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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 September 27, 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., 12/th/ Fl.
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 October 14, 2002 was
152,409,174.
DANAHER CORPORATION
INDEX
FORM 10-Q
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
at September 27, 2002 and December 31, 2001 3
Consolidated Condensed Statements of
Earnings for the three months and
nine months ended September 27, 2002 and
September 28, 2001 4
Consolidated Condensed Statements of
Stockholders' Equity for the nine months
ended September 27, 2002 5
Consolidated Condensed Statements of
Cash Flow for the nine months ended
September 27, 2002 and September 28, 2001 6
Notes to Consolidated Condensed
Financial Statements 7
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
Item 4. Controls and Procedures 31
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
DANAHER CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(000's omitted)
(Unaudited)
September 27, December 31,
2002 2001
------------- ------------
(Note 1)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 803,178 $ 706,559
Accounts receivable, net 757,006 585,318
Inventories:
Finished goods 163,804 131,316
Work in process 115,903 95,119
Raw material and supplies 206,733 181,801
----------- -----------
Total inventories 486,440 408,236
Prepaid expenses and other
current assets 199,964 174,502
----------- -----------
Total current assets 2,246,588 1,874,615
Property, plant and equipment, net
of accumulated depreciation of
$819,000 and $720,000,
respectively 558,382 533,572
Other assets 66,164 119,639
Goodwill and other intangible
assets, net 3,023,667 2,292,657
----------- -----------
Total assets $ 5,894,801 $ 4,820,483
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable and current
portion of long-term debt $ 110,192 $ 72,356
Accounts payable 358,694 235,501
Accrued expenses 904,102 709,437
----------- -----------
Total current liabilities 1,372,988 1,017,294
Other liabilities 494,540 455,270
Long-term debt 1,143,223 1,119,333
Stockholders' equity:
Common stock-$.01 par value 1,664 1,573
Additional paid-in capital 909,129 375,279
Retained earnings 2,041,077 1,921,470
Accumulated other comprehensive
income (67,820) (69,736)
----------- -----------
Total stockholders' equity 2,884,050 2,228,586
----------- -----------
Total liabilities and
stockholders' equity $ 5,894,801 $ 4,820,483
=========== ===========
See notes to consolidated condensed financial statements.
3
DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(000's omitted except per share amounts)
(unaudited)
Quarter Ended Nine Months Ended
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 1,151,721 $ 901,588 $ 3,302,254 $ 2,863,512
Operating costs and expenses:
Cost of sales 691,648 547,630 2,021,740 1,757,328
Selling, general and
administrative expenses 272,889 190,481 785,049 617,690
Gains on sale of real estate (2,674) -- (5,205) --
Goodwill and other amortization 2,428 15,837 6,444 45,823
Total operating costs and ----------- ----------- ----------- -----------
expenses 964,291 753,948 2,808,028 2,420,841
----------- ----------- ----------- -----------
Operating profit 187,430 147,640 494,226 442,671
Interest expense, net 10,287 7,244 32,503 19,385
----------- ----------- ----------- -----------
Earnings before income taxes
and effect of accounting change 177,143 140,396 461,723 423,286
Income taxes 61,114 52,650 159,294 158,733
----------- ----------- ----------- -----------
Net Earnings, before effect
of accounting change 116,029 87,746 302,429 264,553
Effect of accounting change,
net of tax, adoption of
SFAS No. 142 -- -- 173,750 --
----------- ----------- ----------- -----------
Net Earnings $ 116,029 $ 87,746 $ 128,679 $ 264,553
=========== =========== =========== ===========
Per share amounts before
accounting change
Basic earnings per share $ .76 $ .61 $ 2.02 $ 1.84
=========== =========== =========== ===========
Weighted average shares
outstanding - Basic 151,842 143,835 149,432 143,575
=========== =========== =========== ===========
Diluted earnings per share $ .74 $ .59 $ 1.95 $ 1.78
=========== =========== =========== ===========
Weighted average shares
outstanding - Diluted 159,611 152,198 157,868 151,769
=========== =========== =========== ===========
Per share amounts after
accounting change
Basic earnings per share $ .76 $ .61 $ .86 $ 1.84
Diluted earnings per share $ .74 $ .59 $ .85 $ 1.78
Per share effect of accounting
change - Basic -- -- $ 1.16 --
Per share effect of accounting
change - Diluted -- -- $ 1.10 --
See notes to consolidated condensed financial statements.
4
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 -- -- -- 128,679 -- $128,679
Dividends declared -- -- -- (9,072) -- --
Sale of common stock 6,900 69 466,936
Common stock issued for
options exercised 2,190 22 66,914 -- -- --
Increase from translation
of foreign financial
statements -- -- -- -- 1,916 1,916
------- ------ -------- ---------- -------- --------
Balance, September 27, 2002 166,417 $1,664 $909,129 $2,041,077 $(67,820) $130,595
======= ====== ======== ========== ======== ========
5
DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(000's omitted)
(unaudited)
Nine Months Ended
September 27, September 28,
2002 2001
---- ----
Cash flows from operating activities:
Net earnings from operations $ 128,679 $ 264,553
Effect of change in accounting principle 173,750 --
--------- ---------
302,429 264,553
Noncash items, depreciation
and amortization 98,209 129,954
Change in accounts receivable 28,765 78,067
Change in inventories 44,306 24,171
Change in accounts payable 52,986 (26,700)
Change in other assets and liabilities 38,734 (39,716)
--------- ---------
Total operating cash flows 565,429 430,329
--------- ---------
Cash flows from investing activities:
Payments for additions to property,
plant, and equipment (44,953) (59,701)
Proceeds from disposals of property,
plant, and equipment 19,295 2,477
Cash paid for acquisitions (990,312) (351,337)
Proceeds from divestitures 52,562 32,826
--------- ---------
Net cash used in investing activities (963,408) (375,735)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 507,420 26,824
Proceeds from debt borrowings -- 517,564
Debt repayments (16,033) (111,082)
Payment of dividends (9,072) (8,547)
Purchase of treasury stock -- (9,168)
--------- ---------
Net cash provided by financing
activities 482,315 415,591
--------- ---------
Effect of exchange rate changes on cash 12,283 (643)
--------- ---------
Net change in cash and cash equivalents 96,619 469,542
Beginning balance of cash and cash
equivalents 706,559 176,924
--------- ---------
Ending balance of cash and cash
equivalents $ 803,178 $ 646,466
========= =========
Supplemental disclosures:
Cash interest payments $ 35,048 $ 29,267
========= =========
Cash income tax payments $ 17,972 $ 21,981
========= =========
See notes to consolidated condensed financial statements.
6
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 Company, the accompanying financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position of the Company at September 27, 2002
and December 31, 2001, its results of operations for the three months and nine
months ended September 27, 2002 and September 28, 2001, and its cash flows for
the nine months ended September 27, 2002 and September 28, 2001.
Total comprehensive income was as follows:
2002 2001
---- ----
(millions)
Quarter $103.2 $ 92.4
Nine Months $130.6 $252.0
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 the quarter and nine months ended
September 27, 2002 and September 28, 2001 are shown below:
7
Sales
Third Quarter Nine Months
2002 2001 2002 2001
---------- ---------- ---------- ----------
Process/Environmental Controls $ 840,222 $ 616,628 $2,417,978 $2,007,746
Tool and Components 311,499 284,960 884,276 855,766
---------- ---------- ---------- ----------
$1,151,721 $ 901,588 $3,302,254 $2,863,512
========== ========== ========== ==========
Operating Profit
Third Quarter Nine Months
2002 2001 2002 2001
--------- --------- --------- ---------
Process/Environmental Controls $ 139,932 $ 108,425 $ 377,604 $ 341,551
Tool and Components 51,723 43,513 131,954 114,933
Other (4,225) (4,298) (15,332) (13,813)
--------- --------- --------- ---------
$ 187,430 $ 147,640 $ 494,226 $ 442,671
========= ========= ========= =========
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
September 27, 2002
Basic EPS: $116,029 151,842 $ .76
Adjustment for interest
on convertible debentures: 1,981 --
Incremental shares from
assumed exercise of
dilutive options: -- 1,738
Incremental shares from
assumed conversion of the
convertible debenture: -- 6,031
--------------------------
Diluted EPS: $118,010 159,611 $ .74
============ ============
8
Net Earnings Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
For the Three Months Ended
September 28, 2001
Basic EPS: $87,746 143,835 $ .61
Adjustment for interest
on convertible debentures: 1,935 --
Incremental shares from
assumed exercise of
dilutive options: -- 2,332
Incremental shares from
assumed conversion of the
convertible debenture: -- 6,031
---------------------
Diluted EPS: $89,681 152,198 $ .59
===================== =======
Earnings Before Effect
Of Accounting Change Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------
For the Nine Months Ended
September 27, 2002
Basic EPS: $302,429 149,432 $ 2.02
Adjustment for interest
on convertible debentures: 5,908 --
Incremental shares from
assumed exercise of
dilutive options: -- 2,405
Incremental shares from
assumed conversion of the
convertible debenture: -- 6,031
---------------------------------
Diluted EPS: $308,337 157,868 $ 1.95
======== ======= =========
9
Net Earnings Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------
For the Nine Months Ended
September 28, 2001
Basic EPS: $264,553 143,575 $1.84
Adjustment for interest
on convertible debentures: 5,303 -
Incremental shares from
assumed exercise of
dilutive options: - 2,737
Incremental shares from
assumed conversion of the
convertible debenture: - 5,457
-----------------------
Diluted EPS: $269,856 151,769 $1.78
======== ======= =====
NOTE 4. ACQUISITIONS AND DIVESTITURES
The Company has completed numerous acquisitions of existing businesses
during the nine-month period ended September 27, 2002 as well as the years ended
December 31, 2001 and 2000. These acquisitions have either been completed
because of their strategic fit with an existing Company business or because they
are of such a nature and size as to establish a new strategic platform for
growth for the Company. All of the acquisitions during this time period have
been additions to the Company's Process/Environmental Controls segment, have
been accounted for as purchases and have resulted in the recognition of goodwill
in the Company's financial statements. This goodwill arises because the purchase
prices for these targets reflect the competitive nature of the process by which
we acquired the targets, and because of the complementary strategic fit and
resulting synergies these targets bring to existing operations.
The Company makes an initial allocation of the purchase price at the
date of acquisition based upon its understanding of the fair market value of the
acquired assets and liabilities. The Company obtains this information during due
diligence and through other sources. In the months after closing, as the Company
obtains additional information about these assets and liabilities and learns
more about the newly acquired business, it is able to refine the estimates of
fair market value and more accurately allocate the purchase price. Examples of
factors and information that we use to refine the allocations include: tangible
and intangible asset appraisals; cost data related to redundant facilities;
employee/personnel data related to redundant functions; product line integration
and rationalization information; management capabilities; and information
systems compatibilities. The only items considered for subsequent adjustment are
items identified as of the acquisition date. The Company's acquisitions in 2000,
2001 and in the first nine months of 2002 have not had any significant
pre-acquisition contingencies (as contemplated by SFAS No. 38) which were
expected to have a significant
10
effect on the purchase price allocation.
The Company also periodically disposes of existing operations that are
not deemed to strategically fit with its ongoing operations or are not achieving
the desired return on investment. The following briefly describes the Company's
acquisition and divestiture activity for the above-noted periods.
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 the Company 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 acquired 100% of Marconi Data Systems,
formerly known as Videojet Technologies ("Videojet"), from Marconi plc in a
stock acquisition, for approximately $400 million in cash. Videojet is a
worldwide leader in the market for non-contact product marking equipment and
consumables. The results of Videojet's operations have been included in the
Company's Consolidated Statement of Earnings since February 5, 2002.
On February 4, 2002, the Company acquired 100% of Viridor
Instrumentation Limited ("Viridor") from the Pennon Group plc in a stock
acquisition for approximately $135 million in cash. Viridor is a global leader
in the design and manufacture of analytical instruments for clean water, waste
water, ultrapure water and other fluids and materials. The results of Viridor's
operations have been included in the Company's Consolidated Statement of
Earnings since February 4, 2002.
On February 1, 2002, the Company acquired 100% of Marconi Commerce
Systems, formerly known as Gilbarco ("Gilbarco"), from Marconi plc in a stock
acquisition, for approximately $318 million in cash. Gilbarco is a global leader
in retail automation and environmental products and services. The results of
Gilbarco's operations have been included in the Company's Consolidated Statement
of Earnings since February 1, 2002.
In addition, during the nine months ended September 27, 2002, the
Company acquired 8 smaller companies, for total consideration of approximately
$157 million in cash. These companies were all acquired to complement existing
units of the Process/Environmental Controls segment. Each of these 8 companies
individually has less than $60 million in annual revenues and were purchased for
a price of less than $75 million.
11
On January 2, 2001, the Company acquired 100% of the assets of United
Power Corporation ("UPC") from United UPC Corporation for approximately $108
million in cash. UPC operates in the power conditioning industry and
manufactures products ranging from high isolation transformers to rotary
uninterruptible power supply systems. The results of operations for UPC have
been included in the Company's Consolidated Statement of Earnings since January
2, 2001.
The Company acquired 11 smaller companies during 2001 for total cash
consideration of approximately $331 million. In general, each company is a
manufacturer and assembler of light electronic control and instrumentation
products, in markets including electronic and network test, aerospace,
industrial controls, and water quality. These companies were all acquired to
complement existing units of the Process/Environmental Controls segment. Each of
these 11 companies individually has less than $50 million in annual revenues and
were purchased for a price of less than $70 million.
The Company also disposed of two small product lines during 2001,
yielding cash proceeds of approximately $32 million. There were no material
gains or losses recognized on the sale of these product lines.
On July 3, 2000, the Company acquired 100% of the assets of the motion
control businesses of Warner Electric Corporation ("Warner") for approximately
$147 million cash. The results of operations for Warner have been included in
the Company's Consolidated Statement of Earnings since July 3, 2000. These
businesses were purchased from an entity controlled by Steven M. Rales and
Mitchell P. Rales, the Company's Chairman of the Board and Chairman of the
Executive Committee, respectively. The transaction was unanimously recommended
by an independent committee of the Company's Board of Directors, who received an
opinion from an independent financial advisor as to the fairness of the
transaction.
On June 20, 2000, the Company acquired 100% of the common stock of
Kollmorgen Corporation ("Kollmorgen") for approximately $267 million cash and
the assumption of approximately $96 million of debt. Kollmorgen operates in the
motion controls industry. The results of operations for Kollmorgen have been
included in the Company's Consolidated Statement of Earnings since June 20,
2000.
On March 27, 2000, the Company acquired 100% of the common stock of
American Precision Industries ("API") for approximately $187 million cash and
the assumption of approximately $60 million of debt. API operates in the motion
controls industry. The results of operations for API have been included in the
Company's Consolidated Statement of Earnings since March 27, 2000.
12
The Company acquired 5 smaller companies during 2000 for total cash
consideration of approximately $108 million. In general, each company is a
manufacturer and assembler of light electronic control and instrumentation
products, in market segments including electronic and network test, aerospace,
environmental controls, and water quality. These companies were all acquired to
complement existing units of the Process/Environmental Controls segment. Each of
these 5 companies individually has less than $50 million in annual revenues and
was acquired for a purchase price of less than $50 million.
The following table presents the aggregate purchase price allocations
for the 2002 (through September 27, 2002), 2001 and 2000 acquisitions (000's
omitted).
Through
September 27,
2002 2001 2000
--------- --------- ---------
Accounts receivable $ 192,254 $ 42,578 $ 138,925
Inventory 110,129 51,734 86,900
Property, plant and equipment 88,649 28,533 100,285
Intangible assets, primarily
goodwill 923,512 396,014 701,655
Accounts payable (59,133) (14,210) (49,502)
Other assets and liabilities,
net (219,980) (61,546) (114,480)
Assumed debt (47,270) (4,060) (155,189)
---------------------------------------
Net cash consideration $ 988,161 $ 439,043 $ 708,594
=======================================
The unaudited pro forma information for the periods set forth below
gives effect to the above noted acquisitions as if they had occurred at the
beginning of the period. The pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisitions been
consummated as of that time (unaudited, 000's omitted except per share amounts):
13
- -------------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended Full Year Full Year
Sept. 2002 Sept. 2001 2001 2000
- -------------------------------------------------------------------------------------------------------
Net sales $3,465,576 $3,816,378 $4,974,887 $5,504,002
- -------------------------------------------------------------------------------------------------------
Net earnings before change
in accounting principle 309,303 267,878 302,623 363,856
- -------------------------------------------------------------------------------------------------------
Net earnings 135,553 267,878 302,623 363,856
- -------------------------------------------------------------------------------------------------------
Earnings per share before
change in accounting
principle 2.00 1.80 2.04 2.50
- -------------------------------------------------------------------------------------------------------
Earnings per share .90 1.80 2.04 2.50
- -------------------------------------------------------------------------------------------------------
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 primarily to personnel reductions and facility closures or
restructurings, anticipated at the date of acquisition, in accordance with
Emerging Issues Task Force Issue No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." Adjustments to these estimates
are made up to 12 months from the acquisition date as plans are finalized. To
the extent these accruals are not utilized for the intended purpose, the excess
is recorded as a reduction of the purchase price, typically by reducing recorded
goodwill balances. Costs incurred in excess of the recorded accruals are
expensed as incurred. While the Company is still finalizing its exit plans with
respect to certain of its acquisitions, it does not anticipate significant
changes to the current accrual levels related to any acquisitions completed
prior to the date of this report.
With respect to the Videojet, Viridor and Gilbarco acquisitions
mentioned above, the Company has accrued an aggregate of approximately $25.1
million of involuntary employee benefits related to the termination of
approximately 2,700 employees and approximately $17.4 million of exit costs,
primarily related to the closure of 7 acquired manufacturing facilities.
In connection with the UPC acquisition, the Company accrued
approximately $200,000 of involuntary employee benefits related to the
termination of approximately 30 employees and approximately $245,000 of exit
costs.
In connection with the Warner, Kollmorgen and API acquisitions, the
Company accrued an aggregate of approximately $56.4 million of involuntary
employee benefits related to the termination of approximately 1,700 employees
and approximately $13 million of exit costs, primarily related to the planned
closure of 13 acquired manufacturing facilities and two corporate headquarters
facilities.
14
Accrued liabilities associated with these exit activities include the
following ($ in 000's):
Involuntary Facility
Planned Employee Closure &
Headcount Termination Restructuring
Reduction Benefits Costs Total
----------------------------------------------------------------------
Accrual related to 2000
acquisitions 406 $23,833 $16,331 $40,164
Costs incurred in 2000 (106) (4,027) (682) (4,709)
Adjustments to previously
provided reserves -- -- -- --
----------------------------------------------------------------------
Balance December 31, 2000 300 19,806 15,649 35,455
Accrual related to 2001
acquisitions 442 10,272 8,424 18,696
Costs incurred in 2001 (856) (27,474) (10,941) (38,415)
Adjustments to previously
provided reserves 1,745 40,162 13,744 53,906
----------------------------------------------------------------------
Balance December 31, 2001 1,631 42,766 26,876 69,642
Accrual related to 2002
acquisitions 3,287 29,889 26,326 56,215
Costs incurred in 2002 (1,260) (30,385) (12,270) (42,655)
Adjustments to previously
provided reserves 87 (384) (10,063) (10,447)
----------------------------------------------------------------------
Balance September 27, 2002 3,745 $41,886 $30,869 $72,755
======================================================================
Substantially all of the adjustment recorded in 2001 for these exit
activities related to the finalization of the Company's plans to restructure the
acquired motion businesses acquired in 2000, including finalization of the
facilities to be closed and the headcount reductions to be implemented. These
costs were reflected as an increase in goodwill during 2001. As a result of
favorable experience in these activities, the Company reversed approximately $10
million of previously provided exit reserves in 2002. This net reduction was
reflected as a reduction of the related goodwill balances and had no impact on
net earnings. Involuntary employee termination benefits are presented as a
component of the Company's compensation and benefits accrual included in accrued
expenses in the accompanying balance sheet. Facility closure and restructuring
costs are separately reflected in other accrued expenses.
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 $0.29 per share). During
the fourth quarter of 2001, management determined that it would restructure
certain of its product lines, principally its drill chuck, power quality and
industrial controls divisions, due to deteriorating financial performance and
higher cost excess facility capacity. The primary objective of the restructuring
15
plan is to reduce operating costs by consolidating, eliminating and/or
downsizing existing operating locations. No significant product lines are being
discontinued. Severance costs for the termination of approximately 1,100
employees approximates $49 million. These employees include all classes of
employees, including hourly direct, indirect salaried and management personnel,
at the affected facilities. Approximately $16 million of the charge was to
impair assets associated with the closure of 16 manufacturing and distribution
facilities in North America and Europe. The assets impaired were principally
equipment and leasehold improvements associated with the 16 facilities to be
closed. The remainder of the charge was for other exit costs including lease
termination costs. Approximately $25.5 million of the $69.7 million charge
relates to our Tools and Components segment and approximately $44.2 million of
the charge relates to our Process/Environmental Controls segment.
The expected annual pre-tax cost reduction, net of increased costs at
other facilities, from the restructuring is approximately $38 million of which
approximately 50% is expected to be realized in 2002 with the full year benefit
realized in 2003. These net cost reductions will primarily reduce the cost of
goods sold in the Company's statement of earnings. While certain estimates are
required in determining the net amount of cost savings realized, based on the
Company's analysis of the impact of the restructuring, management believes these
net costs savings are being realized.
As of December 31, 2001 and September 27, 2002, there had been no
adjustments to the liability recorded as part of the restructuring charge.
In conjunction with the closing of the facilities, approximately $4
million of inventory was written off in the fourth quarter of 2001 as unusable
in future operating locations. This inventory consisted principally of component
parts and raw materials, which were either redundant to inventory at the
facilities being merged and/or were not economically feasible to relocate since
the inventory was purchased to operate on equipment and tooling which was not
being relocated.
The table below presents a rollforward of the activity in the
restructuring accrual ($ in 000's):
16
- --------------------------------------------------------------------------------------------------------------
Lease
Termination
Employee Impairment and Other
Employee Separation of Facility Restructuring
Reductions Costs Assets Costs Total
- --------------------------------------------------------------------------------------------------------------
Total Restructuring Charge 1,120 $ 49,000 $ 15,700 $ 5,000 $ 69,700
Amounts Expended in 2001 (67) (3,300) (15,035) -- (18,335)
-------- --------- --------- -------- ---------
Balance at December 31, 2001 1,053 45,700 665 5,000 51,365
Amounts Expended in 2002 (775) (32,000) (665) (2,000) (34,665)
-------- --------- --------- -------- ---------
Balance at September 27, 2002 278 $ 13,700 $ -- $ 3,000 $ 16,700
======== ========= ========= ======== =========
NOTE 6. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 FASB issued SFAS 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
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
17
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 carrying amount of goodwill changed by approximately $624 million
during the nine-month period ended September 27, 2002. The components of the
change were $810 million of additional goodwill associated with business
combinations completed in the nine months ended September 27, 2002, $14 million
in other adjustments, primarily related to adjustments to goodwill associated
with acquisitions consummated in the second half of 2001 and foreign currency
translation adjustments, and lastly, a $200 million reduction of goodwill
related to an impairment charge recorded in connection with the adoption of SFAS
No. 142.
There were no dispositions of businesses with related goodwill during
the nine months ended September 27, 2002. Both the acquired goodwill change in
the period and the impairment charge relate to the Company's Process/
Environmental Controls segment. The carrying value of goodwill, at September 27,
2002, for the Tools segment and Process/ Environmental Controls segment is $212
million, and $2,588 million, respectively. Danaher has nine reporting units for
purposes of applying SFAS No. 141 and 142. The reporting units closely align
with the Company's strategic platforms and specialty niche businesses. They are
as follows: Tools, Motion Controls, Electronic Test, Power Quality,
Environmental, Aerospace and Defense, Industrial Controls, Level/Flow, and
Product Identification.
The following table provides the comparable effects of adoptions of
SFAS No. 142 for the quarters and nine months ended September 27, 2002 and
September 28, 2001.
Quarter Ended Nine Months Ended
September 27 September 28 September 27 September 28
(in thousands, except per share data) 2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income, before change
in accounting principle $ 116,029 $ 87,746 $ 302,429 $ 264,553
Add back: goodwill amortization
(net of tax) -- 13,580 -- 39,244
------------ ------------ ------------ ------------
Adjusted net income $ 116,029 $ 101,326 $ 302,429 $ 303,797
============ ============ ============ ============
18
Basic Net Income Per Share, Before
Change in Accounting Principle
Reported net income, before change
in accounting principle $ .76 $ .61 $ 2.02 $ 1.84
Add back: goodwill amortization
(net of tax) -- .10 -- .28
-------- -------- -------- --------
Adjusted net income per basic share $ .76 $ .71 $ 2.02 $ 2.12
======== ======== ======== ========
Diluted Net Income Per Share, Before
Change in Accounting Principle
Reported net income, before change
in accounting principle $ .74 $ .59 $ 1.95 $ 1.78
Add back: goodwill amortization
(net of tax) -- .10 -- .26
-------- -------- -------- --------
Adjusted net income per diluted
Share $ .74 $ .69 $ 1.95 $ 2.04
======== ======== ======== ========
In June, 2001, the FASB issued SFAS 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 FASB issued SFAS 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 FASB approved SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical
Corrections. SFAS No. 145 rescinds previous accounting guidance, which required
all gains and losses from extinguishment of debt be classified as an
extraordinary item. Under SFAS No. 145, classification of debt extinguishment
depends on the facts and circumstances of the transaction. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The Company does not
expect this SFAS to have a material impact on its financial statements.
19
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than at the date of the entity's commitment to an
exit plan. This statement is effective for exit and disposal activities that are
initiated after December 31, 2002. Since adoption of this SFAS is prospective,
the Company does not believe that the implementation of this SFAS will 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.
NOTE 8. SUBSEQUENT EVENT
On September 3, 2002, the Company announced it had entered into an
agreement to purchase Thomson Industries, Inc. ("Thomson") for $165 million and
additional contingent consideration based on the future performance of Thomson.
Thomson, with approximate annual revenues of $155 million, is a leading U.S.
producer of linear motion control products - including linear actuators, ball
screws, linear bearings and rails and precision gearboxes - for a range of
precision motion applications in medical, industrial, aerospace and mobile
off-highway markets. Substantially all conditions to closing have been met and
closing is expected in October 2002.
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
20
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 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
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 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 third
quarter of 2002 of $840.2 million were 36% higher than the 2001 third quarter.
The acquisitions in February 2002 of Gilbarco, Videojet Technologies and Viridor
as well as several smaller 2001 and 2002
21
acquisitions provided a 38% increase from the 2001 third quarter. The remainder
of the sales change was generated by a decrease in core sales volume of 3%,
offset by a favorable currency translation impact. Overall segment prices
remained relatively flat for the 2002 third quarter compared to the 2001 third
quarter.
Core sales volume for the environmental businesses, representing
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. Third quarter core
sales volume for the motion control businesses, representing approximately 20%
of segment revenues, was flat as compared to 2001 levels, as order rates have
stabilized in 2002 relative to the declines experienced in the last three
quarters of 2001. The electronic test businesses, representing approximately 20%
of segment revenues, reported a slight core sales volume decline of 1% for the
quarter, as mid-single digit gains in industrial product revenues were more than
offset by double-digit declines for Fluke Networks due to continued slowing
demand for cable media test products. Power quality revenues declined
approximately 4% in the 2002 third quarter, reflecting an improvement in the
rate of decline in end-user demand from prior quarters.
Segment sales for the nine-month period of 2002 of $2,418.0 million
were 20% higher than the 2001 period. Acquisitions accounted for 31.5% of the
increase in sales over the comparable period in 2001, offset by a decrease in
core sales volume of 12%. Currency translation impacts caused a 0.5% increase in
segment sales, and overall segment prices remained relatively flat compared to
2001.
For the nine-month period, core sales volume for the environmental
businesses 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 sales volume for the motion control
businesses was down approximately 15% for the period, resulting from softness in
end market demand, particularly semiconductor and electronic assembly. The
electronic test businesses reported core sales volume declines at high
single-digit rates for the nine-month period due to weakness in both industrial
and network test equipment sales. Core sales volume declined over 30% in the
power quality platform, due to the significant decline in end-user demand that
began in 2001.
For the third quarter, operating profit margins for the segment
decreased from 17.6% in 2001 to 16.7% in 2002. Approximately 100 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 sales volumes at the business units noted above were
offset by the cessation of goodwill amortization as of January 1, 2002.
22
For the nine-month period, operating profit margins for the segment
decreased from 17.0% in 2001 to 15.6% in 2002. Approximately 140 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 sales volumes at the business units noted above were offset by the
cessation of goodwill amortization as of January 1, 2002.
Tools and Components
Sales in the third quarter of 2002 of $311.5 million were 9% higher than
the 2001 third quarter. The entirety of this growth represents core sales 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,
representing approximately 65% of segment sales, grew at low single-digit rates
for the quarter, due primarily to increases in the Matco sales channel. Sales of
diesel engine retarders by the Jacobs Vehicle Systems business unit grew over
50% for the quarter, as OEM customers accelerated deliveries that were scheduled
for later in 2002.
Segment sales for the nine-month period of 2002 increased 3.3% compared to
2001. The product line sales trends for the period were generally similar to
those noted for the third quarter, with modest growth in the Hand Tool Group
offset by declines in the Delta and Jacobs Chuck business units. Diesel engine
retarder sales increased over 25% for the nine month period.
Operating profit margins for the third quarter of 16.6% increased from
15.3% in 2001 due to the significantly higher production volumes and shipment
levels in 2002. Margins for the nine month period increased from 13.4% to 14.9%
due to the impact of higher revenue levels, cost reduction actions and the
cessation of goodwill amortization as of January 1, 2002.
Gross Profit
Gross profit margin for the third quarter of 2002, as a percentage of
sales, was 39.9%, 70 basis points higher than 2001 levels. This gain was driven
primarily by higher core sales volumes and cost reduction programs implemented
across both business segments. Gross profit margin for the nine-month period of
38.8% improved slightly from the 38.6% reported in 2001.
Operating Expenses
Selling, general and administrative expenses for the 2002 third quarter
were 43% higher than in 2001. Acquisitions completed since the third quarter of
2001 added approximately $63 million to third quarter spending levels,
accounting for the majority of the increase. As a percentage of sales, these
costs were 23.7% and 21.1% in 2002 and 2001, respectively, reflecting the higher
relative spending
23
levels of recently acquired businesses and the impact of variable spending
related to core revenue increases.
Selling, general and administrative expenses for the 2002 nine-month period
were 27% higher than in 2001. Acquisitions accounted for a 29% increase in
spending levels, while cost reductions in core businesses generated an overall
2% decline.
Restructuring
In the fourth quarter of 2001, the Company recorded a restructuring charge
of $69.7 million ($43.5 million after tax, or $0.29 per share). During the
fourth quarter of 2001, management determined that it would restructure certain
of its product lines, principally its drill chuck, power quality and industrial
controls divisions, due to deteriorating financial performance and higher cost
excess facility capacity. The primary objective of the restructuring plan is to
reduce operating costs by consolidating, eliminating and/or downsizing existing
operating locations. No significant product lines are being discontinued.
Severance costs for the termination of approximately 1,100 employees
approximates $49 million. These employees include all classes of employees,
including hourly direct, indirect salaried and management personnel, at the
affected facilities. Approximately $16 million of the charge was to impair
assets associated with the closure of 16 manufacturing and distribution
facilities in North America and Europe. The assets impaired were principally
equipment and leasehold improvements associated with the 16 facilities to be
closed. The remainder of the charge was for other exit costs including lease
termination costs. Approximately $25.5 million of the $69.7 million charge
relates to our Tools and Components segment and approximately $44.2 million of
the charge relates to our Process/Environmental Controls segment.
The expected annual pre-tax cost reduction, net of increased costs at other
facilities, from the restructuring is approximately $38 million of which
approximately 50% is expected to be realized in 2002 with the full year benefit
realized in 2003. These net cost reductions will primarily reduce the cost of
goods sold in the Company's statement of earnings. While certain estimates are
required in determining the net amount of cost savings realized, based on the
Company's analysis of the impact of the restructuring, management believes these
net costs savings are being realized.
As of December 31, 2001 and September 27, 2002, there had been no
adjustments to the liability recorded as part of the restructuring charge.
In conjunction with the closing of the facilities, approximately $4 million
of inventory was written off in the fourth quarter of 2001 as unusable in future
operating locations. This inventory consisted principally of component parts and
raw materials, which were either redundant to inventory at the facilities being
merged
24
and/or were not economically feasible to relocate since the inventory was
purchased to operate on equipment and tooling which was not being relocated.
Interest Expense
The Company's debt financing as of September 27, 2002 is composed primarily
of $539 million of zero coupon convertible notes due 2021 ("LYONs"), $294
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. There have
been no borrowings under this facility since it was established in June 2001.
Net interest expense of $10.3 million in the third quarter of 2002 was $3.0
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 nine month period rose
$13.1 million compared to 2001, driven also by the decline in short-term
interest rates, reducing interest income, and higher average net debt levels
during 2002. Interest income of $2.4 million and $4.3 million was recognized in
the 2002 and 2001 third quarters, respectively, and interest income of $6.9
million and $16.3 million was recognized in the 2002 and 2001 nine- month
periods, respectively.
Income Taxes
The effective tax rate of 34.5% thus far for 2002 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 thus far in 2002 compared to 2001.
Liquidity and Capital Resources
Operating cash flow grew $135.1 million, or 31.4% during the first nine
months of 2002 as compared to 2001. All working capital components showed
improvement during the first nine 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. Capital
spending of $45.0 million for the 2002 nine month period decreased $14.7 million
from 2001, as increased capital spending from new acquisitions was more than
offset by declines in core businesses. Disposals of fixed assets yielded $19.3
million of cash proceeds for the nine month period, primarily due to the sale of
five facilities in the second and third quarters of 2002 for cash proceeds of
$14.8 million. A net after-tax gain of $3.4 million, approximately $0.02 per
share, was recorded on the facility sales, including $1.8 million or $0.01 per
share in the third quarter.
25
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 is using the remainder for general corporate
purposes, including future acquisitions.
Total debt under the Company's borrowing facilities increased to $1,253.4
million at September 27, 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 carry a yield to maturity of 2.375%. Holders of the LYONs may convert each
of their LYONs into 7.2676 shares of Danaher common stock (in the aggregate for
all LYONs, approximately 6.0 million shares of Danaher common stock) at any time
on or before the maturity date of January 22, 2021. 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. The Company will pay contingent interest to the holders
of LYONs during any six-month period commencing after January 22, 2004 if the
average market price of a LYON for a measurement period preceding such six-month
period equals 120% or more of the sum of the issue price and accrued original
issue discount for such LYON. Except for the contingent interest described
above, the Company will not pay interest on the LYONs prior to maturity.
The Company has completed numerous acquisitions of existing businesses
during the nine-month period ended September 27, 2002 as well as the years ended
December 31, 2001 and 2000. These acquisitions have either been completed
because of their strategic fit with an existing Company business or because they
are of such a nature and size as to establish a new strategic platform for
growth for the Company. All of the acquisitions during this time period have
been additions to the Company's Process/Environmental Controls segment, have
been accounted for as purchases and have resulted in the recognition of goodwill
in the Company's financial statements. This goodwill arises because the purchase
prices for these targets reflect the competitive nature of the process by which
we acquired the targets, and because of the complementary strategic fit and
resulting synergies these targets bring to existing operations.
Net cash paid for acquisitions was $937.8 million for the
26
first nine 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 the Company 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 in cash. On February 4, 2002, the Company acquired Viridor
Instrumentation Limited from the Pennon Group plc for approximately $135 million
in cash. On February 1, 2002, the Company acquired 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. In addition, the Company
acquired eight smaller companies during the first nine months of 2002 for a
total consideration of approximately $157 million in cash.
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. The Company acquired 11 smaller companies during
2001 for total cash consideration of approximately $331 million. In general,
each company is a manufacturer and assembler of light electronic control and
instrumentation products, in markets including electronic and network test,
aerospace, industrial controls, and water quality. These companies were all
acquired to complement existing units of the Process/Environmental Controls
segment. Each of these 11 companies individually has less than $50 million in
annual revenues and were purchased for a price of less than $70 million.
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 recourse, certain of its
accounts and notes receivable. Amounts outstanding under this program
approximated $95 million as of September 27, 2002. The subsidiary accounts for
this sale in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities - a replacement
of SFAS No. 125." A provision for estimated losses as a result of the 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
27
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. Additionally,
there have been no borrowings under the Company's uncommitted lines of credit
during the third quarter of 2002.
Due to declines in the equity markets, the fair value of the Company's
pension fund assets has decreased since the fourth quarter of 2001. In
accordance with SFAS No. 87, "Employers' Accounting for Pensions", the Company
expects to record a minimum pension liability adjustment at December 31, 2002.
This would result in a direct charge to stockholders' equity and would not
impact net income, but would be included in other comprehensive income. The
charge to stockholders' equity will be determined based on the final pension
plan valuation, and is expected to be less than $50 million.
In the third quarter of 2001, the Company repurchased 200,500 shares of
its common stock at a cost of $9.2 million.
The Company declared a regular quarterly dividend of $0.025 per share
payable on October 31, 2002, to holders of record on September 27, 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 $803.2 million on the Company's
September 27, 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 for the
foreseeable future to meet normal working capital requirements, capital
expenditures, dividends, scheduled debt repayments, and to fund acquisitions, if
applicable.
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.
28
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 receivable - 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 to a greater degree than anticipated, 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. The following represents a summary of the
changes in goodwill and other intangible assets, net for the years ended
December, 31, 2000 and December 31,2001 and for the nine-months ended September
27, 2002 ($ in 000's):
Balance January 1, 2000 $1,292,289
Attributable to current year acquisitions 608,394
Amortization (48,586)
Other changes, including adjustments of purchase
price, purchase allocations and the effect of
foreign currency translations 11,803
----------
Balance December 31, 2000 1,863,900
Attributable to current year acquisitions 385,774
Amortization (64,705)
Other changes, including adjustments of purchase
price, purchase allocations and the effect of
purchase allocations and the 107,688
----------
Balance, December 31, 2001 2,292,657
Attributable to current year acquisitions 923,512
Writedown of Goodwill (Note 6) (200,000)
29
Amortization (6,444)
Other changes, including adjustments of purchase
price, purchase allocations and the
effect of foreign currency translations 13,942
----------
Balance, September 27, 2002 $3,023,667
==========
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, budgets, economic projections and
anticipated future cash flows.
Purchase accounting - 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 primarily to personnel reductions and facility closures or
restructurings, anticipated at the date of acquisition, in accordance with
Emerging Issues Task Force Issue No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." Adjustments to these estimates
are made up to 12 months from the acquisition date as plans are finalized. To
the extent these accruals are not utilized for the intended purpose, the excess
is recorded as a reduction of the purchase price, typically by reducing recorded
goodwill balances. Costs incurred in excess of the recorded accruals are
expensed as incurred.
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
30
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 September 27, 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's
President and Chief Executive Officer, and Executive Vice President and
Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's
President and Chief Executive Officer, and Executive Vice President and
Chief Financial Officer, have concluded that the Company's disclosure
controls and procedures are effective.
(b) There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
31
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 99.1 Certification of Chief Executive Officer and Chief
Financial Officer, Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification of Chief Executive Officer and Chief
Financial Officer, Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports filed on Form 8-K: NONE
32
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: October 17, 2002 By: /s/ Patrick W. Allender
---------------- -----------------------
Patrick W. Allender
Chief Financial Officer
Date: October 17, 2002 By: /s/ Christopher C. McMahon
---------------- ---------------------------
Christopher C. McMahon
Controller
Certifications
I, H. Lawrence Culp, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and we have:
33
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 17, 2002 /s/ H. Lawrence Culp, Jr.
--------------------------
Name: H. Lawrence Culp, Jr.
Title: President and Chief Executive
Officer
34
I, Patrick W. Allender, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for Danaher Corporation's auditors any
material weaknesses in internal controls; and
35
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 17, 2002 /s/ Patrick W. Allender
------------------------
Name: Patrick W. Allender
Title: Executive Vice President and Chief
Financial Officer
36