SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

 

Commission File Number:         1-8089

 

DANAHER CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: 202-828-0850

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý                                                  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý                                                  No  o

 

The number of shares of common stock outstanding at October 10, 2003 was 153,556,253.

 

 

DANAHER CORPORATION

 

INDEX

 

FORM 10-Q

 

			Page
PART I   - FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Condensed Balance Sheets at September 26, 2003 and December 31, 2002	1
		Consolidated Condensed Statements of Earnings for the three months and nine months ended September 26, 2003 and September 27, 2002	2
		Consolidated Condensed Statements of Stockholders’ Equity for the nine months ended September 26, 2003	3
		Consolidated Condensed Statements of Cash Flow for the nine months ended September 26, 2003 and September 27, 2002	4
		Notes to Consolidated Condensed Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
	Item 4.	Controls and Procedures	30
PART II - OTHER INFORMATION
	Item 6.	Exhibits and Reports on Form 8-K	31
		Signatures	32

 

 

DANAHER CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(000’s omitted)

 

		September 26, 2003			December 31, 2002
		(unaudited)			(Note 1)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,104,727		$	810,463
Trade accounts receivable, net		836,586			759,028
Inventories:
Finished goods		197,347			165,061
Work in process		127,690			119,872
Raw material and supplies		214,751			200,654
Total inventories		539,788			485,587
Prepaid expenses and other current assets		299,306			332,188
Total current assets		2,780,407			2,387,266
Property, plant and equipment, net of accumulated depreciation of $917,000 and $832,000, respectively		570,724			597,379
Other assets		31,049			36,796
Goodwill		2,946,052			2,776,774
Other intangible assets, net		261,990			230,930
Total assets		$	6,590,222		$	6,029,145
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt		$	10,299		$	112,542
Accounts payable		439,494			366,587
Accrued expenses		827,887			786,183
Total current liabilities		1,277,680			1,265,312
Other liabilities		606,370			556,812
Long-term debt		1,246,008			1,197,422
Stockholders’ equity:
Common stock-$.01 par value		1,675			1,665
Additional paid-in capital		988,037			915,562
Accumulated other comprehensive income (loss)		(83,297		)	(105,973		)
Retained earnings		2,553,749			2,198,345
Total stockholders’ equity		3,460,164			3,009,599
Total liabilities and stockholders’ equity		$	6,590,222		$	6,029,145

 

See notes to consolidated condensed financial statements.

 

1

 

DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(000’s omitted except per share amounts)
(unaudited)

 

		Three Months Ended						Nine Months Ended
		September 26, 2003			September 27, 2002			September 26, 2003			September 27, 2002
Net sales		$	1,309,451		$	1,151,721		$	3,805,098		$	3,302,254
Operating costs and expenses:
Cost of sales		766,948			691,648			2,270,310			2,021,740
Selling, general and administrative expenses		326,831			275,317			951,687			791,493
Gains on sale of real estate, net		(93		)	(2,674		)	(868		)	(5,205		)
Total operating expenses		1,093,686			964,291			3,221,129			2,808,028
Operating profit		215,765			187,430			583,969			494,226
Interest expense		(14,520		)	(14,788		)	(44,003		)	(39,429		)
Interest income		2,605			4,501			7,148			6,926
Earnings before income taxes and effect of accounting change		203,850			177,143			547,114			461,723
Income taxes		(65,232		)	(61,114		)	(180,226		)	(159,294		)
Net earnings, before effect of accounting change		138,618			116,029			366,888			302,429
Effect of accounting change, net of tax		—			—			—			(173,750		)
Net earnings		$	138,618		$	116,029		$	366,888		$	128,679
Basic earnings per share:
Net earnings before effect of accounting change		$	0.90		$	0.76		$	2.39		$	2.02
Less:  Effect of accounting change		—			—			—			(1.16		)
Net earnings		$	0.90		$	0.76		$	2.39		$	0.86
Diluted net earnings per share:
Net earnings before effect of accounting change		$	0.87		$	0.74		$	2.31		$	1.95
Less:  Effect of accounting change		—			—			—			(1.10		)
Net earnings		$	0.87		$	0.74		$	2.31		$	0.85
Average common stock and common equivalent shares outstanding:
Basic		153,538			151,842			153,200			149,432
Diluted		161,771			159,611			161,213			157,868

 

See notes to consolidated condensed financial statements.

 

2

 

DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(000’s omitted)
(unaudited)

 

		Common Shares		Stock Amount			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Comprehensive Income
Balance, December 31, 2002		166,545		$	1,665		$	915,562		$	2,198,345		$	(105,973	)
Net earnings for the period		—		—			—			366,888			—			$	366,888
Dividends declared		—		—			—			(11,484		)	—			—
Common stock issued for options exercised and amendment of deferred compensation plan		997		10			72,475			—			—			—
Increase from translation of foreign financial statements		—		—			—			—			22,676			22,676
Balance, September 26, 2003		167,542		$	1,675		$	988,037		$	2,553,749		$	(83,297	)	$	389,564

 

See notes to consolidated condensed financial statements.

 

3

 

DANAHER CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW

(000’s omitted)
(unaudited)

 

		Nine Months Ended
		September 26, 2003			September 27, 2002
Cash flows from operating activities:
Net earnings from operations		$	366,888		$	128,679
Effect of change in accounting principle		—			173,750
Net earnings, before effect of accounting change		366,888			302,429
Non-cash items, depreciation and amortization		102,281			98,209
Change in accounts receivable		(23,008		)	28,765
Change in inventories		(15,017		)	44,306
Change in accounts payable		48,952			52,986
Change in prepaid expenses and other assets		46,201			(25,549		)
Change in accrued expenses and other liabilities		93,062			64,283
Total operating cash flows		619,359			565,429
Cash flows from investing activities:
Payments for additions to property, plant, and equipment		(54,060		)	(44,953		)
Proceeds from disposals of property, plant, and equipment		9,927			19,295
Cash paid for acquisitions		(186,317		)	(990,312		)
Proceeds from divestitures		11,648			52,562
Net cash used in investing activities		(218,802		)	(963,408		)
Cash flows from financing activities:
Proceeds from issuance of common stock		27,754			507,420
Proceeds from debt borrowings		5,262			—
Debt repayments		(147,513		)	(16,033		)
Payment of dividends		(11,484		)	(9,072		)
Net cash (used in) provided by financing activities		(125,981		)	482,315
Effect of exchange rate changes on cash		19,688			12,283
Net change in cash and cash equivalents		294,264			96,619
Beginning balance of cash and cash equivalents		810,463			706,559
Ending balance of cash and cash equivalents		$	1,104,727		$	803,178
Supplemental disclosures:
Cash interest payments		$	36,972		$	35,048
Cash income tax payments		$	86,476		$	17,972

 

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 2002 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 September 26, 2003 and December 31, 2002, its results of operations for the three and nine month periods ended September 26, 2003 and September 27, 2002, and its cash flows for the nine months ended September 26, 2003 and September 27, 2002.

 

Total comprehensive income was as follows:

 

		2003			2002
		(millions)
Three Months		$	142.2		$	103.2
Nine Months		$	389.6		$	130.6

 

Total comprehensive income for all periods represents net earnings and the change in cumulative foreign translation adjustment.  Accumulated comprehensive income (loss) also includes the effect of an additional minimum pension liability recorded in the fourth quarter of 2002 of $76.9 million, net of tax.

 

NOTE 2.                SEGMENT INFORMATION

 

Segment information is presented consistently with the basis described in the 2002 Annual Report.  There has been no material change in total assets or liabilities by segment, except for 2003 acquisitions and divestitures (see Note 4).  Segment results for 2003 and 2002 are shown below:

 

5

 

		Nine Months Ended						Nine Months Ended
		September 26, 2003			September 27, 2002			September 26, 2003			September 27, 2002
Sales:
Process/Environmental Controls		$	1,004,179		$	840,222		$	2,946,729		$	2,417,978
Tool and Components		305,272			311,499			858,369			884,276
		$	1,309,451		$	1,151,721		$	3,805,098		$	3,302,254
Operating Profit:
Process/Environmental Controls		$	172,617		$	139,932		$	474,957		$	377,604
Tool and Components		48,502			51,723			126,803			131,954
Other		(5,354		)	(4,225		)	(17,791		)	(15,332		)
		$	215,765		$	187,430		$	583,969		$	494,226

 

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 2002 goodwill write down is summarized as follows:

 

		Net Earnings (Numerator)			Shares (Denominator)		Per Share Amount
For the Three Months Ended September 26, 2003:
Basic EPS		$	138,618		153,538		$	.90
Adjustment for interest on convertible debentures		2,109			—
Incremental shares from assumed exercise of dilutive options		—			2,202
Incremental shares from assumed conversion of the convertible debenture		—			6,031
Diluted EPS		$	140,727		161,771		$	.87

 

6

 

		Earnings (Numerator)			Shares (Denominator)		Per Share 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 of convertible debentures		—			6,031
Diluted EPS		$	118,010		159,611		$	.74

 

		Net Earnings (Numerator)			Shares (Denominator)		Per Share Amount
For the Nine Months Ended September 26, 2003:
Basic EPS		$	366,888		153,200		$	2.39
Adjustment for interest on convertible debentures		6,290			—
Incremental shares from assumed exercise of dilutive options		—			1,982
Incremental shares from assumed conversion of the convertible debenture		—			6,031
Diluted EPS		$	373,178		161,213		$	2.31

 

		Earnings (Numerator)			Shares (Denominator)		Per Share Amount
For the Nine Months Ended September 27, 2002:
Basic EPS before the effect of the accounting change		$	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 debentures		—			6,031
Diluted EPS before the effect of the accounting change		$	308,337		157,868		$	1.95

 

7

 

NOTE 4.                ACQUISITIONS AND DIVESTITURES

 

The Company completed eight business acquisitions during the nine months ended September 26, 2003.  In addition, the Company acquired twelve businesses during the year ended December 31, 2002. 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 these time periods 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 a number of factors including the future earnings and cash flow potential of these targets; the multiple to earnings, cash flow and other factors at which companies similar to the targets have been purchased by other acquirers; 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 Company will adjust the initial purchase price allocation as the fair value at the acquisition date of the assets and liabilities acquired are determined.  The only items considered for subsequent adjustment are items identified as of the acquisition date. The Company’s acquisitions in 2003 and 2002 have not had any significant pre-acquisition contingencies (as contemplated by SFAS No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises”) which were expected to have a significant 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 nine months ended September 26, 2003.  For a description of the Company’s acquisition activity for the year-ended December 31, 2002, reference is made to Note 2 to the Consolidated Financial Statements included in the 2002 Annual Report on Form 10-K.

 

8

 

The Company acquired eight companies and product lines during the nine-month period ended September 26, 2003 for total consideration of approximately $186 million in cash including transaction costs. The Company also assumed debt with an aggregate fair market value of approximately $45 million in connection with these acquisitions. In general, each company is a manufacturer and assembler of environmental or instrumentation products, in market segments such as product identification, environmental and aerospace and defense. These companies were all acquired to complement existing units of the Process/Environmental Controls segment.  The aggregated annual revenue of the acquired businesses is approximately $210 million and each of these eight companies individually has less than $125 million in annual revenues.  In addition, the Company sold one facility acquired in connection with a prior acquisition for approximately $11.6 million in net proceeds.  No gain or loss was recognized on the sale and the proceeds have been included in proceeds from the divestiture in the accompanying consolidated condensed statements of cash flows.

 

The following table summarizes the aggregate estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the acquisitions consummated during the nine months ended September 26, 2003 ($ in 000’s):

 

Accounts receivable		$	36,454
Inventory		26,881
Property, plant and equipment		21,617
Goodwill		162,689
Other intangible assets, primarily trade names and patents		30,598
Accounts payable		(14,930		)
Other assets and liabilities, net		(32,384		)
Assumed debt		(44,608		)
Net cash consideration		$	186,317

 

The Company is continuing to evaluate the initial purchase price allocations for the acquisitions completed during the nine months ended September 26, 2003 and will adjust the allocations as additional information relative to the estimated integration costs of the acquired businesses and the fair market values of the assets and liabilities of the businesses become known.  The Company completed its evaluation of the purchase price allocation for the Thomson Industries acquisition completed in the fourth quarter of 2002 in September 2003.  Goodwill with respect to the acquisition of Thomson Industries was reduced from the original estimate by approximately $5.4 million due primarily to a reduction of the cost estimates for integration activities to be undertaken with respect to this business.  While not expected to be significant, the Company will adjust the purchase price allocations for its 2003 acquisitions as information related to the fair value of the acquired assets and liabilities becomes available.  In addition, the Company will accrue the estimated cost of integration activities when such amounts are determined, but in no event beyond one-year from the date of acquisition.

 

9

 

The unaudited pro forma information for the periods set forth below gives effect to all prior 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):

 

		Three Months Ended						Nine Months Ended
		September 26, 2003			September 27, 2002			September 26, 2003			September 27, 2002
Net sales		$	1,309,935		$	1,266,673		$	3,823,691		$	3,750,109
Net earnings before change in accounting principle		136,080			113,657			366,849			306,202
Net earnings		136,080			113,657			366,849			132,452
Diluted earnings per share before change in accounting principle		$	.85		$	.72		$	2.30		$	1.98
Diluted earnings per share		$	.85		$	.72		$	2.30		$	.88

 

In connection with its acquisitions, the Company assesses and formulates a plan related to the future integration of the acquired business.  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.  The Company is finalizing its exit plans with respect to certain of its recent acquisitions which may result in adjustments to the current accrual levels.

 

Accrued liabilities associated with these exit activities include the following ($ in 000’s except headcount):

 

		Videojet			Viridor			Gilbarco			Thomson			All Others			Total
Planned Headcount Reduction:
Balance December 31, 2002		6			42			271			936			154			1,409
Accrual related to 2003 acquisitions		—			—			—			—			647			647
Reductions in 2003		(6		)	(32		)	(154		)	(268		)	(507		)	(967		)
Adjustments to previously provided reserves		—			(10		)	(32		)	(207		)	(11		)	(260		)
Balance September 26, 2003		—			—			85			461			283			829
Involuntary Employee Termination Benefits:
Balance December 31, 2002		$	1,613		$	1,595		$	16,067		$	16,541		$	16,119		$	51,935
Accrual related to 2003 acquisitions		—			—			—			—			7,009			7,009
Costs incurred in 2003		(1,613		)	(1,492		)	(7,253		)	(3,412		)	(12,406		)	(26,176		)
Adjustments to previously provided reserves		—			—			—			(7,106		)	(3,251		)	(10,357		)
Balance September 26, 2003		$	—		$	103		$	8,814		$	6,023		$	7,471		$	22,411
Facility Closure and Restructuring Costs:
Balance December 31, 2002		$	914		$	2,389		$	2,573		$	6,424		$	22,609		$	34,909
Accrual related to 2003 acquisitions		—			—			—			—			5,299			5,299
Costs incurred in 2003		(567		)	(792		)	(888		)	(3,977		)	(9,562		)	(15,786		)
Adjustments to previously provided reserves		(18		)	—			—			2,773			(3,488		)	(733		)
Balance September 26, 2003		$	329		$	1,597		$	1,685		$	5,220		$	14,858		$	23,689

 

10

 

NOTE 5.                GOODWILL

 

The following table shows the rollforward of goodwill reflected in the financial statements resulting from the Company’s acquisition activities for the first nine months of 2003 ($ in millions).

 

Balance December 31, 2002		$	2,777
Attributable to 2003 acquisitions		163
Adjustments due to finalization of purchase price allocations		(20		)
Effect of foreign currency translation		26
Balance September 26, 2003		$	2,946

 

There were no dispositions of businesses with related goodwill during the nine months ended September 26, 2003.  The acquired goodwill change in the period related to the Company’s Process/Environmental Controls segment.  The Company reduced previously recorded goodwill related to acquisitions which occurred in 2002 primarily as a result of finalization of the integration plans with respect to the Thomson business and other smaller acquisitions, the receipt of information relative to the fair market value of other assets acquired and the finalization of the acquired businesses deferred tax position reflecting the above changes.  The carrying value of goodwill, at September 26, 2003, for the Tools and Components segments and Process/Environmental Controls segment is approximately $212 million and $2,734 million, respectively.  Danaher has nine reporting units closely aligned with the Company’s strategic platforms and specialty niche businesses.  They are as follows:  Tools, Motion, Electronic Test, Power Quality, Environmental, Aerospace and Defense, Industrial Controls, Level/Flow, and Product Identification.

 

11

 

Goodwill—Management assesses goodwill for impairment at least annually at the beginning of the fourth quarter or as “triggering” events occur.  In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data.  There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment which may effect the carrying value of goodwill.

 

NOTE 6.                NEW ACCOUNTING STANDARDS

 

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.  This SFAS did not have a material impact on the Company’s financial statements.

 

In December 2002, the FASB issued Statement No. 148 (FAS 148), “Accounting for Stock-Based Compensation-Transition and Disclosure” which amends FASB No. 123 (FAS 123), “Accounting for Stock-Based Compensation.”  FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of FAS 123 to require disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The transition guidance and disclosure provisions of FAS 148 is effective for the Company’s financial statements issued for 2003.  As allowed by FAS 123, the Company follows the disclosure requirements of FAS 123, but continues to account for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, which results in no charge to earnings when options are issued at fair market value.  Therefore, at this time, adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

 

12

 

The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:

 

		Three Months Ended						Nine Months Ended
		September 26, 2003			September 27, 2002			September 26, 2003			September 27, 2002
Net earnings before effect of accounting change, as reported		$	138,618		$	116,029		$	366,888		$	302,429
Deduct:  Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(6,569		)	(6,261		)	(16,084		)	(15,935		)
Pro forma net income		$	132,049		$	109,768		$	350,804		$	286,494
Earnings per share before effect of accounting change:
Basic—as reported		$	.90		$	.76		$	2.39		$	2.02
Basic—pro forma		$	.86		$	.72		$	2.29		$	1.92
Diluted—as reported		$	.87		$	.74		$	2.31		$	1.95
Diluted—pro forma		$	.83		$	.70		$	2.22		$	1.85

 

Nonqualified options have been issued only at fair market value exercise prices as of the date of grant during the periods presented herein, and the Company’s policy does not recognize compensation costs for options of this type.  The pro forma costs of these options granted have been calculated using the Black-Scholes option pricing model and assuming an estimated 3.2% risk-free interest rate, an estimated 7 year life for the option, an estimated 25% expected volatility and dividends at the current annual rate.  The weighted-average grant date fair market value of options issued was $24 and $28 per share in the nine months ended September 26, 2003 and September 27, 2002, respectively.

 

In December 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  FIN 45 requires a guarantor to make additional disclosures in its interim and annual financial statements regarding the guarantor’s obligations.  In addition, FIN 45 requires, under certain circumstances, that a guarantor recognize, at the inception of the guarantee, a liability for the fair value of the obligation

undertaken when issuing the guarantee. The Company has adopted the disclosure requirements of this interpretation.

 

The Company has from time to time divested certain of its businesses and assets.  In connection with these divestitures, the Company often provides representations, warranties and/or indemnities to cover various risks and unknown liabilities, such as environmental liabilities and tax liabilities. The Company cannot estimate the potential liability from such representations, warranties and indemnities because they relate to unknown conditions.  However, the Company does not believe that the liabilities relating to these representations, warranties and indemnities will have a material adverse effect on the Company’s financial position, results of operations or liquidity.

 

Due to the Company’s downsizing of certain operations pursuant to acquisitions, restructuring plans or otherwise, certain properties leased by the Company have been sublet to third parties. In the event any of these third parties vacates any of these premises, the

 

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Company would be legally obligated under master lease arrangements. The Company believes that the financial risk of default by such sublessors is individually and in the aggregate not material to the Company’s financial position, results of operations or liquidity.

 

The Company generally accrues estimated warranty costs at the time of sale.  In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained.  Warranty period terms depend on the nature of the product and range from 90 days up to the life of the product.  The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage.  The liability, shown in the following table, is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.

 

In certain cases the Company will sell extended warranty or maintenance agreements.  The proceeds from these agreements is deferred and recognized as revenue over the term of the agreement.

 

The following is a roll forward of the Company’s warranty accrual for the nine months ended September 26, 2003 ($ in 000’s).

 

Balance December 31, 2002		$	61,235
Accruals for warranties issued during the period		31,440
Changes in estimates related to pre-existing warranties		7,725
Settlements made		(36,507		)
Additions due to acquisitions		2,613
Balance September 26, 2003		$	66,506

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46).  This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, addresses consolidation of variable interest entities.  FIN 46 requires certain variable interest entities (“VIE’s”) to be consolidated by the primary beneficiary if the entity does not effectively disperse risks among the parties involved.  The provisions of FIN 46 are effective immediately for those variable interest entities created after January 31, 2003.  The provisions, as amended, are effective for the first interim or annual period ending after December 15, 2003 for those variable interests held prior to February 1, 2003.  While the Company believes this Interpretation will not have a material effect on its financial position or results of operations, it is continuing to evaluate the effect of adoption of this Interpretation.

 

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In April 2003, the FASB released SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies the accounting for derivatives, amending the previously issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies under what circumstances a contract with an initial net investment

meets the characteristics of a derivative, amends the definition of an underlying contract, and clarifies when a derivative contains a financing component in order to increase the comparability of accounting practices under SFAS No. 133. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003.  The adoption of SFAS No. 149 did not have a material impact on our consolidated financial statements.

 

In May 2003 the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities section and the equity section, rather than as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company’s implementation of this SFAS did not have a material impact on its financial statements.

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with its audited consolidated financial statements.

 

INFORMATION RELATING TO FORWARD LOOKING STATEMENTS

 

Certain information included or incorporated by reference in this document may be deemed to be “forward looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical facts, that address activities, events or developments that Danaher Corporation (“Danaher,” the “Company,” “we,” “us,” “our”) 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’s 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

 

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limited to:

•              the Company’s ability to continue long-standing relationships with major customers and penetrate new channels of distribution;

•              increased competition;

•              demand for and market acceptance of new and existing products, including changes in regulations (particularly environmental regulations) which could affect demand for products in the Process/Environmental Controls segment;

•              adverse changes in currency exchange rates or raw material commodity prices;

•              unanticipated developments that could occur with respect to contingencies such as litigation, product liability exposures and environmental matters;

•              changes in the environment for making acquisitions and dispositions, including changes in accounting or regulatory requirements or in the market value of acquisition candidates;

•              the Company’s ability to identify appropriate acquisition candidates and integrate acquired businesses into its operations, realize planned synergies and operate such businesses profitably in accordance with expectations;

•              risks customarily encountered in foreign operations, including transportation interruptions, changes in a country’s or region’s political or economic conditions, trade protection measures, different protection of intellectual property and changes in laws or licensing or regulatory requirements;

•              the Company’s ability to achieve projected levels of efficiencies and cost reduction measures;

•              the difference between the actual and estimated return on pension plan assets;

•              risks related to terrorist activities and instability in the Middle East; and

•              other risks and uncertainties that affect the manufacturing sector generally including, but not limited to, economic, political, 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 statement, all of which are expressly qualified by the foregoing.

 

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OVERVIEW

 

Danaher Corporation 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; retail petroleum automation products; compact professional electronic test tools; product identification equipment and consumables; 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.

 

Market indicators of the global manufacturing economy continue to be mixed.  While differences exist among the Company’s businesses, the Company’s markets have remained generally stable for the past four quarters and this trend is expected to continue for the balance of the 2003 fiscal year.

 

Third quarter 2003 consolidated revenues increased 14% over 2002. Acquisitions accounted for approximately 10% growth, and favorable currency translation contributed 4%.  Consolidated sales from existing businesses for the quarter (defined as businesses that have been part of the Company for each comparable period reported) were consistent with 2002’s levels.  For the nine month period, consolidated sales grew 15%, with acquisition growth of 12% and favorable currency translation of 3%. Consolidated sales from existing businesses for the nine month period were consistent with 2002’s levels.

 

PROCESS/ENVIRONMENTAL CONTROLS

 

Revenues of the Process/Environmental Controls segment increased 19.5% for the third quarter of 2003 compared to 2002.  The fourth quarter 2002 acquisition of Thomson Industries, and the 2003 acquisition of Willett International Limited (“Willett”), together with several other smaller acquisitions provided a 14% increase in segment sales.  This increase was in addition to an approximate 5% favorable currency translation impact.  Sales from existing businesses for this segment were slightly positive for the quarter compared to 2002.

 

Revenues from the Company’s environmental businesses, representing approximately 30% of segment revenue, increased 17% in the 2003 third quarter compared to 2002.  Acquisitions completed in 2002 and 2003 accounted for 6% growth, sales from existing operations

 

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provided 6% growth and favorable currency translation provided 5% growth.  Existing operations were impacted by strength in the Gilbarco Veeder-Root business, resulting primarily from market-share gains in the U.S. and the timing of orders from major oil companies for Gilbarco petroleum dispensers.  Sales before currency gains from existing businesses in the Company’s water quality businesses were up low single-digits for the quarter as strength in both lab and process instrumentation sales in Europe was partially offset by continued softness in the U.S. ultrapure markets.

 

Electronic test revenues, representing approximately 17% of segment revenues, grew 11% during the third quarter of 2003 compared to 2002.  Acquisitions, principally the Raytek Corporation acquisition, provided 8% growth, which includes recent, strong sales of Raytek’s non-contact temperature measurement products.   Favorable currency translation provided 4% growth.  These factors were partially offset by a 1% decline related to sales from existing businesses driven primarily due to softness in industrial end-markets.  Our network test equipment business strengthened, compared to earlier this year, to post near flat sales for the quarter.

 

Sales in the Company’s motion businesses, representing approximately 20% of segment revenues, grew 37%, as acquisitions provided growth of 29% (primarily from the Thomson Industries acquisition in the fourth quarter of 2002) and favorable currency translation effects provided 7% growth to drive this increase.  The existing businesses’ revenues provided 1% growth when compared to the comparable period in 2002 as growth in our motors and direct drives businesses were largely offset by declines in the linear actuator product offerings.

 

In February 2002, the Company established its product identification business with the acquisition of Videojet Technologies, and in January 2003 added to it with the acquisition of Willett, which together account for approximately 12% of segment revenues.  For the third quarter of 2003, product identification revenues grew 53.5% compared to 2002, with the Willett acquisition providing 48% growth, favorable currency impacts of 3%, and existing operations providing 2.5% growth.

 

The segment’s niche businesses in the aggregate showed mid-single digit revenue growth in the third quarter, primarily from acquisitions.

 

Segment sales for the nine month period of 2003 of $2,947 million were 22% higher than the 2002 period.  Acquisitions accounted for a 17% increase in sales over the comparable period in 2002, in addition to favorable currency translation impacts of 5% and a slight increase in sales from existing businesses.

 

For the nine month period, sales from existing operations of the environmental businesses provided 1% growth, with slight improvement in performance in both the water quality markets and in Gilbarco’s dispenser markets offsetting slight declines in the ultrapure instrumentation businesses.  Sales from existing operations of the motion control businesses provided low-single

 

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digit growth for the period, reflecting share gains in certain of its end markets, including electric vehicles and direct drives, offset by weakness in certain linear product offerings.  The electronic test businesses reported sales from existing operations declined at low-single digit rates for the nine month period, primarily due to weakness in network test equipment sales and to a lesser extent softness in industrial end-markets.

 

For the third quarter, operating profit margins for the segment were 17.2% in 2003 compared to 16.6% in 2002.  This 0.6% increase resulted primarily from benefits achieved from the 2001 restructuring program and other cost reductions completed during 2002 and 2003.  This increase was partially offset by the dilutive impact of lower operating margins of newly acquired businesses, and increases in expenditures on growth opportunities in the segment.

 

For the nine month period, operating profit margins for the segment increased to 16.1% in 2003 from 15.6% in 2002.  This improvement was driven primarily by cost reduction initiatives completed during 2002, and margin improvements in recently acquired businesses.

 

TOOLS AND COMPONENTS

 

Revenues in the Tools and Components segment declined approximately 2% in the third quarter of 2003 compared to 2002.  The entirety of this decrease represents a decline in sales from existing businesses, as there were no acquisitions in this segment during 2002 or 2003, and the impact of currency was negligible.  Hand Tool revenues, representing approximately two-thirds of segment sales, improved approximately 9%, driven primarily by increases in sales from the group’s retail hand tool product lines which rebounded following the inventory reductions by the group’s largest customers which affected sales earlier in the year.  Offsetting these increases was a net sales decline in the segment’s niche businesses, as continued weakness in shipments of truck and industrial boxes as a result of softness in end-user demand was partially offset by revenue gains in the Company’s wheel service equipment product lines.  Also, sales of diesel engine retarders fell during the quarter, reflecting decreased end-user demand as compared to 2002. In 2002, the business experienced an inventory build-up by customers in advance of regulatory changes implemented last year.

 

Segment revenues for the nine month period of 2003 fell 3% compared to 2002 principally for the reasons noted above.

 

Third quarter 2003 operating profit margins for the segment were 15.9%, below the 16.6% margins reported in the third quarter of 2002.  Margin improvements at the Jacobs Chuck business unit related to the 2001 restructuring program, and other cost reductions, were offset by margin declines at the Delta Industries business unit related to the volume decrease noted above, the impact of lower engine retarder sales, and by spending on growth opportunities.  Operating profit margins for the nine month period of 14.8% declined slightly from the 14.9% reported in 2002.  The

 

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Company expects to continue pursuing cost reduction efforts in its tools businesses, including plant closures and integrations of existing operations as appropriate.

 

GROSS PROFIT

 

Gross profit margins for the 2003 third quarter were 41.4%, an increase of 1.4 points compared to 40.0% in 2002.  This increase results from the benefits of the 2001 restructuring program and other improvements in the cost structures of existing business units, and from cost reductions in business units acquired during the first quarter of 2002, offset somewhat by the effect of slightly lower gross margins of newly acquired businesses.

 

Gross profit margins for the 2003 nine month period were 40.3%, an increase of 1.5 points compared to 38.8% in 2002.  This increase resulted from the same cost reductions and margin improvements impacting the third quarter, as discussed above.  The Company’s restructuring program announced in the fourth quarter of 2001 is expected to provide approximately $38 million of savings to the full year 2003.

 

OPERATING EXPENSES

 

In the third quarter of 2003, selling, general and administrative expenses were 25.0% of sales, an increase of 1.1 points from the 2002 level of 23.9%.  This increase is due primarily to additional spending to fund growth opportunities throughout the Company, as well as the impact of newly acquired businesses and their higher relative operating expense structures.  For the nine month period of 2003, selling, general and administrative expenses were 25.0% of sales, an increase of 1.0 point from the 2002 level of 24.0%.  This increase results from the same factors as those described for the third quarter.

 

INTEREST COSTS AND FINANCING TRANSACTIONS

 

The Company’s debt financing as of September 26, 2003 was composed primarily of $551.4 million of zero coupon convertible notes due 2021 (“LYONs”), $344.4 million of 6.25% Eurobond notes due 2005 and $250 million of 6% notes due 2008.  The Company maintains revolving senior unsecured credit facilities totaling $1 billion available for general corporate purposes.  There have been no borrowings under the revolving credit facilities.  Borrowings under the revolving credit agreements bear interest of Eurocurrency rate plus ..21% to .70%, depending on the Company’s debt rating.  The credit facilities, each $500 million, have a fixed term expiring June 28, 2006 and July 23, 2006, respectively.

 

Interest expense of $14.5 million in the third quarter of 2003 was slightly lower than the corresponding 2002 period.  The decrease in interest expense is due primarily to reduced debt levels resulting from repaying outstanding indebtedness offset by the unfavorable impact of the Euro/US Dollar exchange rate on interest expense

 

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related to the Company’s $344.4 million of 6.25% Eurobond notes due 2005.  Interest expense of $44.0 million for the nine month period rose slightly compared to 2002, primarily driven by the unfavorable impacts of the Euro/U.S. Dollar exchange rate on interest expense. Interest income of $2.6 million and $4.5 million was recognized in the third quarters of 2003 and 2002, respectively, and interest income of $7.1 million and $6.9 million was recognized in each of the 2003 and 2002 nine month periods, respectively.

 

INCOME TAXES

 

The 2003 effective tax rate of 32.9% is 1.6% lower than the 2002 effective rate, mainly due to the effect of a higher proportion of foreign earnings in 2003 compared to 2002 and the impact of additional research and experimentation credits available to reduce the U.S. tax liabilities.  The Company expects a 32.0% effective tax rate for the balance of 2003.

 

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

 

The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, and credit risk, 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 addition, the Company’s broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its operating earnings as a whole.

 

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 September 26, 2003, the market value of the Company’s fixed-rate long-term debt would decrease by approximately $16 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. 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%.  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 have no impact on net income or stockholders’ equity.

 

The Company has a number of manufacturing sites throughout the world and sells its products in more than 30 countries.  As a result, it is exposed to movements in the exchange rates of various currencies against the United States dollar and against the

 

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currencies of countries in which it manufactures and sells products and services.  In particular, the Company has more sales in European currencies than it has expenses in those currencies.  Therefore, when European currencies strengthen or weaken against the U.S. dollar, operating profits are increased or decreased, respectively.  The Company’s issuance of Eurobond notes in 2000 provides a natural hedge 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.

 

Other than the above noted swap arrangements, there were no material derivative instrument transactions during any of the periods presented.  Additionally, the Company does not have significant commodity contracts or derivatives.

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and temporary investments, our interest rate swap agreements and trade accounts receivable.

 

The Company is exposed to credit losses in the event of nonperformance by counter parties to its financial instruments.  The Company anticipates, however, that counter parties will be able to fully satisfy their obligations under these instruments. The Company places cash and temporary investments and its interest rate swap agreements with various high-quality financial institutions throughout the world, and exposure is limited at any one institution.  In addition, though the Company does not obtain collateral or other security to support these financial instruments, it does periodically evaluate the credit standing of the counter party financial institutions.

 

Concentrations of credit risk arising from trade accounts receivable are due to selling to a large number of customers in a particular industry. The Company performs ongoing credit evaluations of its customers’ financial conditions and obtains collateral or other security when appropriate.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s liquidity needs arise primarily from capital investment in machinery, equipment and the improvement of facilities, funding working capital requirements to support business growth initiatives, acquisitions, dividend payments, pension funding obligations and debt service costs.  The Company continues to generate substantial cash from operations and remains in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing its capital structure on a short and long-term basis.  Operating cash flow, a key source of the Company’s liquidity, was $619.4 million for the nine months ended September 26, 2003, an increase of $54.0 million, or approximately 10% as compared to the

 

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nine months ended September 27, 2002.  The increase in operating cash flow was driven primarily by earnings growth.  The impact of the timing of payments for certain of the Company’s benefit programs, including 401(k) and employee health plan contributions were substantially offset by slowing in working capital improvements relating to accounts receivable and inventory and increased income tax payments compared to levels in 2002.

 

Investing activities for the nine months ended September 26, 2003 used cash of $218.8 million compared to $963.4 million of cash used in the first nine months of 2002.  Gross capital spending of $54.1 million for the first nine months of 2003 increased $9.1 million from the first nine months of 2002, due to capital spending relating to new acquisitions and spending related to the Company’s low-cost region sourcing initiatives.  Capital expenditures are made primarily for machinery, equipment and the improvement of facilities. In 2003, the Company expects capital spending of approximately $80 million. Disposals of fixed assets yielded $9.9 million of cash proceeds for the first nine months of 2003, primarily due to the sale of four facilities and other real property. Net pre-tax gains of $0.9 million were recorded on the sales and are included as a gain on sale of real estate in the accompanying statements of earnings.  In addition, as discussed below, the Company has completed several business acquisitions during the nine months ended September 26, 2003 as well as the year ended December 31, 2002.  All of the acquisitions during this time period have resulted in the recognition of goodwill in the Company’s financial statements. This goodwill typically arises because the purchase prices for these targets reflect the competitive nature of the process by which we acquired the targets and the complementary strategic fit and resulting synergies these targets bring to existing operations.  For a discussion of other factors resulting in the recognition of goodwill see Note 4 to the accompanying financial statements.

 

The Company acquired eight companies and product lines during the nine-month period ended September 26, 2003 for total consideration of approximately $186.3 million in cash, including transaction costs. The Company also assumed debt with an estimated fair market value of approximately $45.0 million in connection with these acquisitions. In general, each company is a manufacturer and assembler of environmental or instrumentation products, in market segments such as product identification, environmental and aerospace and defense. These companies were all acquired to complement existing units of the Process/Controls segment. The aggregated annual revenue of the acquired businesses is approximately $210 Million and each of these eight companies individually has less than $125 Million.  In addition, the Company sold one facility acquired in connection with a prior acquisition for approximately $11.6 million in net proceeds.  No gain or loss was recognized on the sale and the proceeds have been included in proceeds from divestitures in the accompanying Consolidated Condensed Statements of Cash Flows.

 

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On February 25, 2002, the Company completed the divestiture of API Heat Transfer, Inc. to an affiliate of Madison Capital Partners for approximately $63 million (including $53 million in net 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 100% of Marconi Data Systems, formerly known as Videojet Technologies, from Marconi plc in a stock acquisition, for approximately $400 million in cash including transaction costs.  On February 4, 2002, the Company acquired 100% of Viridor Instrumentation Limited from the Pennon Group plc in a stock acquisition, for approximately $137 million in cash including transaction costs.  On February 1, 2002, the Company acquired 100% of Marconi Commerce Systems, formerly known as Gilbarco, from Marconi plc in a stock acquisition, for approximately $309 million in cash including transaction costs (net of $17 million of acquired cash).  On October 18, 2002, the Company acquired 100% of Thomson Industries, Inc. in a stock and asset acquisition, for approximately $147 million in cash including transaction costs (net of $2 million of acquired cash), an agreement to pay $15 million over the next six years, and an additional maximum contingent consideration of up to $60 million cash based on the future performance of Thomson through December 31, 2005.  In addition, during the year ended December 31, 2002, the Company acquired eight smaller companies, for total consideration of approximately $186 million in cash including transaction costs.

 

Financing activities used cash of $126.0 million during the first nine months of 2003 compared to $482.3 million generated during the first nine months of of 2002.  The primary reason for the difference was the Company’s issuance of 6.9 million shares of the Company’s common stock in March 2002.  Proceeds of the common stock issuance, net of the related expenses, were approximately $467 million. The Company used the proceeds to repay approximately $230 million of short-term borrowings incurred in the first quarter of 2002 related to the Videojet, Gilbarco and Viridor acquisitions.

 

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 has not determined if it would issue stock or pay cash in the event the LYONs notes are put in January 2004.  The Company has the ability to draw off available revolving

 

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credit facilities should it elect to redeem such notes for cash and has therefore classified the LYONs obligations as long-term in the accompanying financial statements.  Holders of the LYONs will consider various factors, including the Company’s stock price, the Company’s projected stock price volatility and prevailing market interest rates, in determining whether to require the Company to repurchase the LYONs in January 2004.  If a put does become likely, the Company may consider altering the terms of the indenture governing the LYONs to reduce the likelihood of a put.  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.

 

Total debt decreased to $1,256.3 million at September 26, 2003, compared to $1,310.0 million at December 31, 2002.  This decrease was due primarily to repayments of $147.5 million of debt, offset in part by the change in the U.S Dollar/Euro exchange rates and the resulting increase in the carrying value of the Company’s Euro denominated debt.  All significant debt obligations assumed related to first quarter 2003 acquisitions have been repaid.  As of September 26, 2003, $344.4 million of the Company’s debt was fixed at a rate of 6.25%, $250 million was fixed at an average interest cost of 6% (subject to the interest rate swaps described above) and the Company’s LYONs obligations (which as of September 26, 2003 amounted to $551.4 million) carry a yield to maturity of 2.375% (with contingent interest payable as described above).  Substantially all remaining borrowings have interest costs that float with referenced base rates.  As of September 26, 2003, the Company had unutilized commitments under its revolving credit facilities of $1.0 billion.

 

As of September 26, 2003, the Company held $1.1 billion of cash and cash equivalents that were invested in highly liquid investment grade debt instruments with a maturity of 90 days or less.  As of September 26, 2003, the Company was in compliance with all debt covenants under the aforementioned debt instruments, including limitations on secured debt and debt levels. None of the Company’s debt instruments contain trigger clauses requiring the Company to repurchase or pay off its debt if rating agencies downgrade the Company’s debt rating.  In addition, as of the date of this Form 10-Q, the Company could issue up to $1 billion of securities under its shelf registration statement with the Securities and Exchange Commission.

 

The Company’s Matco subsidiary has sold, with recourse, or provided credit enhancements for, certain of its accounts receivable and notes receivable.  Amounts outstanding under this program approximated $80 million and $93 million at September 26, 2003 and December 31, 2002, respectively.  The subsidiary accounts for such sales in accordance with Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing

 

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of Financial Assets and Extinguishment of Liabilities – a replacement of FASB Statement No. 125.”  A provision for estimated losses relating to the recourse exposure has been included in accrued expenses.

 

Due to declines in the equity markets, the fair value of the Company’s pension fund assets has decreased since 2001.  In accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, the Company recorded a minimum pension liability adjustment of $76.9 million (net of tax benefit of $39.6 million) at December 31, 2002.  The minimum pension liability is calculated as the difference between the actuarially determined accumulated benefit obligation and the value of the plan assets as of September 30, 2002 (see Note 9 to the consolidated financial statements for the year ended December 31, 2002 for additional information).  This adjustment results in a direct charge to stockholders’ equity and does not immediately impact net earnings, but is included in other comprehensive income.  Calculations of the amount of pension and other postretirement benefits costs and obligations depend on the assumptions used in such calculations.  These assumptions include discount rates, expected return on plan assets, rate of salary increases, health care cost trend rates, mortality rates, and other factors.  While the Company believes that the assumptions used in calculating its pension and other postretirement benefits costs and obligations are appropriate, differences in actual experience or changes in the assumptions may affect the Company’s financial position or results of operations.  The Company used a 7.0% discount rate in computing the amount of the minimum pension liability to be recorded at December 31, 2002.  A 25 basis point reduction in the discount rate would have increased the after-tax minimum pension liability approximately $10 million from the amount recorded in the financial statements at December 31, 2002.

 

For 2003, the Company lowered the expected long-term rate of return assumption from 9% to 8.5% for the Company’s defined benefit pension plan reflecting lower expected long-term returns on equity and debt investments included in plan assets.  The plan maintains between 60 to 70% of its assets in equity portfolios, which are invested in funds that are expected to mirror broad market returns for equity securities.  The balance of the asset portfolio is invested in high-quality corporate bonds and bond index funds.  Including the effect of this change, pension expense for this plan for the year ended December 31, 2003 is anticipated to be approximately $12 million, or $8 million on an after-tax basis, compared with $1.9 million (or $1.2 million after tax) for this plan in 2002.  Consistent with prior years, the Company anticipates there will be no statutory funding requirements for the defined benefit plan in 2003.  If asset values and interest rates remain at 2002 levels through the end of 2003, funding of approximately $10 million may be required in 2004.

 

Except to the extent disclosed elsewhere in this document, as of September 26, 2003, there have been no material changes outside the ordinary course of business with respect to the contractual obligations, commercial commitments, and off-balance sheet

 

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obligations described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

The ongoing costs of compliance with existing environmental laws and regulations have not had, and are not expected to have, a material adverse effect on the Company’s cash flows or financial position.

 

The Company will continue to have cash requirements to support working capital needs and capital expenditures and acquisitions, to pay interest and service debt, fund its pension plans as required and to pay dividends to shareholders. In order to meet these cash requirements, the Company intends to use available cash, internally generated funds and borrowings under its credit facility, or accessing capital markets, or under uncommitted lines of credit. The Company believes that cash provided from these sources will be adequate to meet its cash requirements for the foreseeable future.

 

The Company declared a regular quarterly dividend of $.025 per share payable on October 31, 2003, to holders of record on September 26, 2003.

 

ACCOUNTING POLICIES

 

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s Consolidated Condensed 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 the Consolidated Condensed Financial Statements. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, 2002.

 

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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, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

Inventories. 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 Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, the new accounting standard for goodwill, which requires that the Company, on an annual basis, calculate the fair value of the reporting units that contain the goodwill and compare that to the carrying value of the reporting unit to determine if impairment exists.  Impairment testing must take place more often if circumstances or events indicate a change in the impairment status. Management judgment is required in calculating the fair value of the reporting units.

 

Long-lived assets. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the assets.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value.  Judgments made by the Company relate to the expected useful lives of long-lived assets and its ability to realize undiscounted cash flows in excess of the carrying amounts of such assets and are affected by factors such as the ongoing maintenance and improvements of the assets, changes in the expected use of the assets, changes in economic conditions, changes in operating performance and anticipated future cash flows.  Since judgment is involved in determining the fair value of long-lived assets, there is risk that the carrying value of the Company’s long-lived assets may require adjustment in future periods.

 

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

 

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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.

 

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NEW ACCOUNTING STANDARDS – SEE NOTE 6 OF ITEM 1

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The information required by this item is included under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a)           As of the end of the period covered by 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 Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).  Based upon the required 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 changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 6.  Exhibits and Reports on Form 8-K

 

(a)	Exhibits:
	Exhibit 10.1		Credit Agreement dated as of July 23, 2003 by and among Danaher Corporation, Bank of America, N.A. and the other lenders named therein.
	Exhibit 10.2*		Amendment No. 2 to the Danaher Corporation 1998 Stock Option Plan
	Exhibit 10.3*		Non-Qualified Stock Option Agreement dated as of March 26, 2003 by and between Danaher Corporation and H. Lawrence Culp, Jr.
	Exhibit 31.1		Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 31.2		Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.2		Certification of 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 99.1		On October 16, 2003, the Company issued a press release announcing earnings for the quarter ended September 26, 2003.  A copy of the release is furnished herewith as Exhibit 99.1.  The press release attached hereto as Exhibit 99.1 is being furnished by the Company pursuant to Item 12 of Form 8-K.

 

* Indicates management contract or compensatory plan, contract or arrangement

 

(b)           Reports filed on Form 8-K:

 

NONE

 

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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 15, 2003		By:			/s/ Patrick W. Allender
					Patrick W. Allender
					Executive Vice President - Chief Financial Officer and Secretary
Date:	October 15, 2003		By:			/s/ Robert S. Lutz
				Robert S. Lutz
				Vice President and Chief Accounting Officer

 

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