these acquisitions, in accordance with Emerging Issues Task Force Issue No.
95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination."
On February 25, 2002, the Company completed the divestiture of API Heat
Transfer, Inc. to an affiliate of Madison Capital Partners for approximately $66
million (including $56 million in cash and a note receivable in the principal
amount of $10 million), less certain liabilities of API Heat Transfer, Inc. paid
by Danaher at closing and subsequent to closing. API Heat Transfer, Inc. was
part of the Company's acquisition of American Precision Industries, Inc. and was
recorded as an asset held for sale as of the time of the acquisition. No gain or
loss was recognized at the time of sale.
On February 5, 2002, the Company closed the acquisition of Marconi Data
Systems, formerly known as Videojet Technologies, from Marconi plc for
approximately $400 million. Videojet Technologies, with approximately $300
million in revenues, is a worldwide leader in the market for non-contact product
marking equipment and consumables for the product identification market.
Videojet Technologies has been included in the Company's Process/Environmental
Controls segment. The fair value of the assets acquired was approximately $471.8
million, and approximately $82.9 million of liabilities were assumed and
accrued.
8
Based on the preliminary allocation of purchase price, Videojet
Technologies fair value of assets acquired includes approximately $13.6 million
of intangible assets with an average life of 8 years, primarily patents and
proprietary technologies, and $37 million of trade names,
with the remainder of the intangible assets allocated to goodwill.
On February 4, 2002, the Company closed the acquisition of Viridor
Instrumentation Limited from the Pennon Group plc for approximately $135 million
in cash. Viridor, with $75 million in revenues, designs and manufactures
analytical instruments for clean water, wastewater, ultrapure water and other
fluids and materials. Viridor has been included in the Company's
Process/Environmental Controls segment. The fair value of the assets acquired
was approximately $153.7 million, and approximately $18.9 million of liabilities
were assumed and accrued. Based on the preliminary allocation of purchase price,
Viridor's fair value of assets acquired includes approximately $1.4 million of
patents and technology, and $6.0 million of trade names, with the remainder of
intangible assets allocated to goodwill.
On February 1, 2002, the Company closed the acquisition of Marconi Commerce
Systems, formerly known as Gilbarco, from Marconi plc for approximately $318
million in cash in addition to $7 million of assumed net debt. Gilbarco, with
approximately $500 million in revenues, is a global leader in retail automation
and environmental products and services. Gilbarco has been included in the
Company's Process/ Environmental Controls segment. The fair value of the assets
acquired was approximately $444.0 million, and approximately $125.9 million of
liabilities were assumed and accrued. Based on the preliminary allocation of
purchase price, Gilbarco's fair value of assets acquired included approximately
$4.8 million of intangible assets with an average life of 4 years, primarily
patents and software, and $26 million of trade names with the remainder of
intangible assets allocated to goodwill.
In addition, during the first six months of 2002, the Company acquired
three smaller companies, additions to the Process/Environmental Controls
segment, for total consideration of $35.8 million. The fair value of the three
smaller acquired companies was approximately $51.2 million, and approximately
$15.4 million of liabilities were assumed and accrued.
On January 2, 2001, the Company acquired United Power Corporation. The
consideration was approximately $108 million. The fair value of the assets
acquired was approximately $117 million, and approximately $9 million of
liabilities were assumed. The transaction was accounted for as a purchase.
9
NOTE 5. RESTRUCTURING CHARGE
In the fourth quarter of 2001, the Company recorded a restructuring charge
of $69.7 million ($43.5 million after tax, or $.29 per share). During the fourth
quarter of 2001, management determined that it would restructure certain of its
product lines, principally its power quality, industrial controls, and drill
chuck businesses, due to dramatic changes in end user demand within power
quality, as well as opportunities to exit high cost and/or low capacity
utilization facilities. Severance costs for the termination of approximately
1,100 employees approximates $49 million. Approximately $16 million of the
charge was to write-off assets associated with the closure of 16 facilities in
North America and Europe. The remainder of the charge of $5 million was for
other exit costs including lease termination costs. The majority of the cash
expenditures and cost savings related to the restructuring are expected to be
spent and realized in 2002. As of June 28, 2002, the Company had cumulatively
spent $25.4 million ($10.4 million in the second quarter of 2002) in cash and
written down approximately $16 million in assets in connection with the charge.
By the end of the second quarter, nine of the sixteen facilities had been
closed.
NOTE 6. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 141, "Business Combinations." This statement
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and establishes specific criteria
for the recognition of intangible assets separately from goodwill. The Company
has followed the requirements of this statement for business acquisitions made
after June 30, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This statement requires that goodwill and intangible assets deemed to have an
indefinite life not be amortized. Instead of amortizing goodwill and intangible
assets deemed to have an indefinite life, the statement requires a test for
impairment to be performed annually, or immediately if conditions indicate that
such an impairment could exist. The Company adopted the statement effective
January 1, 2002. As a result of adopting SFAS No. 142, the Company will no
longer record goodwill amortization of approximately $62 million (pre-tax) per
year. Using the fair value measurement requirement, rather than the undiscounted
cash flows approach, the Company has recorded an impairment from the
implementation of SFAS No. 142 as a change in accounting principle in
10
the first quarter of 2002. The evaluation of reporting units on a fair value
basis, adjusted for what the balance of goodwill would have been if purchase
accounting were applied at the date of impairment, as required from the
implementation of SFAS No. 142, indicates that an impairment exists at the
Company's power quality business unit. Based upon the evaluation, impairment is
approximately $200.0 million ($173.8 million after tax), approximately 8.7% of
intangible assets recorded as of December 31, 2001. In accordance with SFAS No.
142, once impairment is determined at a reporting unit, SFAS No. 142 requires
that the amount of goodwill impairment be determined based on what the balance
of goodwill would have been if purchase accounting were applied at the date of
impairment. Under SFAS No. 142, if the carrying amount of goodwill exceeds its
fair value, an impairment loss must be recognized in an amount equal to that
excess. Once an impairment loss is recognized, the adjusted carrying amount of
goodwill will be its new accounting basis.
The following table provides the comparable effects of adoptions of SFAS
No. 142 for the quarters and six months ended June 28, 2002 and June 29, 2001.
Quarter Ended Six Months Ended
June 28 June 29 June 28 June 29
(in thousands, except per share data) 2002 2001 2002 2001
--------- -------- ------- -------
Reported net income, before change
in accounting principle $ 103,665 $ 94,230 $ 186,400 $ 176,807
Add back: goodwill amortization
(net of tax) -- 13,174 -- 25,664
--------- --------- --------- ---------
Adjusted net income $ 103,665 $ 107,404 $ 186,400 $ 202,471
========= ========= ========= =========
Basic Net Income Per Share, Before
Change in Accounting Principle
Reported net income, before change
in accounting principle $ .69 $ .65 $ 1.26 $ 1.23
Add back: goodwill amortization
(net of tax) -- .10 -- .18
--------- --------- --------- ---------
Adjusted net income per basic share $ .69 $ .75 $ 1.26 $ 1.41
========= ========= ========= =========
Diluted Net Income Per Share, Before
Change in Accounting Principle
Reported net income, before change
in accounting principle $ .66 $ .63 $ 1.21 $ 1.19
Add back: goodwill amortization
(net of tax) -- .08 -- .16
--------- --------- --------- ---------
Adjusted net income per diluted
Share $ .66 $ .71 $ 1.21 $ 1.35
========= ========= ========= =========
11
In June, 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2002. The Company does not believe that implementation
of this SFAS will have a material impact on its financial statements.
In October 2001, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it retains
the basic requirements of SFAS No. 121 regarding when and how to measure an
impairment loss, SFAS No. 144 provides additional implementation guidance. SFAS
No. 144 applies to long-lived assets to be held and used or to be disposed of,
including assets under capital leases of lessees; assets subject to operating
leases of lessors; and prepaid assets. SFAS No. 144 also expands the scope of a
discontinued operation to include a component of an entity, and eliminates the
current exemption to consolidation when control over a subsidiary is likely to
be temporary. This statement is effective for fiscal years beginning after
December 15, 2001. The Company does not believe that implementation of this SFAS
will have a material impact on its financial statements.
In April 2002, the Financial Accounting Standards Board
approved SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
SFAS 13, and Technical Corrections. SFAS 145 rescinds previous accounting
guidance, which required all gains and losses from extinguishment of debt be
classified as an extraordinary item. Under SFAS 145, classification of debt
extinguishment depends on the facts and circumstances of the transaction. SFAS
145 is effective for fiscal years beginning after May 15, 2002. The Company does
not expect SFAS 145 to have a material impact on its financial statements.
NOTE 7. COMMON STOCK
On March 8, 2002, the Company completed the issuance of 6.9
million shares of the Company's common stock.
On July 1, 2002, the Company amended its certificate of
incorporation to increase its authorized number of shares of common stock from
300,000,000 shares to 500,000,000 shares. This amendment was approved by the
Company's shareholders at its May 7, 2002 annual meeting.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information included or incorporated by reference in this
document may be deemed to be "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements, other than statements of historical facts, that address activities,
events or developments that the Company intends, expects, projects, believes or
anticipates will or may occur in the future are forward looking statements. Such
statements are characterized by terminology such as "believe," "anticipate,"
"should," "intend," "plan," "will," "expects," "estimates," "projects,"
"positioned," "strategy," and similar expressions. These statements are based on
assumptions and assessments made by the Company management in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. These
forward looking statements are subject to a number of risks and uncertainties,
including but not limited to continuation of the Company's longstanding
relationship with major customers, the Company's ability to integrate acquired
businesses into its operations and realize planned synergies, the extent to
which acquired businesses are able to meet the Company's expectations and
operate profitably, changes in regulations (particularly environmental
regulations) which could affect demand for products in the Process/Environmental
Controls segment and unanticipated developments that could occur with respect to
contingencies such as environmental matters and litigation. In addition, the
Company is subject to risks and uncertainties that affect the manufacturing
sector generally including, but not limited to, economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices. Any such forward looking statements are
not guarantees of future performances and actual results, developments and
business decisions may differ from those envisaged by such forward looking
statements. The Company disclaims any duty to update any forward looking
statements, all of which are expressly qualified by the foregoing.
Results of Operations
Danaher Corporation (the "Company") designs, manufactures and markets
industrial and consumer products with strong brand names, proprietary technology
and major market positions in two business segments: Process/Environmental
Controls and Tools and Components. The Process/Environmental Controls Segment is
a leading producer of environmental products, including water quality analytical
instrumentation and leak detection systems for underground fuel storage tanks;
compact professional electronic test tools; product identification equipment and
consumables; retail petroleum automation products; and motion, position, speed,
temperature, pressure, level, flow, particulate and power reliability and
quality control and safety devices. In its Tools and Components Segment, the
Company is a leading producer and distributor of general-purpose mechanics' hand
tools and
13
automotive specialty tools, as well as of toolboxes and storage devices, diesel
engine retarders, wheel service equipment, drill chucks, and hardware and
components for the power generation and transmission industries.
Process/Environmental Controls
Sales of the Process/Environmental Controls segment in the second
quarter of 2002 of $843.5 million were 26.5% higher than the 2001 second
quarter. The acquisitions in February 2002 of Gilbarco, Videojet Technologies
and Viridor as well as several smaller 2001 acquisitions provided a 38% increase
from the 2001 second quarter. The remainder of the sales change was generated by
a decrease in core volume of 12%, offset by a 1% favorable currency translation
impact. Overall segment prices remained relatively flat for the 2002 second
quarter compared to the 2001 second quarter.
Core volume for the environmental business, approximately 30% of
segment revenue, declined at low single-digit rates in the quarter, with slight
growth in water quality markets due to relative strength in both lab and process
sales offset by weakness in demand for ultrapure instrumentation and in
Veeder-Root's leak detection market. Core volume for the motion control
businesses, representing approximately 20% of segment revenues, decreased at
rates in the low teens from 2001 levels, driven by weakness in end markets,
particularly semiconductor and electronic assembly. The electronic test
businesses, with approximately 20% of segment revenues, reported high single
digit core volume declines for the quarter, with the rate of decline somewhat
higher at Fluke Networks largely due to slowing demand for cable media test
products. Power quality revenues declined over 30% in the 2002 second quarter,
primarily due to significant declines in data center and web hosting end-user
demand.
Segment sales for the six month period of 2002 of $1,577.8 million
were 13.4% higher than the 2001 period. Acquisitions accounted for 29% of the
increase, and the remainder of the sales change was generated by a decrease in
core volume of 16%. Currency translation impacts were nominal for the period,
and overall segment prices remained relatively flat compared to 2001.
For the six month period, core volume for the environmental
business declined at low single-digit rates, with flat performance in water
quality markets offset by weakness in demand for ultrapure instrumentation
and in Veeder- Root's leak detection market. Core volume for the motion control
businesses was down approximately 20% for the period, resulting from softness in
end market demand, particularly semiconductor and electronic assembly. The
electronic test businesses reported core volume declines in the low teens for
the six month period due to weakness in both industrial and network test
equipment sales. Core volume declined over 40% in the
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power quality platform, due to the significant decline in end-user demand that
began in 2001.
For the second quarter, operating profit margins for the segment
decreased from 17.6% in 2001 to 15.4% in 2002. Approximately 200 basis points of
this decline resulted from the dilutive impact of lower operating margins of the
new businesses acquired during 2001 and 2002. Additionally, margin declines
resulting from lower core volumes at the business units noted above were
partially offset by the cessation of goodwill amortization as of January 1,
2002.
For the six month period, operating profit margins for the segment
decreased from 16.8% in 2001 to 15.1% in 2002. Approximately 200 basis points of
this decline resulted from the dilutive impact of lower operating margins of the
new businesses acquired during 2001 and 2002. Additionally, margin declines from
lower core volumes at the business units noted above were partially offset by
the cessation of goodwill amortization as of January 1, 2002.
Tools and Components
Sales in the second quarter of 2002 of $302.8 million were 4.5%
higher than the 2001 second quarter. The entirety of this growth represents core
volume growth, as there were no acquisitions in this segment during 2001 and
2002, and price and currency impacts were negligible. Hand Tool Group revenues,
approximately 65% of segment sales, grew at mid-single digit rates for the
quarter, due to increases in both the Craftsman and Matco sales channels. Sales
of diesel engine retarders grew over 25% for the quarter, as OEM customers
accelerated deliveries that were scheduled for later in 2002. Other product
lines were flat to slightly down.
Segment sales for the six month period of 2002 were essentially
flat compared to 2001. The product line sales trends for the period were
generally similar to those noted for the second quarter, with modest growth in
the Hand Tool Group offset by a low double digit sales decline of the Joslyn
hardware and electrical apparatus product lines in the first quarter of 2002.
Diesel engine retarder sales were flat in the first quarter of 2002.
Operating profit margins for the second quarter of 15.0% were flat
versus 2001. Margins for the six month period increased from 12.5% to 14.0% due
to the impact of cost reduction actions and the cessation of goodwill
amortization as of January 1, 2002.
Gross Profit
Gross profit margin for the second quarter of 2002, as a
percentage of sales, was 38.8%, 0.4 points lower than 2001 levels. Lower gross
margins in businesses acquired in 2002 and lower fixed cost
15
absorption from lower core sales volumes were partially offset by cost reduction
programs implemented across both business segments. Gross profit margin for the
six month period of 38.2% was down only slightly from the 38.3% reported in
2001.
Operating Expenses
Selling, general and administrative expenses for the 2002 second
quarter were 34.5% higher than in 2001. Acquisitions completed since the second
quarter of 2001 added approximately $68 million to second quarter spending
levels, accounting for essentially all of the $70 million increase. As a
percentage of sales, these costs were 23.9% and 21.3% in 2002 and 2001,
respectively, reflecting the higher relative spending levels of recently
acquired businesses and the fixed cost component of these expenses combined with
core volume declines.
Selling, general and administrative expenses for the 2002 six
month period were 19% higher than in 2001. Acquisitions accounted for a 26%
increase in spending levels, while cost reductions in core businesses generated
an overall 7% decline.
Interest Expense
The Company's debt financing as of June 28, 2002 is composed
primarily of $534 million of zero coupon convertible notes due 2021 ("LYONs"),
$297 million of 6.25% Eurobond notes due 2005, $250 million of 6% notes due
2008, uncommitted lines and a revolving credit facility which provides senior
financing of $500 million for general corporate purposes. The interest rates for
borrowing under the revolving credit facility float with base rates.
Net interest expense of $11.3 million in the second quarter of
2002 was $5.5 million higher than the corresponding 2001 period. Returns on
invested cash balances fell significantly, as general short-term market interest
rates declined throughout 2001. Net interest expense for the six month period
rose $10.1 million compared to 2001, driven also by the steep decline in
short-term interest rates, reducing our interest income, and higher average net
debt levels during 2002. Interest income of $2.5 million and $6.7 million was
recognized in the 2002 and 2001 second quarters, and interest income of $4.5
million and $12.0 million was recognized in the 2002 and 2001 six month periods.
Income Taxes
The 2002 effective tax rate of 34.5% is 3.0% lower than the 2001
effective rate, mainly due to the effect of adopting SFAS No. 142 and its
resulting cessation of goodwill amortization, and also due to a higher
proportion of foreign earnings in 2002 compared to 2001.
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Liquidity and Capital Resources
Operating cash flow grew $82 million, or 26% during the first six months of
2002 as compared to 2001. All working capital components showed improvement
during the first six months of 2002, driven both by Danaher Business System
efforts to improve asset turnover, and by reductions in accounts receivable and
inventories resulting from declining core sales volumes. Net capital spending
decreased $22.9 million from the 2001 period, primarily due to the sale of three
facilities in the second quarter of 2002 for total cash proceeds of $10.2
million. A net after-tax gain of $1.6 million, approximately $0.01 per share,
was recorded on the facility sales.
In March 2002, the Company completed the issuance of 6.9 million shares of
the Company's common stock. Proceeds of the common stock issuance, net of the
related expenses, were approximately $467 million. The Company has used the
proceeds to repay approximately $230 million of short-term borrowings incurred
in the 2002 first quarter and intends to use the remainder for general corporate
purposes, including future acquisitions.
Total debt under the Company's borrowing facilities increased to $1,221.5
million at June 28, 2002, compared to $1,191.7 million at December 31, 2001.
This increase was due primarily to the change in the U.S dollar/Euro exchange
rates and the resulting impact on the Company's Euro denominated debt. During
the first quarter of 2001, the Company issued $830 million (value at maturity)
in zero-coupon convertible senior notes due 2021 known as Liquid Yield Option
Notes or LYONS. The net proceeds to the Company were approximately $505 million,
of which approximately $100 million was used to pay down debt, and the balance
was used for general corporate purposes, including acquisitions. The LYONS are
convertible into approximately 6.0 million common shares of the Company, and
carry a yield to maturity of 2.375%. The Company may redeem all or a portion of
the LYONs for cash at any time on or after January 22, 2004. Holders may require
the Company to purchase all or a portion of the notes for cash and/or Company
common stock, at the Company's option, on January 22, 2004 or on January 22,
2011.
Net cash paid for acquisitions was $827.3 million for the first six months
of 2002. On February 25, 2002, the Company completed the divestiture of API Heat
Transfer, Inc. to an affiliate of Madison Capital Partners for approximately $66
million (including $56 million in cash and a note receivable in the principal
amount of $10 million), less certain liabilities of API Heat Transfer, Inc. paid
by Danaher at closing and subsequent to closing. On February 5, 2002, the
Company acquired Marconi Data Systems, formerly known as Videojet Technologies,
from Marconi plc for approximately $400 million. On February 4, 2002, the
Company acquired Viridor Instrumentation Limited from the Pennon Group plc for
approximately $135 million. On February 1, 2002, the Company acquired Marconi
Commerce Systems, formerly known as Gilbarco,
17
from Marconi plc for approximately $318 million in cash in addition to $7
million of assumed net debt. In addition, the Company acquired three smaller
companies during the first half of 2002 for a total cash consideration of
approximately $36 million. On January 2, 2001, the Company acquired United Power
Corporation for approximately $108 million in cash. The Company also disposed of
two small product lines during the 2001 first quarter, yielding cash proceeds of
approximately $32 million. There was no material gain or loss recognized on the
sale of these product lines.
In January 2002, the Company entered into two interest rate swap agreements
for the term of the Company's 6% notes due 2008 having a notional principal
amount of $100 million whereby the effective interest rate on $100 million of
the notes will be the six month LIBOR rate plus approximately 0.425%. In
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, the Company accounts for these swap agreements as fair
value hedges. Since these instruments qualify as "effective" or "perfect"
hedges, they will have no impact on net income or stockholders' equity.
The Company's Matco subsidiary has sold, with limited recourse, certain of
its accounts and notes receivable. Amounts outstanding under this program
approximated $93 million as of June 28, 2002. The subsidiary accounts for this
sale in accordance with Statement of Financial Accounting Standards (SFAS) No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - a replacement of FASB Statement No. 125." A
provision for estimated losses as a result of the limited recourse has been
included in accrued expenses. No gain or loss arose from these transactions.
On June 28, 2001, the Company replaced its $250 million bank credit
facility with a new $500 million credit facility. The new facility provides
funds for general corporate purposes and has a five year term. There have been
no borrowings under either facility during 2001 or 2002.
The Company declared a regular quarterly dividend of $0.02 per share
payable on July 31, 2002, to holders of record on June 28, 2002.
Operating cash flow is an important source of liquidity for the Company.
The Company attempts to maximize the cash flow from its operating businesses and
attempts to keep the working capital employed in the business to the minimum
level required for efficient operations. A decrease in demand for the Company's
products would reduce the availability of funds generated from operations.
The cash and cash equivalents of $705.1 million on the Company's June 28,
2002 balance sheet were invested in highly liquid investment grade short term
instruments. The Company's cash provided from operations, as well as credit
facilities available, should provide sufficient available funds to meet normal
working capital requirements, capital expenditures, dividends, scheduled debt
repayments, and to fund acquisitions, if applicable.
18
Accounting Policies
Management's discussion and analysis of the Company's financial condition
and results of operations are 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. On an ongoing basis, the
Company evaluates these estimates, including those related to bad debts,
inventories, intangible assets, pensions, and other post-retirement benefits,
income taxes, and contingencies and litigation. The Company bases these
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect
management's more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements. For a detailed discussion on the
application of these and other accounting policies, see Note 1 in the 2001
Consolidated Financial Statements.
Accounts receivables - The Company maintains allowances for doubtful accounts
for estimated losses resulting from the inability of the Company's customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventory - The Company records inventory at the lower of cost or
market. The estimated market value is based on assumptions for future demand and
related pricing. If actual market conditions are less favorable than those
projected by management, reductions in the value of inventory may be required.
Acquired intangibles - The Company's business acquisitions typically result in
goodwill and other intangible assets, which affect the amount of future period
amortization expense and possible impairment expense that the Company will
incur. The determination of the value of such intangible assets requires
management to make estimates and assumptions that affect the Company's
Consolidated Financial Statements.
Long-lived assets - The Company periodically evaluates the net realizable value
of long-lived assets, including property, plant and equipment, relying on a
number of factors including operating results,
19
budgets, economic projections and anticipated future cash flows.
Purchase accounting - In connection with its acquisitions, management assesses
and formulates a plan related to the future integration of the acquired entity.
This process begins during the due diligence process and is concluded within
twelve months of the acquisition. The Company accrues estimates for certain
costs related to these acquisitions, in accordance with Emerging Issues Task
Force Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination."
Disclosures regarding new accounting standards are included in this report
in footnote 6 to the financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates, which could impact its results of operations
and financial condition. The Company manages its exposure to these risks through
its normal operating and financing activities. In January 2002, the Company
entered into two interest rate swap agreements for the term of the 6% notes due
2008 having a notional principal amount of $100 million whereby the effective
interest rate on $100 million of these notes will be the six month LIBOR rate
plus approximately 0.425%. See Note 7 of the Company's December 31, 2001
Consolidated Financial Statements for further discussion. The Company's issuance
of Eurobond notes in 2000 provided an offset to a portion of the Company's
European net asset position. The Company has generally accepted the exposure to
exchange rate movements relative to its investment in foreign operations without
using derivative financial instruments to manage this risk. Additionally, the
Company does not generally utilize or trade commodity contracts or derivatives.
The fair value of the Company's fixed-rate long-term debt is sensitive to
changes in interest rates. The value of this debt is subject to change as a
result of movements in interest rates. Sensitivity analysis is one technique
used to evaluate this potential impact. Based on a hypothetical, immediate 100
basis point increase in interest rates at June 28, 2002, the market value of the
Company's fixed-rate long-term debt would be impacted by a net decrease of $18
million. This methodology has certain limitations, and these hypothetical gains
or losses would not be reflected in the Company's results of operations or
financial conditions under current accounting principles.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 7, 2002, shareholders approved an amendment to the Company's
Certificate of Incorporation to increase the number of
20
authorized shares of common stock to 500,000,000. On July 1, 2002, the Company's
Certificate of Incorporation was amended to reflect this increase in authorized
shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on May 7, 2002, our
stockholders voted on the following proposals:
1. Proposal to elect three directors:
For Withheld
--- --------
H. Lawrence Culp, Jr. 124,313,820 13,642,312
Mitchell P. Rales 124,319,245 13,636,887
A. Emmet Stephenson, Jr. 135,905,555 2,049,577
2. Proposal to amend the Company's certificate of incorporation to
increase the number of authorized shares of common stock of the
Company to a total of five hundred million (500,000,000) shares, $.01
par value per share:
For 120,612,432
Against 16,784,891
Abstain 554,692
Broker non-vote 4,117
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibit 3 - Certificate of Incorporation of Danaher
Corporation, as amended
(b) Reports on Form 8-K: The Company filed a current report on Form
8-K dated May 29, 2002 reporting on its dismissal of Arthur
Andersen, LLP as its Independent Accountant and its intention to
engage Ernst & Young LLP.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANAHER CORPORATION:
Date: July 17, 2002 By: /s/ Patrick W. Allender
-----------------------
Patrick W. Allender
Chief Financial Officer
Date: July 17, 2002 By: /s/ Christopher C. McMahon
--------------------------
Christopher C. McMahon
Vice President and Controller
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