Exhibit 99.1
Danaher
2002 Annual Report
Relentlessly
Listen. Focus. Improve. Grow.
[Inside Fold Out Cover]
[image of water drop]
[image of ratchet]
[image of beverage cans with lot code]
DANAHER AT-A-GLANCE
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Strategic Platforms Key Brands Key Customers/
Vertical Markets
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Electronic Test
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Fluke Corporation is a world leader in the Fluke, Technicians,
manufacture, distribution and service of electronic Meterman, Engineers,
test tools and software. From industrial electronic Fluke Biomedical, Metrologists,
installation, maintenance and service, to precision Raytek Commercial and
measurement and quality control, Fluke tools help Residential
keep business and industry around the globe up and Electricians
running.
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Fluke Networks is a leading provider of innovative Fluke Networks, Network Engineers and
solutions for ensuring data communications and OptiView, Technicians,
Internet uptime. Fluke Networks products combine MicroTools, Network Installation and
speed, accuracy and ease of use for maximizing OmniScanner, Maintenance Professionals,
network performance. DSP Telecommunication
Technicians
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Environmental
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Hach/Lange is a worldwide market leader in analytical Hach, Lange, Drinking Water
instrumentation for water quality and applications. Orbisphere, OTT, Facilities,
Hach/Lange provides advanced analytical systems and McCrometer. Waste Water Plants,
technical support for water quality testing with Pacific Scientific Pharmaceuticals,
solutions for the lab, plant, and field. Environmental
Monitoring Agencies
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Gilbarco Veeder-Root enjoys a leading position Gilbarco, Major Oil Companies,
providing solutions and technologies that provide Veeder-Root, Convenience Stores,
convenience, control, and environmental integrity Red Jacket, Retail Fueling
for retail fueling and adjacent markets. Gasboy Franchises,
Commercial Fueling
Operators
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Motion
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Danaher Motion is changing the way things move through Kollmorgen, Factory Automation,
innovation in flexibility, precision, efficiency, and Pacific Scientific, Medical Equipment,
reliability for applications as diverse as robotics, Thomson, Aerospace and Defense,
wheelchairs, lift trucks, electric vehicles, and Superior Electric, Electronic Vehicles,
packaging machines. Portescap, Lift Trucks,
Dover Health and Fitness
Machines
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Product Identification
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The output of our product identification technology Videojet, Consumer Packaged Goods,
can be seen every day, from the lot code on a pill Willett, Pharmaceuticals,
bottle to the expiration date on a beverage can. Marsh Automotive,
Videojet technology applies codes to more than one Aerospace,
trillion products each year worldwide. Building Materials
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Mechanics Hand Tools
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Danaher Tool Group and Matco enjoy a leading share Sears Sears,
position in the billion dollar U.S. mechanics hand Craftsman(R), Professional
tool market. Danaher is committed to deliver Armstrong, Automotive
customer-driven innovation with new products that Matco, Mechanics,
improve safety, strength, speed and access. Allen(TM), NAPA,
KD-Tools, Industrial Maintenance
Holo-Krome, and Repair
NAPA(R),
SATA
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Focused Niche Businesses
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Aerospace and Defense Hennessy Industries
Industrial Control Jacobs Chuck Manufacturing Company
Power Quality Jacobs Vehicle Systems
Delta Consolidated Industries Joslyn Manufacturing Company
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[The following appears in chart format]
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1998 1999 2000 2001 2002
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Sales (dollars in billions) $3.05 $3.20 $3.78 $3.78 $4.58
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11% Compounded Annual Growth Rate
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Operating Profit (dollars in millions) $384 $458 $552 $502 $701
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16% compounded annual growth rate
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Earnings Per Share (in dollars)*
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20% compounded annual growth rate $1.33 $1.79 $2.23 $2.01 $2.79
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*Before effect of accounting change and
reduction of income tax reserves related to
previously discontinued operations.
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Operating Cash Flow (dollars in millions)
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19% compounded annual growth rate $353 $419 $512 $608 $710
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[Inside Cover]
DANAHER
Danaher, a leading industrial company, designs, manufactures, and markets
innovative products, services and technologies with strong brand names and
significant market positions. Driven by strong core values and a foundation
provided by the Danaher Business System, Danaher's associates are pursuing a
focused strategy aimed at creating a premier global enterprise.
Financial Operating Highlights
(dollars in thousands expect per share data and number of
associates)
Year ended December 31
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2002 2001
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Sales $4,577,232.00 $3,782,444.00
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Operating profit $ 701,122.00 $ 502,011.00
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Net earnings before accounting change and tax $ 434,141.00 $ 297,665.00
reserve reduction
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Net earnings $ 290,391.00 $ 297,665.00
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Earnings per share before accounting change and tax $ 2.79 $ 2.01
reserve reduction
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Earnings per share $ 1.88 $ 2.01
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Operating cash flow $ 710,347.00 $ 608,471.00
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Capital expenditures $ 65,430.00 $ 84,457.00
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Free cash flow (operating cash flow less capital $ 644,917.00 $ 524,014.00
expenditures)
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Number of associates (permanent and temporary) 29,000 23,000
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Total assets $6,029,145.00 $4,820,483.00
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Total debt $1,309,964.00 $1,191,689.00
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Stockholders' equity $3,009,599.00 $2,228,586.00
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Total debt as a percent of total capitalization 30.3% 34.8%
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Return on equity before accounting change and tax 13.8% 13.4%
reserve reduction
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[The following appear in chart format]
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Year-End Market price of stock 1998 1999 2000 2001 2002
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$54.31 $48.25 $68.38 $60.31 $65.70
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[The following appears in pie chart format]
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75+% of Revenues from 5 Strategic Platforms (% of revenues)
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Motion 15.96%
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Electronic Test 12.77%
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Product ID 6.38%
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Focused Niche Businesses 23.40%
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Mechanics Hand Tools 17.02%
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Environmental 24.47%
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DEAR SHAREHOLDERS:
WE ARE PLEASED TO REPORT RECORD PERFORMANCE IN SALES, EARNINGS BEFORE ACCOUNTING
CHANGES, AND OPERATING CASH FLOW FOR 2002. WE DELIVERED THESE RESULTS AGAINST
THE BACKDROP OF A VERY CHALLENGING OPERATING ENVIRONMENT MARKED BY WEAKNESS IN
THE WORLDWIDE ECONOMY AND RISING GEOPOLITICAL UNCERTAINTIES THROUGHOUT THE YEAR.
The Danaher team stayed focused on both our customers and our performance. Key
highlights include:
Revenues increased 21% v. 2001 to $4.6 billion - putting our annualized run-rate
above $5 billion.
Earnings per share, before the effect of accounting changes and certain tax
related credits, rose to $2.79. And just as in 2001, earnings grew amidst the
ongoing industrial recession and technology depression.
Operating cash flow grew 17% to $710 million - our best year ever.
Free cash flow, defined as operating cash flow less purchases of property, plant
and equipment, increased 23% to $645 million - the eleventh year in a row in
which our free cash flow exceeded our net earnings.
An exciting, new fifth strategic platform, Product Identification, was
constructed with the Videojet and Willett transactions.
Danaher stock appreciated 9% - outdistancing peers and broader market indices.
DBS
We have dedicated several pages of this annual report to a detailed description
of the Danaher Business System (DBS) that we hope you find insightful for
several reasons. First, DBS has been - and remains - the foundation of our
performance, and we're hopeful a deeper understanding of DBS will help you
understand the strength of our company more fully. Second, "what is DBS?"
remains a frequent question among shareholders who, especially in the current
environment, have an interest in understanding our operating model in detail.
Third, as I mentioned a year ago, we are extending the traditional reach of DBS
beyond manufacturing to include non-manufacturing functions, particularly those
related to innovation and growth, and we want to update you on our early
progress.
I often think that "what is DBS?" is a Rorschach-like question when asked of
those familiar with our company, and I am always fascinated by the answers. For
me, the answer has always been simple: "it's who we are and how we do what we
do."
DBS has evolved since its beginnings in the late 1980s to become the
comprehensive operating and management system we use rigorously in each of our
businesses in pursuit of our quality, delivery, cost, and innovation (QDCI)
goals. The new DBS image found on pages 6 and 7 in this report details the key
elements of DBS.
To me, to define DBS as merely a set of tools and processes only answers part of
the question "what is DBS?" and omits the other differentiating aspect of our
organization, our core values. The concept of kaizen is a great example. Kaizen,
the Japanese word for continuous improvement, is most literally translated as
"continuity and change for the better" and is the heart of the Toyota Production
System. Once just a tool in the DBS toolbox, kaizen has become a fundamental
part of Danaher's culture and one of our five core values. No matter how well we
perform, we know we can do better and we look to do so tomorrow.
In an environment in which investors are increasingly interested in the true
sustainability of companies' operating models and cultures, we are fortunate to
be fifteen years into our efforts to build DBS. We were committed to DBS years
before others cared about such concepts. And our continuously increasing
commitment to the same values and concepts comes not from the greater interest
shareholders have today but rather from the deep understanding we have of the
power of DBS to create successes in our organization, an understanding we've
built over many years.
In 2002 we intensified our efforts to take DBS into non-manufacturing functions,
and enjoyed some early successes. We held scores of transactional process
improvement (TPI) events to improve administrative functions. These TPI events
drove many working capital improvements in 2002, which contributed significantly
to our record cash flow performance.
We added several new tools to DBS specifically intended to improve our growth
and innovation skills. Resources were added to the DBS Office to support these
efforts and the results are encouraging. We also increased our funding of
corporate breakthroughs, those organic growth opportunities with at least $30
million of annualized revenue potential within three to five years and we now
have 22 funded projects with over $600 million of growth potential.
We are confident that you will find this snapshot of DBS useful in better
understanding our company. I use the word snapshot intentionally, because in the
spirit of kaizen, DBS will be different a year from now. The bedrock elements
will be the same (continuity) but we know we have countless improvement
opportunities (change for the better) that will be realized in the coming year,
and in years to come.
BUSINESS PORTFOLIO
Our results in 2002 were also driven by the quality of Danaher's business
portfolio. Our five strategic platforms - global businesses with scale and
leadership positions in attractive markets - now account for over 75% of
Danaher's revenues. The construction of these strategic platforms over the past
five years has been a conscious effort to provide our larger businesses the
scale and leading positions needed for outperformance in an increasingly
competitive global marketplace. Our focused niche businesses also make important
contributions, generating positive returns through competitive advantages in
their respective markets, and providing important career development assignments
for Danaher leaders.
Environmental: Hach/Lange strengthened its worldwide leadership position for
analytical instrumentation used in water quality applications in 2002.
Hach/Lange continues to play a key role maintaining the safety of our public
water supplies, safety we no longer take for granted. Hach/Lange posted positive
organic growth in the year and demonstrated again the relative resiliency of its
business in soft economic conditions. The Viridor acquisition brought several
key technologies especially in the area of ultrapure instrumentation where
Orbisphere is a worldwide leader. Orbisphere ultrapure instrumentation assures
quality and purity in the production of food and beverages. Gilbarco, acquired
in February, was integrated with Veeder-Root to create a global leader in
environmental instrumentation and retail automation products and services for
the retail petroleum market. Early integration successes resulted in share gains
against a backdrop of weak demand due to global uncertainties and higher oil
prices.
Electronic Test: Fluke, a leading global brand in handheld test instrumentation,
gained momentum throughout the year with new product launches and creative
marketing programs. Fluke's growth breakthrough initiative in the electrical
market drove double-digit growth as we progress well toward our three-year goal
of $30 million of growth in that market. Acquired in August, Raytek enhanced
Fluke's product portfolio with its core non contact infrared temperature
technology. Raytek infrared products complement current Fluke products in
commercial and industrial applications where only non contact temperature
readings can be taken - giving Fluke a leading global position in this new
product category. Fluke Networks, while down for the year due to the sluggish
information technology spending environment, gained market share due to the
introduction of several unique products, including the OptiView Wireless and
Workgroup Analyzers, LinkRunner, WaveRunner and Optifiber, all key products for
the enterprise network engineer.
Motion: The integration of our precision motion businesses under the Danaher
Motion banner continued with design wins and new distribution partners providing
evidence of the strength of the combined Pacific Scientific, Kollmorgen, API and
Warner operations. The economic downturn affected us most dramatically in Motion
so we were pleased with the stronger organic growth rates achieved during the
second half of 2002. We are funding more growth breakthroughs in Motion than in
any other platform. Our precision motor sales to Otis in conjunction with their
Gen2 elevator enjoyed double-digit growth. As electrical lift truck
manufacturers transition to more energy-efficient motor and drive solutions, we
expect to win the majority of new designs which, in turn, are expected to
generate in excess of $100 million in revenues by 2005. The addition of Thomson,
a U.S. leader in precision mechanical devices, strengthens our system offering
for our OEM customers while providing significant strength in the North American
distribution channel.
Hand Tools: We enjoyed 2% growth in Hand Tools for the year due primarily to the
superior performance turned in by Matco in mobile distribution and by our
Professional Tool Division and its Armstrong brand in industrial distribution.
New products, such as Hi-Vis sockets and the Next Generation Ratcheting System,
helped us mitigate the soft retail environment in 2002. We are excited about our
agreement with Sears at year end whereby we obtained exclusive rights to take
the Craftsman brand into industrial, electrical and construction channels. This
agreement gives us additional growth opportunities for 2003 and beyond.
Product Identification: Videojet joined Danaher last February and is the
cornerstone of our newest platform: Product Identification. Videojet, a leading
worldwide brand for marking variable product information across a broad range of
consumer and industrial applications, including the pharmaceutical and food and
beverage industries, saw a return to sales growth as the company refocused on
core customers while aggressively implementing DBS across its operations. The
addition of Willett in January 2003 raised platform revenues in excess of $400
million and, more importantly, dramatically improved our reach into the
rapidly-growing markets of Asia, Latin America and Eastern Europe.
STRATEGY AND PROSPECTS
Our annual strategic plan review with each Danaher business is a key element of
DBS. We continue this discussion throughout the year, continually asking
ourselves, "what game are we playing?" and "how do we win?" By doing so, we
identify and address the issues and opportunities that face each of our
businesses, with tailored strategies. Our Danaher-wide efforts aimed at growing
our team, evolving DBS and stimulating organic growth and innovation - with
specific attention on these efforts outside of North America - are integrated
with each business's strategic plan for maximum focus at the point of impact. We
are excited about the strategic prospects for each of our businesses and for our
corporation as a whole.
However, I characterize our near-term outlook as cautious. Despite the strong
organic growth we enjoyed in the fourth quarter of 2002, we began 2003
anticipating a flat global economy unlikely to see a sustained up-tick in the
near future. Accordingly, we are actively pursuing share gains and investing in
our key long-term growth initiatives while retaining our generally conservative
posture on expenses so as to grow earnings again in 2003 while funding our
future. With over $800 million of cash on the balance sheet at year-end, we
remain well-positioned and committed to an active strategic acquisition program
to complement our organic growth strategies, but will maintain our financial
discipline along the way.
Our long-term view of Danaher's future remains unchanged: our team is confident
that the powerful combination of DBS and our high-quality portfolio of
businesses will create superior value for shareholders as we continue the
journey of becoming a premier global enterprise.
FINAL THOUGHTS
Many people - Danaher associates, suppliers and customers - helped deliver the
record 2002 performance presented in this report. I am grateful for their
support and contributions to our collective success. I am particularly proud of
all of the Danaher associates who worked so tirelessly and diligently throughout
the year with a relentless commitment to DBS. To be their leader continues to be
a humbling experience. Thank you for your continued support.
Sincerely,
/s/ H. Lawrence Culp, Jr.
H. Lawrence Culp, Jr.
President and Chief Executive Officer
March 28, 2003
KEY QUESTIONS INVESTORS ARE ASKING
A Q&A with Management
[image of H. Lawrence Culp, Jr., President and Chief Executive Officer]
Q: HOW HAS DANAHER BEEN ABLE TO OUTPERFORM DURING THE LAST TWO YEARS OF
RECESSION?
A: Larry - Several reasons. First, I give a lot of credit to the Danaher team
who consistently faced reality and took appropriate action. Remember, we began
our preparation for the downturn back in the summer of 2000, well-ahead of the
actual recession. Second, DBS gives us a powerful framework in which to reduce
costs while investing for share gains and growth. Third, the quality of the
portfolio helped a great deal. Our Environmental, Electronic Test, Motion,
Mechanics Hand Tools and Product Identification businesses are global leaders in
their respective markets.
Q: HOW IS DANAHER'S APPROACH TO CONTINUOUS IMPROVEMENT DIFFERENT FROM OTHER
COMPANIES?
A: Larry - We've been on this journey for quite some time. The cumulative
experience we have in this regard is invaluable. We know what works and what
doesn't work. Toyota lets their competitors visit their factories, I think,
because they know it's very difficult to make up for lost time when it comes to
continuous improvement. DBS is led from the top of the organization. My entire
senior team is committed to DBS. I teach our Policy Deployment module as often
as I can because I believe it is a key element of DBS, and because I enjoy the
interaction with new associates engaging DBS for the first time. Kaizen is just
a set of tools for a lot of companies. At Danaher, kaizen is no longer a tool,
it is a core value.
It's part of our culture. And you can't copy culture.
Q: WHAT ARE YOUR PRIORITIES GOING FORWARD?
A: Larry - We'll continue to evolve DBS toward a broader definition beyond its
manufacturing roots. We will continue to take full advantage of these economic
conditions by increasing our investments in organic growth and acquisitions.
Developing our organization in anticipation of our growth remains a high
priority. And I would like for us to become more global than we are today with
particular emphasis on our opportunities in China.
Q: WHAT IS A CORPORATE BREAKTHROUGH?
A: Larry - For us, these are our larger organic growth opportunities - in excess
of $30 million of annualized revenue potential in a three to five year period.
We put particular focus on them so that we properly allocate both capital and
talent from across Danaher to maximize our potential for success. Today, we fund
22 such projects with over $600 million of growth potential. Not all of these
projects will be successful, but having a portfolio of such investments
underscores how actively we are funding organic growth during this economic
downturn.
Q: WHAT DO YOU SAY TO THOSE WHO BELIEVE DANAHER IS SIMPLY AN ACQUISITION STORY?
A: Larry - The facts suggest otherwise. The best example may be my calendar. We
spend a tremendous amount of time on strategy, execution and organization and
talent development during the course of a year, not just acquisitions. Our free
cash flow gives us the opportunity to consider investments in acquisitions and
fortunately we have been successful in that regard but to characterize Danaher
in that way doesn't reconcile with how we run the company.
[image of PATRICK W. ALLENDER Executive Vice President, Chief Financial Officer
and Secretary]
Q: 2002 WAS THE ELEVENTH YEAR IN A ROW YOUR FREE CASH FLOW EXCEEDED YOUR NET
INCOME. HOW DOES DANAHER DO IT?
A: Pat - Free cash flow generation is a fundamental by-product of the Danaher
Business System, in particular the elimination of waste. In balance sheet terms,
waste can appear in
the form of excess working capital or excess fixed capital. We have made a
concerted effort over a long period of time to drive excess working capital out
of the system as well as use our fixed capital more efficiently. The shift in
our business mix towards our Process/Environmental Controls businesses, which
are substantially less capital intensive than our Tools and Components
businesses, has contributed to the excess of depreciation costs over capital
expenditures that we have enjoyed in recent years.
Q: WILL FREE CASH FLOW CONTINUE TO EXCEED NET INCOME IN THE FUTURE?
A: Pat - We expect free cash flow will continue to exceed net income, although
it is likely that the relative percentage of excess cash flow to net income will
moderate. As the business climate improves, we expect to grow at higher rates,
with working capital reductions, particularly accounts receivable, contributing
less to free cash flow.
Q: WHAT FINANCIAL CRITERIA DO YOU USE WHEN LOOKING AT ACQUISITIONS?
A: Pat - Our primary financial criterion in looking at acquisitions is return on
invested capital. Our minimum hurdle rate target is 10% after tax ROIC. We look
to reach those goals in three years or less for most acquisitions. For
acquisitions involving the establishment of a new platform, the timing of the
10% target threshold may be set somewhat longer but in no event beyond five
years. Of course, 10% is only a minimum target and we don't expect to stop
there, either with our new acquisitions or more mature businesses. While we do
look at EPS accretion as a relevant measure, accretion alone is a poor
substitute for ROIC, particularly in the current climate of generationally low
incremental borrowing rates.
Q: HOW DID THE 2002 ACQUISITIONS FARE AGAINST THOSE METRICS?
A: Pat - We are quite pleased with the progress made to date on the 2002
acquisitions. Gilbarco, our largest single acquisition in 2002, exited the year
at an ROIC rate approaching our hurdle rate, in spite of a very difficult market
with sales down more than 10% for the year. Videojet, our newest platform
business, exited the year at an even higher ROIC rate.
WHAT IS THE DANAHER BUSINESS SYSTEM?
In the mid-1980s, a Danaher division faced with intensifying competition
launched an improvement effort based on the then-new principles of lean
manufacturing. The initiative succeeded beyond anyone's expectations -
reinforcing the division's industry leadership as well as spawning the Danaher
Business System (DBS). Since this modest beginning, DBS has evolved from a
collection of manufacturing improvement tools into a philosophy, set of values,
and series of management processes that collectively define who we are and how
we do what we do.
Fueled by Danaher's core values, the DBS engine drives the company through a
never-ending cycle of change and improvement: exceptional people develop
outstanding plans and execute them using world-class tools to construct
sustainable processes, resulting in superior performance. Superior performance
and high expectations attract exceptional people, who continue the cycle.
Guiding all efforts is a simple philosophy rooted in four customer-facing
priorities: Quality, Delivery, Cost, and Innovation.
[image of DBS]
[Following is Text around image]
CUSTOMERS
CUSTOMERS TALK, WE LISTEN
DANAHER
KAIZEN IS OUR WAY OF LIFE
QUALITY
DELIVERY
COST
INNOVATION
People, Plan, Process, Performance
THE BEST TEAM WINS
TALENT DEVELOPMENT PROCESS
ORGANIZATION PLANNING
EXECUTIVE LEADERSHIP TRAINING
EXECUTIVE CHAMPION ORIENTATION
INNOVATION DEFINES OUR FUTURE
STRATEGIC PLANNING
POLICY DEPLOYMENT
VALUE STREAM MAPPING
KAIZEN EVENT BASICS
5S VISUAL MANAGEMENT
STANDARD WORK
COOPERATIVE BUSINESS PLANNING
VALUE SELLING
VOICE OF THE CUSTOMER
PRODUCT LAUNCH
DANAHER DEVELOPMENT SYSTEM
STRATEGIC SUPPLIER INTEGRATION
PRODUCTION PREPARATION PROCESS
TRANSACTIONAL PROCESS IMPROVEMENT
PROBLEM SOLVING
VARIATION REDUCTION KAIZEN
SIX SIGMA
DESIGN FOR SIX SIGMA
MEASUREMENT SYSTEM ANALYSIS
DBS BOOT CAMP
ACQUISITION INTEGRATION
MODEL CELL
SET UP REDUCTION
DANAHER MATERIALS PROCESS
TOTAL PRODUCTIVE MAINTENANCE
INSTRUCTIONAL TECHNIQUES
WE COMPETE FOR SHAREHOLDERS
The Danaher Business System is Who We Are and How We Do What We Do.
On the following pages, three case studies show DBS in action.
Relentlessly Listen. Focus. Improve. Grow.
[image of electrician with Fluke Meter]
..
How Do You Take An Existing Brand And Make It A Leader In A New Market?
Relentlessly Listen To The Voice Of Your Customer
Fluke is a world leader in the manufacture, distribution and service of
electronic test tools and software. Since its founding in 1948, Fluke has helped
define and grow a unique technology market, providing testing and
troubleshooting capabilities for technicians, engineers, metrologists, and
computer network professionals.
While engaged in the strategic planning process, the Fluke team identified a
significant growth opportunity targeting residential and commercial contractor
electricians. The channel was a natural extension of the current industrial
product line that includes products such as clamp meters that safely measure
electrical current in power distribution systems without having to disconnect
the circuit. Success would require the disciplined focus of DBS tools for
corporate breakthroughs.
Fluke began with the voice of the customer (VOC) to fully understand the unique
needs of the target market. Using web surveys and visiting job sites, Fluke
captured the spoken and anticipated customer expectations that became the
foundation for a compelling new product line to help contract electricians do
their job better.
Within a period of 24 months, the existing clamp meter product line was revamped
with a new ergonomic design for tight spaces, facilitating the launch of eight
new products into the channel. High voltage products, previously used only in
Europe, were also introduced in this new product set and are exceeding the
Company's internal projections by over 100%.
Through the VOC process, Fluke found in addition to requiring traditional
electrical tools, the target market needed data-com tools not available in the
electrical channel. Working with Fluke Networks, a leading provider of network
monitoring technology, data-com products were introduced under the Fluke brand -
growing the business in the electrical channel more than 50% in the first year.
Developing the product line was only the first step. Using cooperative business
planning (CBP), Fluke partnered with the two largest electrical wholesalers in
the U.S. to help leverage Fluke's new products from a quality, delivery, and
growth perspective. Fluke then turned to Europe to put CBP processes into place
for Hagemeyer BV, one of the largest electrical wholesalers in the world.
Success has been reflected in the results with double-digit increases with CBP
partners and nine percent growth globally since 2002.
Fluke is enjoying above-average growth and enhanced brand recognition among
electrical contractors worldwide as a result of relentlessly listening to its
customers in this new market segment.
[image of lift truck in warehouse]
How Do You Dramatically Change A Market?
Relentlessly Focus On Innovative Technologies.
Danaher Motion is changing the way things move, maintaining a constant emphasis
on product improvement and innovative design. Steeped in the culture of
continuous improvement, Danaher Motion identified a technology conversion that
would significantly impact the global lift truck market.
The technology breakthrough involved the conversion from direct current power
supply to alternate current. This successful conversion would bring significant
advantages such as the elimination of older higher maintenance brush motor
technology as well as increased battery efficiency extending the uptime of the
lift truck between charges.
The target market was clear: seven global manufacturers producing 200,000 lift
trucks annually. The complexity of the initiative was daunting - a global effort
that would span three continents, many product lines, and several divisions
within Danaher Motion. OEM expectations included six sigma quality and
world-class on-time delivery.
Policy deployment, a key DBS tool for successfully managing growth
breakthroughs, provided the focus required to align all of the efforts. Specific
breakthrough targets for quality, delivery, and cost actions were set early in
the development process.
A variety of other DBS tools were employed. Standard Work - the best combination
of people and process to maximize performance with minimum waste - replaced
batch assembly production with single piece flow capability to increase
productivity and capacity, and ensure high levels of product quality. Additional
DBS tools were used to improve the supplier outsourcing process, identify root
causes and solve customer concerns.
The end result for Danaher Motion is a more efficient, more effective motor
technology - one that is meeting the needs of its customers, and generating a
significant revenue opportunity for Danaher. Danaher Motion has captured
significant global market share in electric lift truck power supply conversion
as this technology has been adopted and now has the potential for use in other
adjacent vehicle markets.
[image of customers at computer terminal]
How Do You make a great partnership Even Better?
Relentlessly Improve Quality, Delivery, Cost And Innovation.
Danaher's Matco Tools is an established leader in the professional automotive
tool industry, providing quality professional automotive equipment, tools and
toolboxes. Since 1979, Matco has sold products directly through a network of
independent franchised mobile distributors. Today, Matco distributors operate in
all 50 states, the District of Columbia and Puerto Rico.
Quality, delivery, cost and innovation doesn't stop at the front door for Matco,
those same objectives are critical for the success of Matco's distributor
partners. A distributor spending time on administrative concerns instead of
servicing their customers is considered non-value added activity. Using its
Matco Distributor Advisory Council to gather feedback, Matco identified three
areas distributors felt were the most critical in their relationship with the
company: improved accuracy of ordering and shipping, reduction or elimination of
backorder time, and improvement in response time to customers' questions.
With priorities in place, the Matco team began applying a number of DBS tools to
improve service levels. Value stream mapping identified specific areas of
improvement within the value chain between Matco and distributors. The team
mapped each step, not just on paper, but physically walked through the process
to understand every part of the value chain. This rigorous mapping identified
non-value-added activities, and paved the way for sustainable improvements and
innovative solutions.
It was a process of improvement well worth the effort. Two years ago, shipping
accuracy on orders at Matco was a respectable 95%. Since applying various DBS
tools to the process, that level of accuracy was 99.85% at the end of 2002.
Prior to this focused effort, Matco's fill rate was running between 89% and 90%.
In 2001, that rate climbed to 92%, and in 2002 it moved up to 94% - their best
performance to date.
The same positive results have been achieved in Matco's four call centers. Two
years ago, Matco's ability to respond to a customer's call within 20 seconds was
65%; at the end of 2002, that figure stood at 91%.
Matco has used DBS to dramatically improve customer service and delivery. Matco
has created a competitive advantage for both itself and its distribution
partners that has fueled above-average growth in recent years.
DIRECTORS AND OFFICERS
DIRECTORS
Mortimer M. Caplin
Senior Member
Caplin & Drysdale
H. Lawrence Culp, Jr.
President And Chief Executive Officer
Danaher Corporation
Donald J. Ehrlich
Chief Executive Officer
Schwab Corporation
Walter G. Lohr, Jr.
Partner
Hogan & Hartson
Mitchell P. Rales
Chairman Of The Executive Committee
Danaher Corporation
Steven M. Rales
Chairman Of The Board
Danaher Corporation
Alan G. Spoon
Managing General Partner
Polaris Venture Partners
A. Emmet Stephenson, Jr.
Chairman Of The Board
StarTek, Inc.
EXECUTIVE OFFICERS
H. Lawrence Culp, Jr.
President And Chief Executive Officer
Patrick W. Allender
Executive Vice President, Chief
Financial Officer And Secretary
Philip W. Knisely
Executive Vice President
Steven E. Simms
Executive Vice President
William J. Butler
Group Executive and Vice President -
Danaher Business System
Daniel L. Comas
Vice President - Corporate Development
James H. Ditkoff
Vice President - Finance & Tax
Dennis A. Longo
Vice President - Human Resources
Robert S. Lutz
Vice President - Chief Accounting Officer
Christopher C. McMahon
Vice President - Controller
Daniel A. Pryor
Vice President - Strategic Development
CORPORATE OFFICERS
Thomas P. Joyce
Vice President and Group Executive
James A. Lico
Vice President And Group Executive
Jeffrey A. Svoboda
Vice President And Group Executive
Donald E. Doles
Vice President - Corporate Procurement
Frank T. McFaden
Vice President and Treasurer
Frank Anders Wilson
Vice President - Investor Relations
MAJOR OPERATING COMPANY PRESIDENTS
PROCESS / ENVIRONMENTAL CONTROLS
MOTION
Danaher Precision Systems
Jeffrey A. Beck
General Purpose Systems
John S. Stroup
Linear Motion Systems
Gary A. Masse
Specialty Motors
William T. Fejes, Jr.
ENVIRONMENTAL
Hach / Lange
Thomas P. Joyce, Jr.
Gilbarco Veeder-Root
Scott G. Clawson
McCrometer
Kerry F. McCall
Orbisphere
Yves Ducommun
Pacific Scientific Instruments Company
Simon R. Appleby
ELECTRONIC TEST
Fluke
James A. Lico
Fluke Networks
Chris L. Odell
PRODUCT IDENTIFICATION
Videojet Technologies, Inc.
Craig B. Purse
FOCUSED NICHE BUSINESSES
Aerospace And Defense
Kollmorgen Artus
Robert Perrin
Kollmorgen Electro-Optical Division
H. Kenyon Bixby
Pacific Scientific Energetic Materials Company
Thomas L. Walsh
Pacific Scientific Safety & Aviation Group
Richard G. Knoblock
Industrial Control
Danaher Industrial Controls Group
Lawrence D. Kingsley
Gems Sensors
Steven E. Breitzka
Power Quality
Danaher Power Solutions
Kurt F. Gallo
Jennings Technology Company
Steven J. Randazzo
Joslyn Hi-Voltage Company
Robert E. Joyce
QualiTROL Corporation
Ronald N. Meyer
TOOLS AND COMPONENTS
MECHANICS HAND TOOLS
Danaher Tool Group Professional Tools Division
Jake R. Nichol
Danaher Tool Group Special Markets Division
Thomas R. Sulentic
Matco Tools Corporation
Thomas N. Willis
FOCUSED NICHE BUSINESSES
Delta Consolidated Industries
Thomas N. Willis
Hennessy Industries, Inc.
Vincent E. Piacenti
Jacobs Chuck Manufacturing Company
Vincent E. Piacenti
Jacobs Vehicle Systems
Brian E. Burnett
Joslyn Manufacturing Company
Michael J. Gallant
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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. NW
Washington, D.C. 20006-1813
---------------- ----------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: 202-828-0850
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchanges on
Title of each class which registered
------------------- ----------------
Common Stock $.01 par New York Stock Exchange,
Value Inc.
Pacific Stock Exchange,
Inc.
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange act Rule 12b-2).
Yes __X No
As of March 17, 2003, the number of shares of common stock outstanding was
152.7 million and were held by approximately 2,800 holders. The aggregate
market value of common shares held by non-affiliates of the Registrant on June
28, 2002 was approximately $7.6 billion, based upon the closing price of the
Company's common shares as quoted on the New York Stock Exchange composite tape
on such date.
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 limited to:
. the Company's ability to continue longstanding 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;
. 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;
. risks related to the U.S. and international response to recent terrorist
activities and the potential for war in Iraq;
. 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 integrate acquired businesses into its
operations, realize planned synergies and operate such businesses
profitably in accordance with expectations;
. the Company's ability to achieve projected levels of efficiencies and
cost reduction measures; 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.
PART I
ITEM 1. BUSINESS
Operating Segments
Danaher conducts its operations through two business segments:
Process/Environmental Controls and Tools & Components. The
Process/Environmental Controls segment accounted for approximately 74% of
Danaher's revenues in 2002 and the Tools & Components segment accounted for
approximately 26% of Danaher's revenues in 2002. For additional information
regarding the Company's segments, please refer to Note 14 in the Consolidated
Financial Statements included in this Annual Report.
PROCESS/ENVIRONMENTAL CONTROLS
The Process/Environmental Controls segment encompasses four strategic platforms
(Motion, Environmental, Electronic Test, and Product Identification) and three
focused niche businesses (Power Quality, Aerospace and Defense, and Industrial
Controls). Process/Environmental Controls products are distributed by the
Company's sales personnel and independent representatives to distributors,
end-users, and original equipment manufacturers.
2
STRATEGIC PLATFORMS
Electronic Test. The Electronic Test platform, representing approximately 20%
of segment revenue in 2002, was created through the acquisition of Fluke
Corporation in 1998, and has since been supplemented by various acquisitions.
Fluke designs, manufactures, and markets a variety of compact professional test
tools, as well as calibration equipment, for electrical, industrial,
electronic, and calibration applications. These test products measure voltage,
current, resistance, power quality, frequency, temperature, pressure, and other
key electrical parameters.
In 2000, Fluke Networks was separated from Fluke as a stand-alone business
unit. Fluke Networks provides software and hardware products used for the
testing, monitoring, and analysis of local and wide area ("enterprise")
networks and the fiber and copper infrastructure of those networks.
The Company believes that the Fluke and Fluke Networks brand names and trade
dress are well-recognized and well-regarded among targeted customers. Both
Fluke and Fluke Networks are leaders in their served market segments.
Environmental. As of December 31, 2002, Environmental, representing
approximately 30% of segment revenue in 2002, was Danaher's largest strategic
platform. The Environmental platform serves two main markets: water quality and
retail/commercial petroleum.
Danaher's water quality operations provide a wide range of instruments, related
consumables, and services used to detect and measure chemical, physical, and
microbiological parameters in drinking water, wastewater, groundwater, and
ultrapure water. Typical users of these products include municipal drinking
water and wastewater treatment plants, industrial process water and wastewater
treatment facilities, and third-party testing laboratories. The Company is a
worldwide leader in this market, providing products under a variety of
well-known brands. We entered the water quality sector in 1996 and have
enhanced our geographical coverage and product and service breadth through
subsequent acquisitions including Dr. Lange, Hach Company, and Viridor
Instrumentation, which was acquired in February 2002.
Through the Gilbarco Veeder-Root business, Danaher is a leading worldwide
provider of technologies and services for the retail/commercial petroleum
market. The Company designs, manufactures, and markets a wide range of products
including monitoring and leak detection systems, vapor recovery equipment, fuel
dispensers, point-of-sale and merchandising systems, and submersible turbine
pumps. Within our target markets, we also provide remote monitoring and
outsourced fuel management services, including compliance services, fuel system
maintenance, and inventory planning and supply chain support. Danaher has
participated in the retail/commercial petroleum market since the mid-1980s
through its Veeder-Root business, and substantially enhanced its geographic
coverage and product and service breadth through the recent acquisitions of Red
Jacket and of Gilbarco (formerly known as Marconi Commerce Systems), which was
acquired in February 2002.
Motion. Danaher's Motion platform, representing approximately 20% of segment
revenue in 2002, provides motors, drives, controls, mechanical components (such
as ball screws, linear bearings, clutches/brakes, and linear actuators) and
related products for various precision motion markets such as packaging
equipment, medical equipment, robotics, circuit board assembly equipment, and
electric vehicles such as lift trucks. The Company is currently one of the
leading worldwide providers of precision motion control equipment. We entered
the motion industry through the acquisition of Pacific Scientific Company in
1998, and have subsequently expanded our product and geographic breadth with
various additional acquisitions, including American Precision Industries,
Kollmorgen Corporation, the motion businesses of Warner Electric Company, and
Thomson Industries, which was acquired in October 2002. Operations in the
Motion platform are conducted through three divisions: General Purpose Systems,
addressing general motion applications, Linear Motion Systems, addressing
linear motion applications, and Specialty Motors, addressing minimotor
applications.
Product Identification. The Product Identification platform, which accounted
for approximately 10% of segment revenues in 2002, designs, manufactures, and
markets a variety of equipment used to print bar codes, date codes, lot codes,
and other tracking and marketing information on primary and secondary
packaging. Typical users of these products include food and beverage
manufacturers, pharmaceutical manufacturers, and commercial printing and
mailing operations. Danaher entered the Product Identification market through
the acquisition of Videojet (formerly known as Marconi Data Systems) in
February 2002. The acquisition of Willett International in January 2003,
further expanded the product and geographic coverage of this platform. Today,
Danaher is a leader in its served Product Identification market segments.
FOCUSED NICHE BUSINESSES
Aerospace and Defense. Aerospace and Defense designs, manufactures, and markets
a variety of aircraft safety equipment, including smoke detection and fire
suppression systems, energetic material systems, electronic security systems,
motors and actuators, and electrical power generation and management
3
subsystems, as well as submarine periscopes and photonic masts. These product
lines came principally from the Pacific Scientific and Kollmorgen acquisitions,
and are marketed under the Pacific Scientific, Sunbank, Securaplane, Kollmorgen
Electro-Optical, and Calzoni brands.
Industrial Control. Danaher's Industrial Control products include instruments
that measure and control discrete manufacturing variables such as temperature,
position, quantity, and time, as well as level and flow measurement devices for
various non-water-related end-markets. These products are marketed under a
variety of brands, including Dynapar, Eagle Signal, Hengstler, Partlow,
Anderson, West, Dolan-Jenner, Namco, GEMS Sensors, and Setra.
Power Quality. Power Quality serves two general markets. Through the Danaher
Power Solutions business, Danaher provides products such as digital static
transfer switches, power distribution units, and transient voltage surge
suppressors. Sold under the Cyberex, Current Technology, Joslyn and United
Power brands, these products are typically incorporated within systems used to
ensure high-quality, reliable power in commercial and industrial environments.
Danaher's other power quality businesses provide a variety of products,
marketed under the Joslyn Hi-Voltage, Joslyn, Qualitrol, Jennings, and
Fisher-Pierce brands, and are mainly used in power transmission and
distribution systems. Customers are primarily utilities.
TOOLS & COMPONENTS
The Tools & Components segment encompasses one strategic platform, Mechanics'
Hand Tools, and five focused niche businesses. Products are distributed by the
Company's sales personnel and independent representatives to distributors,
end-users, and original equipment manufacturers.
STRATEGIC PLATFORM
Mechanics' Hand Tools. The Mechanics' Hand Tools platform, representing
approximately 65% of segment revenue in 2002, encompasses two businesses:
Danaher Tool Group ("DTG") and Matco Tools Corporation ("Matco"). DTG is one of
the largest worldwide producers of general purpose mechanics' hand tools,
primarily ratchets, sockets, and wrenches, and specialized automotive service
tools for the professional and "do-it-yourself" markets. DTG has been the
principal manufacturer of Sears, Roebuck and Co.'s Craftsman(R) line of
mechanics' hand tools for over 60 years. DTG has also been the primary supplier
of specialized automotive service tools to the National Automotive Parts
Association (NAPA) for over 30 years, and the designated supplier of general
purpose mechanics' hand tools to NAPA since 1983. In addition to this private
label business, Danaher also markets various products under its own brand
names, including mechanics' hand tools for industrial and consumer markets
under the Armstrong, Allen and Sata brands, automotive service tools under the
K-D Tools brand, and specialty fasteners under the Holo-Krome brand.
Matco manufactures and distributes professional automotive equipment, tools,
and toolboxes through independent mobile distributors, who sell primarily to
professional mechanics. The business is one of the leaders in the hand tool
mobile distribution channel.
FOCUSED NICHE BUSINESSES
Delta Consolidated Industries. Delta is a leading manufacturer of automotive
truckboxes and industrial gang boxes, which it sells under the DELTA and JOBOX
brands.
Hennessy Industries. Hennessy is a leading North American full-line wheel
service equipment manufacturer, providing brake lathes, vehicle lifts, tire
changers, wheel balancers, and wheel weights under the Ammco, Bada, and Coats
brands.
Jacobs Chuck Manufacturing Company. Jacobs designs, manufactures, and markets
chucks and precision tool and workholders, primarily for the portable power
tool industry. Founded by the inventor of the three-jaw drill chuck, Jacobs
maintains a worldwide leadership position in drill chucks.
Jacobs Vehicle Systems ("JVS"). JVS is a leading worldwide supplier of
supplemental braking systems for commercial vehicles, selling Jake Brake brand
engine retarders for class 7 and 8 vehicles and exhaust brakes for class 2
through 7 vehicles. With over 2 million engine retarders installed, JVS has
maintained a leadership position in its industry since introducing the first
engine retarder in 1961.
Joslyn Manufacturing Company. Joslyn Manufacturing designs, manufactures, and
markets pole line hardware, electrical apparatus, and termination enclosures
for the electrical utility and telecommunications markets.
The following discussions of Raw Materials, Patents/Trademarks, Competition,
Seasonal Nature of Business, Backlog, Employee Relations, Research and
Development, Government Contracts, Environmental and
4
Safety Regulations, International Operations and Major Customers include
information common to both of our segments.
Raw Materials
The Company's manufacturing operations employ a wide variety of raw materials.
Danaher believes that it will generally be able to obtain adequate supplies of
major raw material requirements or reasonable substitutes at reasonable costs.
Patents/Trademarks
The Company owns numerous patents and trademarks, and has also acquired
licenses under patents and trademarks owned by others. Although in aggregate
the Company's intellectual property is important to its operations, the Company
does not consider any single patent or trademark to be of material importance
to either segment or to the business as a whole. From time to time, however,
the Company does engage in litigation to protect its patents and trademarks.
Competition
Our served markets are generally highly competitive and global in nature.
Because of the diversity of products the Company manufactures and the variety
of markets it serves, the Company encounters a wide variety of competitors. The
Company faces numerous regional or specialized competitors, many of which are
well-established in their markets. In addition, some of the Company's
competitors are larger companies or divisions of larger companies that have
greater sales, marketing, research, and financial resources than the Company.
Key competitive factors typically include price, quality, delivery speed,
service and support, innovation, product features and performance, and brand
name.
Seasonal Nature of Business
Although certain Danaher businesses experience seasonal fluctuations in demand,
as a whole, the Company is not subject to material seasonality.
Backlog
Backlog is generally not considered a significant factor in the Company's
business as relatively short delivery periods and rapid inventory turnover are
characteristic of most of its products.
Employee Relations
At December 31, 2002, the Company employed approximately 29,000 permanent and
temporary persons, of which approximately 17,000 were employed in the United
States and approximately 12,000 were employed outside the United States. Of
these United States employees, approximately 3,200 were hourly-rated unionized
employees. The Company also has government-mandated collective bargaining
arrangements or union contracts in other countries. The Company considers its
labor relations to be good.
Research and Development
The Company's research and development expenditures were approximately $174
million for 2002, $119 million for 2001 and $138 million for 2000. The Company
conducts research and development activities for the purpose of developing new
products and services and improving existing products and services.
Government Contracts
The Company has agreements relating to the sale of products to government
entities, primarily defense-related products and water and wastewater related
products, and, as a result, is subject to various statutes and regulations that
apply to companies doing business with the government. The laws governing
government contracts differ from the laws governing private contracts. For
example, many government contracts contain pricing terms and conditions that
are not applicable to private contracts. The Company's agreements relating to
the sale of products to government entities may be subject to termination,
reduction or modification in the event of changes in government requirements,
reductions in federal spending and other factors. The Company is also subject
to investigation and audit for compliance with the regulations governing
government contracts, including requirements related to procurement integrity,
export control, employment practices, the accuracy of records and the recording
of costs. A failure to comply with these regulations might result in suspension
of these contracts, administrative penalties or suspension or debarment from
U.S. government contracting or subcontracting for a period of time.
Environmental and Safety Regulations
Certain of the Company's operations are subject to environmental laws and
regulations in the jurisdictions in which they operate, which impose
limitations on the discharge of pollutants into the
5
ground, air and water and establish standards for the generation, treatment,
use, storage and disposal of solid and hazardous wastes. The Company must also
comply with various health and safety regulations in both the United States and
abroad in connection with its operations. The Company believes that it is in
substantial compliance with applicable environmental, health and safety laws
and regulations. Compliance with these laws and regulations has not had and,
based on current information and the applicable laws and regulations currently
in effect, is not expected to have a material adverse effect on the Company's
capital expenditures, earnings or competitive position.
In addition to environmental compliance costs, the Company may incur costs
related to alleged environmental damage associated with past or current waste
disposal practices or other hazardous materials handling practices. For
example, generators of hazardous substances found in disposal sites at which
environmental problems are alleged to exist, as well as the owners of those
sites and certain other classes of persons, are subject to claims brought by
state and federal regulatory agencies pursuant to statutory authority. In
addition to clean-up actions brought by governmental authorities, private
parties could bring personal injury or other claims due to the presence of or
exposure to hazardous substances. The Company has received notification from
the U.S. Environmental Protection Agency, and from state and foreign
environmental agencies, that conditions at a number of sites where the Company
and others disposed of hazardous wastes require clean-up and other possible
remedial action and may be the basis for monetary sanctions, including sites
where the Company has been identified as a potentially responsible party under
federal and state environmental laws and regulations. The Company has projects
underway at several current and former manufacturing facilities, in both the
United States and abroad, to investigate and remediate environmental
contamination resulting from past operations. In particular, Joslyn
Manufacturing Company ("JMC"), a subsidiary of the Company, previously operated
wood treating facilities that chemically preserved utility poles, pilings and
railroad ties. All such treating operations were discontinued or sold prior to
1982. Danaher acquired JMC in September 1995. These facilities used wood
preservatives that included creosote, pentachlorophenol and
chromium-arsenic-copper. While preservatives were handled in accordance with
then existing law, environmental law now imposes retroactive liability, in some
circumstances, on persons who owned or operated wood-treating sites. JMC is
remediating some of its former sites and will remediate other sites in the
future.
The Company has made a provision for environmental remediation; however, there
can be no assurance that estimates of environmental liabilities will not
change. The Company generally makes an assessment of the costs involved for its
remediation efforts based on environmental studies as well as its prior
experience with similar sites. If the Company determines that it has potential
liability for properties currently owned or previously sold, it accrues the
total estimated costs, including investigation and remediation costs,
associated with the site. While the Company actively pursues appropriate
insurance recoveries, it does not recognize any insurance recoveries for
environmental liability claims until realized. The ultimate cost of site
cleanup is difficult to predict given the uncertainties of the Company's
involvement in certain sites, uncertainties regarding the extent of the
required cleanup, the availability of alternative cleanup methods, variations
in the interpretation of applicable laws and regulations, the possibility of
insurance recoveries with respect to certain sites and the fact that imposition
of joint and several liability with right of contribution is possible under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
and other environmental laws and regulations. As such, there can be no
assurance that the Company's estimates of environmental liabilities will not
change. In view of the Company's financial position and reserves for
environmental matters, the Company believes that its liability, if any, for
past or current waste disposal practices and other hazardous materials handling
practices will not have a material adverse effect on its results of operation,
financial condition and cash flow.
International Operations
The Company's net revenue originating outside the U.S., as a percentage of the
Company's total net revenue, was approximately 28 percent in 2002, 31 percent
in 2001 and 24 percent in 2000. The Company's long-lived assets located outside
of the U.S., as a percentage of the Company's total long-lived assets, was
approximately 15 percent in 2002, 12 percent in 2001 and 5 percent in 2000.
Most of the Company's sales in international markets are made by foreign sales
subsidiaries and through various representatives and distributors. However, the
Company also sells into international markets directly from the U.S.
The Company's international business is subject to risks customarily
encountered in foreign operations, including interruption in the transportation
of parts to the Company and finished goods to the Company's customers, changes
in a specific country's or region's political or economic conditions, trade
protection measures, import or export licensing requirements, unexpected
changes in tax laws and regulatory requirements, difficulty in staffing and
managing widespread operations, differing labor regulations and differing
protection of intellectual property. The Company is also exposed to foreign
currency exchange rate risk inherent in its sales commitments, anticipated
sales, and assets and liabilities denominated in currencies other than the
local functional currency, and may also become subject to interest rate risk
inherent in any debt incurred, or investment and finance receivable portfolios
held. The U.S. and international response to recent terrorist activities, and
the potential for war in Iraq, could exacerbate these risks. Financial
information about the Company's international operations is contained in Note
14 of the consolidated financial statements included in Item 8 of this
6
report.
Major Customers
The Company has no customers which accounted for more than 10% of consolidated
sales in 2002. The Company's largest single customer is Sears, Roebuck and Co.
("Sears"), and although the relationship with Sears is long-standing, the
Company believes the loss or material reduction of this business could have a
material adverse effect on the results of operations of the Tools and
Components segment and of the Company as a whole.
Available Information
The Company maintains an internet website at www.danaher.com. The Company makes
available free of charge on the website its annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after filing such material
electronically with, or furnishing such material to, the SEC. The Company's
Internet site and the information contained therein or connected thereto are
not incorporated by reference into this Form 10-K.
Danaher Corporation, originally DMG, Inc., was organized in 1969 as a
Massachusetts real estate investment trust. In 1978 it was reorganized as a
Florida corporation under the name Diversified Mortgage Investors, Inc. ("DMI")
which in a second reorganization in 1980 became a subsidiary of a newly created
holding company named DMG, Inc. The Company adopted the name Danaher in 1984
and was reincorporated as a Delaware corporation following the 1986 annual
meeting of shareholders.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Washington, D.C. At
December 31, 2002, the Company had approximately 130 significant manufacturing
and distribution locations worldwide, comprising approximately 17 million
square feet, of which approximately 11 million square feet are owned and
approximately 6 million square feet are leased. Of these manufacturing and
distribution locations, approximately 85 facilities are located in the United
States and approximately 45 are located outside the United States, primarily in
Europe and to a lesser extent in Asia-Pacific, Canada, and Latin America. The
approximate number of manufacturing and distribution locations by business
segment are: Process/ Environmental Controls, 95; and Tools and Components, 35.
The Company considers its facilities suitable and adequate for the purposes for
which they are used and does not anticipate difficulty in renewing existing
leases as they expire or in finding alternative facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company has been engaged in product liability litigation related to an air
tool product line that was disposed in 1987. The Company has accepted an
agreement, in principle, to settle the claims related to this litigation. The
Company believes that completion of this settlement will not result in a
material adverse effect on the Company's results of operations or financial
condition.
In addition to the litigation noted above, the Company is, from time to time,
subject to routine litigation incidental to its business. These lawsuits
primarily involve claims for damages arising out of the use of the Company's
products, allegations of patent and trademark infringement, and litigation and
administrative proceedings involving employment matters and commercial
disputes. Some of these lawsuits include claims for punitive as well as
compensatory damages. The Company estimates its exposure for product liability
and accrues for this estimated liability up to the limits of the deductibles
under available insurance coverage. All other claims and lawsuits are handled
on a case-by-case basis. As previously noted under Item 1, the Company is also
involved in proceedings with respect to environmental matters, including sites
where it has been identified as a potentially responsible party under federal
and state environmental laws and regulations. The Company believes that the
results of the above-noted litigation and other pending legal proceedings will
not have a materially adverse effect on the Company's results of operations,
cash flows or financial condition, notwithstanding any related insurance
recoveries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange and the
Pacific Stock Exchange under the symbol DHR. On March 17, 2003, there were
approximately 2,800 registered holders of record of the Company's common stock.
The high and low common stock prices per share as reported on the New York
Stock Exchange, and the dividends paid per share, in each case for the periods
described below, were as follows:
2002 2001
----------------------- -----------------------
Dividends Dividends
High Low Per Share High Low Per Share
------ ------ --------- ------ ------ ---------
First quarter. $74.25 $58.51 $ .02 $68.69 $52.21 $0.02
Second quarter 75.46 61.28 .02 65.49 51.51 0.02
Third quarter. 66.36 52.60 .025 59.20 43.90 0.02
Fourth quarter 67.19 52.98 .025 64.10 45.57 0.02
The payment of dividends by the Company in the future will be determined by the
Company's Board of Directors and will depend on business conditions, the
Company's financial earnings and other factors.
ITEM 6. SELECTED FINANCIAL DATA
2002 2001 2000 1999
---------- ---------- ---------- ----------
(in thousands except per share data)
Sales........................................................... $4,577,232 $3,782,444 $3,777,777 $3,197,238
Operating profit................................................ 701,122(c) 502,011(c) 552,149 458,007
Net earnings before effect of accounting change and reduction of
income tax reserves related to previously discontinued
operation..................................................... 434,141(c) 297,665(c) 324,213 261,624(b)
Net earnings.................................................... 290,391(c) 297,665(c) 324,213 261,624(b)
Earnings per share before accounting change and reduction of
income tax reserves related to previously discontinued
operation
Basic........................................................ 2.89(c) 2.07(c) 2.28 1.84(b)
Diluted...................................................... 2.79(c) 2.01(c) 2.23 1.79(b)
Earnings per share
Basic........................................................ 1.93(c) 2.07(c) 2.28 1.84(b)
Diluted...................................................... 1.88(c) 2.01(c) 2.23 1.79(b)
Dividends per share............................................. 0.09 0.08 0.07 0.07
Total assets.................................................... 6,029,145 4,820,483 4,031,679 3,047,071
Total debt...................................................... 1,309,964 1,191,689 795,190 374,634
1998
----------
Sales........................................................... $3,047,061
Operating profit................................................ 384,112
Net earnings before effect of accounting change and reduction of
income tax reserves related to previously discontinued
operation..................................................... 192,186(a)
Net earnings.................................................... 192,186(a)
Earnings per share before accounting change and reduction of
income tax reserves related to previously discontinued
operation
Basic........................................................ 1.37(a)
Diluted...................................................... 1.33(a)
Earnings per share
Basic........................................................ 1.37(a)
Diluted...................................................... 1.33(a)
Dividends per share............................................. 0.09
Total assets.................................................... 2,840,859
Total debt...................................................... 503,639
- --------
(a) Includes $28.6 million in after-tax costs ($0.20 per share) from the merger
with the Fluke Corporation.
(b) Includes $9.8 million in after-tax costs ($0.07 per share) from the merger
with the Hach Company.
(c) Includes $69.7 million ($43.5 million after-tax or $0.29 per share) in
costs from restructuring charges taken in the fourth quarter of 2001 and an
adjustment of $6.3 million ($4.1 million after-tax or $0.03 per share) in
after-tax costs recorded in the fourth quarter of 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated
financial statements.
8
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.
Management believes that the Company's future sales growth will come from both
core organic growth and acquisitions. The Company invests significant resources
in its organic growth initiatives across its business units. Additionally, the
Company has completed numerous acquisitions and expects new acquisitions to
provide revenue growth in the future. During 2003, the Company expects its
primary served markets to remain essentially flat, with the majority of its
revenue growth coming from market share gains and geographic expansion.
Results of Operations
Summary Of Sales By Business Segment.
2002 2001 2000
---------------- ---------------- ----------------
(in thousands)
Process/Environmental Controls $3,385,154 74.0% $2,616,797 69.2% $2,441,986 64.6%
Tools and Components.......... 1,192,078 26.0% 1,165,647 30.8% 1,335,791 35.4%
---------- ----- ---------- ----- ---------- -----
$4,577,232 100.0% $3,782,444 100.0% $3,777,777 100.0%
========== ===== ========== ===== ========== =====
PROCESS/ENVIRONMENTAL CONTROLS
The Process/Environmental Controls segment is comprised of Hach Company, the
Dr. Bruno Lange Group, Videojet Technologies, Fluke Corporation, Fluke
Networks, Gilbarco, Veeder-Root Company, the Danaher Industrial Controls Group,
the Danaher Motion Group (including General Purpose Systems, Linear Motion
Systems and the Specialty Motors Division), Gems Sensors, Danaher Power
Solutions, QualiTROL Corporation, and the aerospace and defense businesses of
Pacific Scientific and Kollmorgen Corporation. These companies produce and sell
compact, professional electronic test tools; product identification equipment
and consumables; retail petroleum automation products; underground storage tank
leak detection systems; motion, position, speed, temperature, and level
instruments and sensing devices; power switches and controls; communication
line products; power protection products; liquid flow and quality measuring
devices; quality assurance products and systems; safety devices; and electronic
and mechanical counting and controlling devices.
2002 COMPARED TO 2001
Sales of the Process/Environmental Controls segment increased 29% in 2002
compared to 2001. The acquisitions in February 2002 of Gilbarco and Videojet
Technologies as well as several smaller 2001 and 2002 acquisitions provided a
36% increase in segment sales. This increase was offset by an 8% unit volume
decline in existing businesses. A favorable currency translation impact
provided a 1% revenue increase, and prices were essentially flat compared to
2001.
Revenues from the Company's environmental business, representing approximately
30% of segment revenue, increased over 90% in 2002 compared to 2001, resulting
primarily from the acquisitions of Gilbarco and Viridor in February 2002 and
two smaller acquisitions completed in 2002 and 2001. Acquisitions provided the
entirety of this growth, as core operations declined approximately 2%. Modest
growth in the Company's water quality business units was offset by weakness in
demand for ultrapure instrumentation, brought on primarily by weakness in
semiconductor end markets, and in Veeder-Root's leak detection market. The
Company believes geopolitical uncertainties in oil-producing regions
contributed to the decline in demand in the end markets served by the
Gilbarco/Veeder-Root business in 2002. Electronic test revenues, representing
approximately 20% of segment revenues, grew 6% during 2002, also due to
acquisition activity. Acquisitions contributed 11% of this growth, which was
offset by a core volume decline of 5%, resulting from weakness in both
industrial and network test equipment sales. Sales in the Company's motion
businesses, representing approximately 20% of segment revenues, declined 3%, as
a core volume decline of 9% was offset by acquisition growth of 6%. Continued
softness in semiconductor and electronic assembly end market demand was a
leading factor in motion's core volume decline.
9
Aerospace and defense revenues increased 7% in 2002, resulting from acquisition
activity of 5% and core volume growth of 2%. Power quality sales declined 28%
in 2002, due to a significant decline in end user demand that began in early
2001 and has continued through 2002. Sales of the Company's industrial controls
product lines fell 7% due to recession-related weakness in their served end
markets. In February 2002, the Company established its product identification
business with the acquisition of Videojet Technologies, which accounted for
approximately 11% of the segment's growth during 2002.
Operating profit margins for the segment were 16.0% in 2002 compared to 14.9%
in 2001. Excluding the impact of the 2001 restructuring program from both 2002
and 2001, margins decreased 0.7 points from 16.5% in 2001 to 15.8% in 2002.
Approximately 130 basis points of the change in operating margin resulted from
the dilutive impact of lower operating margins of the new businesses acquired
during 2001 and 2002. Additionally, margin declines from lower sales volumes at
the business units described above, and increases in expenditures on growth
opportunities in the segment, were offset by the cessation of goodwill
amortization as of January 1, 2002, and other cost reductions including the
partial benefit of the 2001 restructuring actions.
2001 COMPARED TO 2000
Sales in 2001 were 7% higher than in 2000 for this segment. The full-year
impact of the 2000 acquisitions of American Precision Industries, Kollmorgen
Corporation, Warner Electric Motion and acquisitions of several smaller
businesses in 2001 provided a 15% increase from 2000. Two small product line
dispositions in 2001 caused a 2% decrease in 2001 segment sales. The remainder
of the sales change was generated by a decrease in unit volume of 5% and a 1%
negative currency translation impact. Overall segment prices remained flat for
2001 compared to 2000.
Revenues from the motion business grew approximately 20% from 2000 levels. An
increase of 40% from acquisitions was offset by declines in revenues from
existing businesses of approximately 20%, driven by recession-related weakness
in end markets, particularly semiconductor end markets. Electronic test
revenues declined 1.5%. Acquisition growth of 3.5% and continued growth in
sales of Fluke Networks business were offset by declines in sales of Fluke
industrial products. Environmental revenues for 2001 increased 17% from 2000.
7% of this growth resulted from acquisitions, with the balance coming from core
growth in the Veeder-Root and water quality product lines. The Company's
aerospace and defense business units grew 39% in 2001. Acquisition growth of
30%, in particular that provided by the full-year impact of the Kollmorgen
acquisition, accounted for most of the increase. Power quality revenues
declined 14% in 2001, as net acquisition growth of 6% offset significant
declines in end-user demand.
Operating profit margins, excluding the effects of the restructuring charge
recorded in the fourth quarter of 2001, increased from 15.7% to 16.5% due to
aggressive cost reduction actions across all business units and continued
margin improvements in recently acquired companies.
TOOLS AND COMPONENTS
The Tools and Components Segment is comprised of the Danaher Hand Tool Group
(including the Special Markets, Asian Tools, Professional Tools and Matco Tools
Divisions), Jacobs Chuck Manufacturing Company, Delta Consolidated Industries,
Jacobs Vehicle Systems, Hennessy Industries, and the hardware and electrical
apparatus lines of Joslyn Manufacturing Company. This segment is one of the
largest domestic producers and distributors of general purpose and specialty
mechanics' hand tools. Other products manufactured by these companies include
toolboxes and storage devices; diesel engine retarders; wheel service
equipment; drill chucks; custom-designed headed tools and components; hardware
and components for the power generation and transmission industries; and
high-quality precision socket screws, fasteners, and miniature precision parts.
2002 COMPARED TO 2001
Revenues in the Tools and Components segment grew 2% in 2002. 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 revenues, representing approximately 65% of segment
sales, grew 2%, generated primarily by increases in the Matco sales channel as
a result of continued market share gains. Additionally, hand tool revenues in
the Company's Asian channels grew, but were offset by declines in domestic
retail channels. Sales of diesel engine retarders at the Jacobs Vehicle Systems
business unit increased significantly, as OEM customers accelerated their 2002
order rates to meet a regulatory deadline. Diesel engine retarder demand
declined sharply following passage of the regulatory deadline in October 2002,
and is expected to negatively impact engine retarder revenues during 2003.
Increases in this segment in 2002 were offset by declines in the Delta and
Jacobs Chuck business units.
Operating profit margins for the segment were 15.2% in 2002 compared to 11.3%
in 2001. Excluding the impact of the 2001 restructuring program from both 2002
and 2001, margins increased 1.6 points from 13.5% in 2001 to 15.1% in 2002.
This increase resulted from the effect of higher revenue levels, the cessation
of goodwill amortization as of January 1, 2002, and other cost reductions
including the partial benefit of the 2001 restructuring actions.
10
2001 COMPARED TO 2000
Sales declined 13% from 2000 to 2001. Continued weakness in the heavy-duty
truck market significantly impacted sales of diesel engine retarders,
accounting for a 4% drop in segment revenues. Sharp declines in drill chuck
sales combined with a fall in hand tool revenues to contribute a 6% reduction
in segment sales from 2000. Sales in both the Joslyn hardware and electrical
apparatus lines and the Delta Industries product lines reflected double-digit
declines from the sales levels achieved by those lines in 2000 due to
recessionary pressures in the markets they serve. Price and currency impacts
were negligible for this segment. Operating profit margins, excluding the
effects of the restructuring charge recorded in the fourth quarter of 2001,
decreased from 14.2% to 13.5%. The unfavorable impact of lower production
volumes was partially offset by aggressive cost reduction actions taken across
all business units.
GROSS PROFIT
Gross profit margin for 2002 was 39.0%, an increase of 0.8 points compared to
38.2% in 2001. This increase resulted from the benefits of the 2001
restructuring program and other improvements in the gross margins of core
business units, in addition to the effect of slightly higher gross margins of
newly acquired businesses.
Gross profit margin in 2001 was 38.2%, a 0.5% decrease compared to 38.7%
achieved in 2000. Lower core volume and lower margins associated with
businesses acquired in 2000 and 2001 drove the reduction, and were partially
offset by overhead cost reductions and process improvements in all business
units.
OPERATING EXPENSES
In 2002, selling, general and administrative expenses were 23.8% of sales, an
increase of 0.7 points from 2001 levels. This increase is due primarily to the
effect of newly acquired businesses and their higher relative cost structures,
offset by the elimination of goodwill amortization effective January 1, 2002.
Selling, general and administrative expenses for 2001 as a percentage of sales
were 23.1%, 1 point lower than in 2000. Aggressive cost reductions and
reductions in discretionary spending implemented in late 2000 and throughout
2001 drove this decrease.
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, to improve financial performance. The primary objective of
the restructuring plan was to reduce operating costs by consolidating,
eliminating and/or downsizing existing operating locations. No significant
product lines have been discontinued. Severance costs for the termination of
approximately 1,100 employees was estimated at $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 provide for impaired 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 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 related to the Tools and Components
segments and approximately $44.2 million of the charge related to the
Process/Environmental Controls segment. A table describing the application of
the restructuring accrual is included in Note 3 to the Company's Consolidated
Financial Statements.
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% has been realized in 2002 with the full year benefit to be
realized in 2003. These net cost reductions will primarily reduce the cost of
goods sold in the Company's Consolidated Statement of Earnings. As of December
31, 2002, the restructuring program has been substantially completed as
planned. While certain estimates are required in determining the net amount of
cost savings achieved, based on the Company's analysis of the impact of the
restructuring, management believes these net costs savings have been realized.
Due to minor changes to the original restructuring plan and to costs incurred
being less than estimated, in December 2002, the Company adjusted its
restructuring reserves accrued as part of the fourth quarter 2001 restructuring
charge by approximately $6.3 million ($4.1 million after tax, or $0.03 per
share).
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
11
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 inventory write-off was included in Cost of Sales in the
fourth quarter of 2001 and was not part of the restructuring charge.
INTEREST COSTS AND FINANCING TRANSACTIONS
The Company's debt financing as of December 31, 2002 was composed primarily of
$542 million of zero coupon convertible notes due 2021 ("LYONs"), $315 million
of 6.25% Eurobond notes due 2005 and $250 million of 6% notes due 2008. The
Company maintains uncommitted lines and a revolving $500 million senior
unsecured credit facility available for general corporate purposes. There have
been no borrowings under the revolving credit facility since it was established
in June 2001. Borrowings under the revolving credit agreement bear interest of
Eurocurrency rate plus .21% to .70%, depending on the Company's current debt
rating. The credit facility has a fixed five year term. There were no
borrowings outstanding under the Company's uncommitted lines of credit as of
December 31, 2002.
Net interest expense of $43.7 million in 2002 was $17.9 million higher than
2001. Returns on invested cash balances fell significantly, as general
short-term market interest rates declined substantially throughout 2002.
Interest income of $10.3 million and $22.4 million was recognized in 2002 and
2001, respectively. Net interest expense in 2001 was $3.5 million lower than in
2000 due to an increase in interest earned as a result of higher average
invested cash balances during 2001.
INCOME TAXES
The 2002 effective tax rate of 34.0% is 3.5% lower than the 2001 effective
rate, mainly due to the effect of adopting SFAS No. 142 and its resulting
cessation of goodwill amortization, and also due to a higher proportion of
foreign earnings in 2002 compared to 2001.
In connection with the completion of a federal income tax audit, the Company
adjusted certain income tax related reserves established related to the sale of
a previously discontinued operation and recorded a $30 million credit to its
fourth quarter 2002 income statement. This credit has been classified
separately below net earnings from continuing operations since the tax reserves
related to a previously discontinued operation.
The 2001 effective tax rate of 37.5% is 0.5% lower than in 2000, driven
primarily by a higher proportion of foreign earnings in 2001 compared to 2000.
INFLATION
The effect of inflation on the Company's operations has been minimal in 2002,
2001 and 2000.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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.
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 December 31, 2002, the market value
of the Company's fixed-rate long-term debt would decrease by $15 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 will have no
impact on net income or stockholders' equity. See Note 7 of the Consolidated
Financial Statements for further discussion.
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 currencies of countries in which it manufactures and sells
products and services. The Company's issuance of Eurobond notes in 2000
provides 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.
12
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.
LIQUIDITY AND CAPITAL RESOURCES
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 the capital structure
on a short- and long-term basis. Being a key source of the Company's liquidity,
operating cash flow grew $101.9 million to $710.3 million in 2002, or 16.7%
during 2002 as compared to 2001. The increase in operating cash flow in 2002
over 2001 was primarily the result of higher earnings and improved working
capital management. Improvements were achieved in each working capital
component during 2002, driven by Danaher Business System efforts to improve
asset turnover. Gross capital spending of $65.4 million for 2002 decreased
$19.0 million from 2001, as increased capital spending from new acquisitions
was more than offset by declines in core businesses. Capital expenditures are a
significant use of funds and are made primarily for machinery, equipment and
the improvement of facilities. In 2003, the Company expects capital spending of
approximately $100 million. Disposals of fixed assets yielded $26.5 million of
cash proceeds for 2002, primarily due to the sale of six facilities in 2002. A
net after-tax gain of $3.9 million, approximately $.02 per share, was recorded
on the facility sales and is included as a reduction of selling, general and
administrative expenses.
In addition to measuring its cash flow generation and usage based upon the
operating, investing, and financing classifications included in the
Consolidated Statement of Cash Flows, the Company also measures its free cash
flow. Free cash flow for 2002, which is defined as operating cash flow of $710
million less capital expenditures of $65 million, grew to a record $645
million, an increase of 23% from 2001. Free cash flow for 2001 is defined as
operating cash flow of $608 million less capital expenditures of $84 million.
Free cash flow provides a measurement of the cash flows from operations
available for purposes other than ongoing capital expenditures.
Investing activities for the year ended December 31, 2002, used cash of $1,145
million compared to $488 million of cash used in 2001. As discussed below, the
Company has completed numerous acquisitions of existing businesses during the
year ended December 31, 2002 as well as the years ended December 31, 2001 and
2000. All of the acquisitions during this time period have been accounted for
as purchases and 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.
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 6 years, and an additional maximum contingent
consideration of up to $60 million cash based on the future performance of
Thomson through December 31, 2005. 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). In addition, during the year ended December 31, 2002, the Company
acquired 8 smaller companies, for total consideration of approximately $166
million in cash including transaction costs.
On January 2, 2001, the Company acquired 100% of the assets of United Power
Corporation for approximately $108 million in cash including transaction costs.
The Company acquired 11 smaller companies during 2001 for total cash
consideration of approximately $343 million including transaction costs. The
Company also disposed of two small product lines during 2001, yielding cash
proceeds of approximately $33 million.
On July 3, 2000, the Company acquired 100% of the assets of the motion
businesses of Warner Electric Corporation for approximately $147 million cash
including transaction costs. On June 20, 2000, the Company acquired 100% of the
common stock of Kollmorgen Corporation for approximately $267 million cash
including transaction costs. The Company also assumed debt with a fair market
value of approximately $95 million in connection with this acquisition. On
March 27, 2000, the Company acquired 100% of the common stock of American
Precision Industries for approximately $186 million cash including transaction
costs. The Company also assumed debt with a fair market value of approximately
$60 million in connection with this acquisition. The Company acquired 5 smaller
companies during 2000 for total cash
13
consideration of approximately $109 million including transaction costs.
Financing activities generated cash of $516 million in 2002 compared to $410
million in 2001. 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 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 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 under the Company's borrowing facilities increased to $1,310.0
million at December 31, 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
as well as the effect of assumed debt obligations related to 2002 acquisitions.
As discussed previously, as of December 31, 2002, $315 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 December 31, 2002 amounted to $542
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 December 31, 2002, the Company had
unutilized commitments under its revolving credit facility of $500 million. As
of December 31, 2002, the Company held $810 million 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 December 31, 2002, 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 Annual Report on Form 10-K, the
Company could issue up to approximately $500 million of securities under its
shelf registration statement with the Securities and Exchange Commission.
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.
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. This adjustment results in a direct charge to stockholders'
equity and does not impact net income, 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. For 2003, the
Company anticipates lowering the expected long-term rate of return assumption
from 9% to 8.5% for the Company's defined benefit pension plans. The Company
anticipates there will be no funding requirements for the defined benefit plans
in 2003.
In the third and fourth quarters of 2001, the Company repurchased 375,500
shares of its common stock at a cost of $17.3 million. In the first quarter of
2000, the Company repurchased 2,042,300 shares of the Company's common stock
for total consideration of $82.2 million.
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.
14
The Company will continue to have cash requirements to support working capital
needs and capital expenditures, and to pay interest and service debt. In order
to meet these cash requirements, the Company intends to use available cash and
internally generated funds and to borrow under its credit facility 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.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables summarize, as of December 31, 2002, and by period due or
expiration of commitment, certain of the Company's contractual obligations and
other commercial commitments.
Payments due by Period
Less than 4-5 Over 5
Total 1 Year 1-3 Years Years Years
---------- --------- --------- ------- --------
(in thousands)
Long-term debt (a)................. $1,309,964 $112,542 $385,949 $ 5,792 $805,681
Non-cancelable operating leases (b) 261,000 54,000 78,000 56,000 73,000
---------- -------- -------- ------- --------
Total.............................. $1,570,964 $166,542 $463,949 $61,792 $878,681
========== ======== ======== ======= ========
- --------
(a) As described in Note 7 to the Consolidated Financial Statements
(b) As described in Note 11 to the Consolidated Financial Statements
Other Commercial Commitments
Amount of Commitment Expiration Per Period
--------------------------------------------
Total Amounts Less than 1
Committed Year 1-3 Years 4-5 Years Over 5 Years
------------- ----------- --------- --------- ------------
(in thousands)
Standby Letters of Credit and Performance Bonds $ 58,000 $ 51,000 $ 7,000 -- --
Guarantees..................................... 102,000 100,000 2,000 -- --
Contingent Purchase Consideration.............. 60,000 -- 10,000 10,000 40,000
Standby Repurchase Obligations................. 2,000 1,000 1,000 -- --
-------- -------- ------- ------- -------
Total Commercial Commitments................... $222,000 $152,000 $20,000 $10,000 $40,000
======== ======== ======= ======= =======
Standby letters of credit and performance bonds are generally issued to secure
the Company's obligations under short-term contracts to purchase raw materials
and components for manufacture and for performance under specific manufacturing
agreements. In general these commitments do not extend for more than a few
months.
Guarantees reflected in the table above primarily relate to the Company's Matco
subsidiary, which has sold, with recourse, or provided credit enhancements for
certain of its accounts receivable and notes receivable. Amounts outstanding
under this program approximated $93 million, $92 million and $70 million as of
December 31, 2002, 2001 and 2000, respectively. The subsidiary accounts for
such sales 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.
In connection with the Company's acquisition of Thomson, the Company has
entered into agreements to pay $15 million over the next 6 years, and an
additional maximum contingent consideration of up to $60 million cash based on
the future performance of Thomson through December 31, 2005.
Aside from the sale of accounts receivable described above, the contingent
consideration related to the acquisition of Thomson, the leases included in the
table above, and certain performance bonds and guarantees included in the table
above, the Company has not entered into any off-balance sheet financing
arrangements as of December 31, 2002. Also, the Company does not have any
unconsolidated special purpose entities as of December 31, 2002.
15
ACCOUNTING POLICIES
Management's discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's Consolidated Financial
Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, the
Company evaluates these estimates, including those related to bad debts,
inventories, intangible assets, pensions and other post-retirement benefits,
income taxes, and contingencies and litigation. The Company bases these
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect
management's more significant judgments and estimates used in the preparation
of our Consolidated Financial Statements. For a detailed discussion on the
application of these and other accounting policies, see Note 1 in our
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, 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 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 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.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations." This statement
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, and establishes specific criteria
for the recognition of intangible assets separately from goodwill. The Company
has followed the requirements of this statement for business acquisitions made
after June 30, 2001. See Note 2 of the Consolidated Financial Statements.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This statement requires that goodwill and intangible assets deemed to have an
indefinite life not be amortized. Instead of amortizing goodwill and intangible
assets deemed to have an indefinite life, the statement requires a test for
impairment to be performed annually, or immediately if conditions indicate that
such an impairment, measured on a reporting unit basis, could exist. The
Company adopted the statement effective January 1, 2002. Danaher has nine
reporting units closely aligned with the Company's strategic platforms and
specialty
16
niche businesses. They are as follows: Tools, Motion, Electronic Test, Power
Quality, Environmental, Aerospace and Defense, Industrial Controls, Level/Flow,
and Product Identification.
As a result of adopting SFAS No. 142, the Company will no longer record
goodwill amortization which amounted to approximately $55 million and $46
million, net of tax, in 2001 and 2000, respectively. Using the fair value
measurement requirement, rather than the undiscounted cash flows approach, the
Company recorded an impairment related to the Company's power quality business
unit of $200 million ($173.8 million after tax), approximately 8.7% of
intangible assets recorded as of January 1, 2002.
The following table provides the comparable effects of adopting of SFAS No. 142
for the two years ended December 31, 2001 and 2000.
For the Years Ended December 31:
2001 2000
-------- --------
(in thousands except earning
per share amounts)
Reported Net Earnings....................... $297,665 $324,213
Add back: Goodwill Amortization (net of tax) 54,978 45,995
-------- --------
Adjusted Net Earnings....................... $352,643 $370,208
======== ========
Basic Net Earnings per Share
2001 2000
-------- --------
Reported Net Earnings....................... $2.07 $2.28
Add back: Goodwill Amortization (net of tax) .39 .32
-------- --------
Adjusted Net Earnings....................... $2.46 $2.60
======== ========
Diluted Net Earnings per Share
2001 2000
-------- --------
Reported Net Earnings....................... $2.01 $2.23
Add back: Goodwill Amortization (net of tax) .36 .31
-------- --------
Adjusted Net Earnings....................... $2.37 $2.54
======== ========
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company does not believe that implementation of this
SFAS will have a material impact on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it
retains the basic requirements of SFAS No. 121 regarding when and how to
measure an impairment loss, SFAS No. 144 provides additional implementation
guidance. SFAS No. 144 applies to long-lived assets to be held and used or to
be disposed of, including assets under capital leases of lessees; assets
subject to operating leases of lessors; and prepaid assets. SFAS No. 144 also
expands the scope of a discontinued operation to include a component of an
entity, and eliminates the current exemption to consolidation when control over
a subsidiary is likely to be temporary. This statement was effective January 1,
2002. Implementation of this SFAS did not have a material impact on the
Company's 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.
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
17
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.
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 will be effective
for the Company's financial statements issued for the first quarter of 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 will not
have a material impact on the Company's financial position or results of
operations.
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 additions, 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 for the fiscal
year ended December 31, 2002. The adoption of this interpretation did not have
a material impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
-------------------------------------
2002 2001 2000
---------- ---------- ----------
(in thousands, except per share data)
Sales................................................................................ $4,577,232 $3,782,444 $3,777,777
Cost of sales........................................................................ 2,791,175 2,338,027 2,315,731
Selling, general and administrative expenses......................................... 1,091,208 872,680 909,897
Restructuring expenses............................................................... (6,273) 69,726 --
---------- ---------- ----------
Total operating expenses............................................................. 3,876,110 3,280,433 3,225,628
---------- ---------- ----------
Operating profit..................................................................... 701,122 502,011 552,149
Interest expense, net................................................................ 43,654 25,747 29,225
---------- ---------- ----------
Earnings before income taxes......................................................... 657,468 476,264 522,924
Income taxes......................................................................... 223,327 178,599 198,711
---------- ---------- ----------
Net earnings, before effect of accounting change and reduction of income tax reserves 434,141 297,665 324,213
Reduction of income tax reserves related to previously discontinued operation........ 30,000 -- --
Effect of accounting change, net of tax, adoption of SFAS No. 142.................... (173,750) -- --
---------- ---------- ----------
Net earnings......................................................................... $ 290,391 $ 297,665 $ 324,213
========== ========== ==========
Basic net earnings per share:........................................................
Net earnings before effect of accounting change and reduction of income tax
reserves........................................................................ $ 2.89 $ 2.07 $ 2.28
Add: Reduction of income tax reserves............................................. 0.20 -- --
Less: Effect of accounting change................................................. (1.16) -- --
---------- ---------- ----------
Net earnings...................................................................... $ 1.93 $ 2.07 $ 2.28
========== ========== ==========
Diluted net earnings per share:
Net earnings before effect of accounting change and reduction of income tax
reserves........................................................................ $ 2.79 $ 2.01 $ 2.23
Add: Reduction of income tax reserves............................................. 0.19 -- --
Less: Effect of accounting change................................................. (1.10) -- --
---------- ---------- ----------
Net earnings...................................................................... $ 1.88 $ 2.01 $ 2.23
========== ========== ==========
Average common stock and common equivalent shares outstanding:
Basic............................................................................. 150,224 143,630 142,469
Diluted........................................................................... 158,482 151,848 145,499
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
19
CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------
2002 2001
---------- ----------
ASSETS (in thousands)
Current assets:
Cash and equivalents.................................................................. $ 810,463 $ 706,559
Trade accounts receivable, less allowance for doubtful accounts of $64,000 and $44,000 759,028 585,318
Inventories........................................................................... 485,587 408,236
Prepaid expenses and other............................................................ 332,188 174,502
---------- ----------
Total current assets............................................................... 2,387,266 1,874,615
Property, plant and equipment, net.................................................... 597,379 533,572
Other assets.......................................................................... 36,796 119,639
Goodwill and other intangible assets.................................................. 3,007,704 2,292,657
---------- ----------
$6,029,145 $4,820,483
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt................................... $ 112,542 $ 72,356
Trade accounts payable................................................................ 366,587 235,501
Accrued expenses...................................................................... 786,183 709,437
---------- ----------
Total current liabilities.......................................................... 1,265,312 1,017,294
Other liabilities..................................................................... 556,812 455,270
Long-term debt........................................................................ 1,197,422 1,119,333
Stockholders' equity:.................................................................
Common stock, one cent par value; 500,000 shares authorized;
166,545 and 157,327 issued; 152,532 and 143,314 outstanding......................... 1,665 1,573
Additional paid-in capital............................................................ 915,562 375,279
Accumulated other comprehensive income................................................ (105,973) (69,736)
Retained earnings..................................................................... 2,198,345 1,921,470
---------- ----------
Total stockholders' equity......................................................... 3,009,599 2,228,586
---------- ----------
$6,029,145 $4,820,483
========== ==========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these balance sheets.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------
2002 2001 2000
----------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net earnings............................................ $ 290,391 $ 297,665 $ 324,213
Reduction of income tax reserves........................ (30,000) -- --
Effect of change in accounting principle................ 173,750 -- --
----------- --------- ---------
434,141 297,665 324,213
Depreciation and amortization........................... 129,565 178,390 149,721
Change in trade accounts receivable..................... 59,030 142,308 (15,926)
Change in inventories................................... 77,544 66,833 (38,451)
Change in accounts payable.............................. 54,008 (38,138) (81)
Change in other assets.................................. (71,536) (62,641) (78,599)
Change in accrued expenses and other liabilities........ 27,595 24,054 171,368
----------- --------- ---------
Total operating cash flows........................... 710,347 608,471 512,245
----------- --------- ---------
Cash flows from investing activities:
Payments for additions to property, plant and equipment. (65,430) (84,457) (103,718)
Proceeds from disposals of property, plant and equipment 26,466 3,872 15,215
Cash paid for acquisitions.............................. (1,158,129) (439,814) (708,594)
Proceeds from divestitures.............................. 52,562 32,826 1,800
----------- --------- ---------
Net cash used in investing activities................ (1,144,531) (487,573) (795,297)
----------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 512,105 28,169 26,580
Dividends paid.......................................... (13,516) (11,676) (10,015)
Proceeds from debt borrowings........................... 37,528 517,564 340,409
Debt repayments......................................... (19,820) (107,048) (74,319)
Purchase of treasury stock.............................. -- (17,299) (82,174)
----------- --------- ---------
Net cash provided by financing activities............ 516,297 409,710 200,481
----------- --------- ---------
Effect of exchange rate changes on cash................. 21,791 (973) (786)
----------- --------- ---------
Net change in cash and equivalents...................... 103,904 529,635 (83,357)
Beginning balance of cash and equivalents............... 706,559 176,924 260,281
----------- --------- ---------
Ending balance of cash and equivalents.................. $ 810,463 $ 706,559 $ 176,924
=========== ========= =========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
-------------- Paid-in Retained Comprehensive Comprehensive
Shares Amount Capital Earnings Income Income
------- ------ ---------- ---------- ------------- -------------
(in thousands)
Balance, December 31, 1999...................... 154,035 $1,540 $420,036 $1,321,283 $ (34,105)
Net earnings for the year....................... -- -- -- 324,213 -- $324,213
Dividends declared.............................. -- -- -- (10,015) -- --
Common stock issued for options exercised....... 1,615 16 26,564 -- -- --
Purchase of treasury stock...................... -- -- (82,174) -- -- --
Decrease from translation of foreign financial
statements.................................... -- -- -- -- (25,025) (25,025)
------- ------ -------- ---------- --------- --------
Balance, December 31, 2000...................... 155,650 $1,556 $364,426 $1,635,481 $ (59,130) $299,188
========
Net earnings for the year....................... -- -- -- 297,665 -- 297,665
Dividends declared.............................. -- -- -- (11,676) -- --
Common stock issued for options exercised....... 1,677 17 28,152 -- -- --
Purchase of treasury stock...................... -- -- (17,299) -- -- --
Decrease from translation of foreign financial
statements.................................... -- -- -- -- (10,606) (10,606)
------- ------ -------- ---------- --------- --------
Balance, December 31, 2001...................... 157,327 $1,573 $375,279 $1,921,470 $ (69,736) $287,059
========
Net earnings for the year....................... -- -- -- 290,391 -- 290,391
Dividends declared.............................. -- -- -- (13,516) -- --
Sale of common stock............................ 6,900 69 466,936 -- -- --
Common stock issued for options exercised....... 2,318 23 73,347 -- -- --
Increase from translation of foreign financial
statements.................................... -- -- -- -- 40,704 40,704
Minimum pension liability (net of tax benefit of
$39,637)...................................... -- -- -- -- (76,941) (76,941)
------- ------ -------- ---------- --------- --------
Balance, December 31, 2002...................... 166,545 $1,665 $915,562 $2,198,345 $(105,973) $254,154
======= ====== ======== ========== ========= ========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
22
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business--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;
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.
Accounting Principles--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated upon consolidation.
Use of Estimates--The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Inventory Valuation--Inventories include material, labor and overhead and are
stated principally at the lower of cost or market using the last-in, first-out
method (LIFO).
Property, Plant and Equipment--Property, plant and equipment are carried at
cost. The provision for depreciation has been computed principally by the
straight-line method based on the estimated useful lives (3 to 35 years) of the
depreciable assets.
Other Assets--Other assets include principally deferred income taxes, assets
held for sale, noncurrent trade receivables and capitalized costs associated
with obtaining financings which are amortized over the term of the related debt.
Fair Value of Financial Instruments--For cash and equivalents, the carrying
amount is a reasonable estimate of fair value. For long-term debt, rates
available for debt with similar terms and remaining maturities are used to
estimate the fair value of existing debt.
Goodwill and Other Intangible Assets--Goodwill and other intangible assets
result from the Company's acquisition of existing businesses. In accordance
with Statement of Financial Accounting Standard (SFAS) No. 142, amortization of
recorded goodwill balances ceased effective January 1, 2002, however
amortization of certain intangible assets continues over the estimated useful
lives of the identified asset. Amortization expense for all goodwill and other
intangible assets was $8,177,000, $64,705,000 and $48,586,000 for the years
ended December 31, 2002, 2001 and 2000, respectively. See Notes 2 and 16 for
additional information. At December 31, 2002 and 2001, goodwill and other
intangible assets includes other intangible assets, net of accumulated
amortization, of $231,000,000 and $116,000,000, respectively. Other intangible
assets consist primarily of tradenames, trademarks, patents and other
proprietary technology.
Shipping and Handling--Shipping and handling costs are included as a component
of cost of sales. Shipping and handling costs billed to customers are included
in sales.
Revenue Recognition--The Company's standard terms of sale are FOB Shipping
Point and, as such, the Company generally records revenue upon shipment and
when any significant obligations to the customer have been fulfilled.
Foreign Currency Translation--Exchange adjustments resulting from foreign
currency transactions are generally recognized in net earnings, whereas
adjustments resulting from the translation of financial statements are
reflected as a component of accumulated other comprehensive income within
stockholders' equity. Net foreign currency transaction gains or losses are not
material in any of the years presented.
Cash and Equivalents--The Company considers all highly liquid investments with
a maturity of three months or less at the date of purchase to be cash
equivalents.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
Accumulated Other Comprehensive Income--Accumulated other comprehensive income
consists of primarily cumulative foreign translation loss adjustments of
$29,032,000, $69,736,000, and $59,130,000 for 2002,
23
2001 and 2000, respectively and a minimum pension liability loss adjustment of
$76,941,000 (net of $39,637,000 tax benefit) recorded in 2002. (See Note 9)
Accounting for Stock Options--As described in Note 10, the Company accounts for
the issuance of stock options under the intrinsic value method under Accounting
Principles Board Statement Number 25, "Accounting for Stock Issued to
Employees" and the disclosure requirements of FAS 123, "Accounting for
Stock-Based Compensation."
New Accounting Pronouncements--See Note 16.
(2) ACQUISITIONS AND DIVESTITURES:
The Company has completed numerous acquisitions of existing businesses during
the years ended December 31, 2002, 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 a number of
factors including the future earnings and cash flow potential of these target
companies; the multiple to earnings, cash flow and other factors at which
companies similar to the target have been purchased by other acquirers; the
competitive nature of the process by which we acquired the target; 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 2002, 2001, and 2000 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 above-noted periods.
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 6 years, and additional maximum contingent consideration
of up to $60 million cash based on the future performance of Thomson through
December 31, 2005. Thomson is a leading U.S. producer of linear motion control
products. The acquisition resulted in the recognition of goodwill of $78
million primarily related to the anticipated future earnings and cash flow
potential of Thomson and its leadership in the motion industry. The future
earnings and cash flow potential is expected to be enhanced through cost
reduction activities as well as by potential synergies to be gained by
integrating Thomson's operations with existing Danaher operations in
complimentary product lines. The results of Thomson's operations have been
included in the Company's Consolidated Statement of Earnings since October 18,
2002.
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. 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 including transaction
costs. Videojet is a worldwide leader in the market for non-contact product
marking equipment and consumables. The acquisition resulted in the recognition
of goodwill of $276 million primarily related to the anticipated future
earnings and cash flow potential and worldwide leadership of Videojet in the
product marking equipment and consumables market. Videojet represents a new
strategic platform for Danaher and was acquired in a competitive acquisition
process. The results of Videojet's operations have been included in the
Company's Consolidated Statement of Earnings since
24
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 $137 million in cash including transaction costs. 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
acquisition resulted in the recognition of goodwill of $109 million primarily
related to the anticipated future earnings and cash flow potential of Viridor
and its global leadership in the area of "process water" instrumentation. The
future earnings and cash flow potential is expected to be enhanced through cost
reduction activities as well as by potential synergies to be gained by
integrating Viridor's operations with existing Danaher operations in
complementary product lines. 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 $309 million in cash including transaction costs
(net of $17 million of acquired cash). Gilbarco is a global leader in retail
automation and environmental products and services. The acquisition resulted in
the recognition of goodwill of $226 million primarily related to the
anticipated future earnings and cash flow potential of Gilbarco and its
worldwide leadership in retail automation and environmental products and
services. The future earnings and cash flow potential is expected to be
enhanced through cost reduction activities as well as the potential synergies
to be gained by integrating Gilbarco's operations with existing Danaher
subsidiaries in complementary product lines. 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 year ended December 31, 2002, the Company acquired 8
smaller companies, for total consideration of approximately $166 million in
cash including transaction costs. 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.
On January 2, 2001, the Company acquired 100% of the assets of United Power
Corporation ("UPC") from UPC for approximately $108 million in cash including
transaction costs. UPC operates in the power conditioning industry and
manufactures products ranging from high isolation transformers to rotary
uninterruptible power supply systems. The acquisition resulted in the
recognition of goodwill of $102 million. 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 $343 million including transaction costs. 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 $33 million. There were no material gains or losses
recognized on the sale of these product lines.
In 2000, the Company acquired three businesses to form the core of its new
Motion strategic platform, American Precision Industries, Kollmorgen
Corporation and the motion businesses of Warner Electric Company (the "Motion
acquisition"). These businesses all brought different products and capabilities
to the Company and have been integrated to form the Company's Motion business.
These acquisitions resulted in the recognition of goodwill of $578 million.
On July 3, 2000, the Company acquired 100% of the assets of the motion
businesses of Warner Electric Corporation ("Warner") for approximately $147
million cash including transaction costs. 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 including
transaction costs. The Company also assumed debt with a fair market value of
approximately $95 million in connection with this acquisition. Kollmorgen
operates in the motion 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 $186 million cash including
transaction costs. The Company also assumed debt
25
with a fair market value of approximately $60 million in connection with this
acquisition. API operates in the motion industry. The results of operations for
API have been included in the Company's Consolidated Statement of Earnings
since March 27, 2000.
The Company acquired 5 smaller companies during 2000 for total cash
consideration of approximately $109 million including transaction costs. 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 summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition for each significant
acquisition consummated during 2002, 2001 and 2000 (in thousands):
2002 Acquisitions
Thomson VideoJet Viridor Gilbarco All Others Total
-------- -------- -------- -------- ---------- ----------
Accounts Receivable............................... $ 21,665 $ 61,206 $ 12,747 $ 97,888 $ 20,827 $ 214,333
Inventory......................................... 32,211 24,759 14,462 49,455 18,863 139,750
Property, Plant and Equipment..................... 31,417 36,880 8,181 48,636 6,779 131,893
Goodwill.......................................... 78,353 275,612 108,918 225,513 146,008 834,404
Other Intangible Assets, primarily Trade Names and
Patents......................................... 20,670 50,600 7,400 30,800 13,756 123,226
Accounts Payable.................................. (11,709) (9,725) (3,884) (37,521) (7,653) (70,492)
Other Assets and Liabilities, net................. (25,282) (16,692) (10,971) (82,001) (31,903) (166,849)
Assumed Debt...................................... -- (23,839) -- (23,369) (928) (48,136)
-------- -------- -------- -------- -------- ----------
Net Cash Consideration............................ $147,325 $398,801 $136,853 $309,401 $165,749 $1,158,129
======== ======== ======== ======== ======== ==========
2001 Acquisitions
UPC All Others Total
-------- ---------- --------
Accounts Receivable....................................... $ 8,502 $ 33,484 $ 41,986
Inventory................................................. 6,054 46,331 52,385
Property, Plant and Equipment............................. 331 32,867 33,198
Goodwill.................................................. 101,705 267,555 369,260
Other Intangible Assets, primarily Trade Names and Patents -- 17,000 17,000
Accounts Payable.......................................... (3,742) (10,448) (14,190)
Other Assets and Liabilities, net *....................... (5,287) (50,478) (55,765)
Assumed Debt.............................................. -- (4,060) (4,060)
-------- -------- --------
Net Cash Consideration.................................... $107,563 $332,251 $439,814
======== ======== ========
26
2000 Acquisitions
Motion
Group All Others Total
--------- ---------- ---------
Accounts Receivable................ $ 123,399 $ 15,526 $ 138,925
Inventory.......................... 75,585 11,315 86,900
Property, Plant and Equipment...... 91,960 8,325 100,285
Goodwill........................... 577,996 87,998 665,994
Accounts Payable................... (41,087) (8,415) (49,502)
Other Assets and Liabilities, net * (72,263) (6,556) (78,819)
Assumed Debt....................... (155,189) -- (155,189)
--------- -------- ---------
Net Cash Consideration............. $ 600,401 $108,193 $ 708,594
========= ======== =========
- --------
* Included in other assets and liabilities is approximately $11 million and $1
million of accrued transaction costs related to 2001 and 2000 acquisitions,
respectively.
As of December 31, 2002, the Company does not anticipate further material
adjustments to the purchase price allocations of any of the above transactions
with the exception of Thomson, the acquisition of which was consummated in the
fourth quarter of 2002. The Company is continuing to evaluate Thomson's
operations to determine the cost estimates for any integration activities to be
undertaken and will adjust the estimated amounts accrued for these activities
by no later than fourth quarter of 2003. The Company is also waiting on cost
estimates with respect to exiting various lease obligations of Thomson which
will require adjustment.
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, in thousands except per share amounts):
2002 2001
---------- ----------
Net sales....................................................................... $4,868,397 $5,147,556
Net earnings before change in accounting principle and reversal of income tax
reserves...................................................................... 430,521 287,760
Net earnings.................................................................... 286,771 287,760
Diluted earnings per share before change in accounting principle and reversal of
income tax reserves........................................................... 2.77 1.94
Diluted earnings per share...................................................... 1.86 1.94
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 the exception of Thomson, as indicated above.
Accrued liabilities associated with these exit activities include the following
(in thousands, except headcount):
27
Motion United
Group Power All
Acquisitions Corporation Videojet Viridor Gilbarco Thomson Others Total
------------ ----------- -------- ------- -------- ------- ------- --------
Planned Headcount Reduction:
Accrual related to 2000 acquisitions..... 62 -- -- -- -- -- 344 406
Reductions in 2000....................... (46) -- -- -- -- -- (60) (106)
Adjustments to previously provided
reserves............................... -- -- -- -- -- -- -- --
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2000................ 16 -- -- -- -- -- 284 300
-------- ----- ------- ------- -------- ------- ------- --------
Accrual related to 2001 acquisitions..... -- 29 -- -- -- -- 413 442
Reductions in 2001....................... (648) (19) -- -- -- -- (189) (856)
Adjustments to previously provided
reserves............................... 1,814 -- -- -- -- -- 62 1,876
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2001................ 1,182 10 -- -- -- -- 570 1,762
-------- ----- ------- ------- -------- ------- ------- --------
Accrual related to 2002 acquisitions..... -- -- 223 147 640 990 252 2,252
Reductions in 2002....................... (456) (10) (217) (105) (369) (54) (628) (1,839)
Adjustments to previously provided
reserves............................... (726) -- -- -- -- -- (40) (766)
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2002................ -- -- 6 42 271 936 154 1,409
======== ===== ======= ======= ======== ======= ======= ========
Involuntary Employee Termination
Benefits:
Accrual related to 2000 acquisitions..... $ 22,148 -- -- -- -- -- $ 1,685 $ 23,833
Costs incurred in 2000................... (3,538) -- -- -- -- -- (489) (4,027)
Adjustments to previously provided
reserves............................... -- -- -- -- -- -- -- --
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2000................ 18,610 -- -- -- -- -- 1,196 19,806
-------- ----- ------- ------- -------- ------- ------- --------
Accrual related to 2001 acquisitions..... -- 33 -- -- -- -- 10,239 10,272
Costs incurred in 2001................... (21,717) (136) -- -- -- -- (5,621) (27,474)
Adjustments to previously provided
reserves............................... 36,352 168 -- -- -- -- 3,642 40,162
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2001................ 33,245 65 -- -- -- -- 9,456 42,766
-------- ----- ------- ------- -------- ------- ------- --------
Accrual related to 2002 acquisitions..... -- -- 8,367 3,694 27,322 16,771 5,665 61,819
Costs incurred in 2002................... (14,643) (65) (6,754) (2,099) (11,255) (230) (8,253) (43,299)
Adjustments to previously provided
reserves............................... (11,937) -- -- -- -- -- 2,586 (9,351)
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2002................ $ 6,665 $ -- $ 1,613 $ 1,595 $ 16,067 $16,541 $ 9,454 $ 51,935
======== ===== ======= ======= ======== ======= ======= ========
Facility Closure and Restructuring Costs:
Accrual related to 2000 acquisitions..... $ 15,000 -- -- -- -- -- $ 1,331 $ 16,331
Costs incurred in 2000................... -- -- -- -- -- -- (682) (682)
Adjustments to previously provided
reserves............................... -- -- -- -- -- -- -- --
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2000................ 15,000 -- -- -- -- -- 649 15,649
Accrual related to 2001 acquisitions..... -- 245 -- -- -- -- 8,179 8,424
Costs incurred in 2001................... (7,753) -- -- -- -- -- (3,188) (10,941)
Adjustments to previously provided
reserves............................... 12,990 -- -- -- -- -- 754 13,744
-------- ----- ------- ------- -------- ------- ------- --------
Balance December 31, 2001................ 20,237 245 -- -- -- -- 6,394 26,876
-------- ----- ------- ------- -------- ------- ------- --------
Accrual related to 2002 acquisitions..... -- -- 2,166 3,578 3,190 7,582 20,272 36,788
28
Costs incurred in 2002..................... (3,102) (126) (1,252) (1,189) (617) (1,158) (11,982) (19,426)
Adjustments to previously provided reserves (15,000) -- -- -- -- -- 5,671 (9,329)
-------- ----- ------- ------- ------ ------- -------- --------
Balance December 31, 2002.................. $ 2,135 $ 119 $ 914 $ 2,389 $2,573 $ 6,424 $ 20,355 $ 34,909
======== ===== ======= ======= ====== ======= ======== ========
In 2001, the Company recorded purchase price adjustments related to Motion
acquisition in 2000 primarily related to finalization of the cost estimates for
severance and facility closure costs associated with its integration activities
($49 million) and the determinations of the fair values of the assets and
liabilities acquired including accounts receivable, inventories and warranty
costs ($54 million). These adjustments increased goodwill by approximately $103
million. In 2002, the Company recorded a reduction of goodwill related to these
acquisitions of approximately $27 million, which had no impact on net earnings.
This reduction related to reserves that were not necessary and reserves
associated with facilities that were not closed due to unexpected delays in
commencing certain planned integration activities. 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.
(3) 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, to improve financial performance. The primary objective of
the restructuring plan was to reduce operating costs by consolidating,
eliminating and/or downsizing existing operating locations. No significant
product lines were discontinued. Severance costs for the termination of
approximately 1,100 employees approximated $49 million. These employees
included 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 related to our Tools and Components
segments and approximately $44.2 million of the charge related to our
Process/Environmental Controls segment.
Due to minor changes to the original restructuring plan and to costs incurred
being less than estimated, in December 2002, the Company adjusted its
restructuring reserves accrued as part of the fourth quarter 2001 restructuring
charge by approximately $6.3 million ($4.1 million after tax, or $0.03 per
share).
In conjunction with the closing of the facilities, approximately $4 million of
inventory was written off 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 inventory
write-off was included in cost of sales in the fourth quarter of 2001 and was
not part of the restructuring charge.
The table below presents a rollforward of the activity in the restructuring
accrual.
Lease
Termination
Employee Impairment and Other
Headcount Separation of Facility Restructuring
Reductions Costs Assets Costs Total
---------- ---------- ----------- ------------- --------
(in thousands, except headcount)
Total Restructuring Charge.......... 1,120 $ 49,000 $ 15,700 $ 5,000 $ 69,700
Amounts Expended/ Recognized 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............ (934) (31,118) (665) (2,367) (34,150)
Amounts Reversed in 2002............ -- (6,273) -- -- (6,273)
----- -------- -------- ------- --------
Balance at December 31, 2002........ 119 $ 8,309 $ -- $ 2,633 $ 10,942
===== ======== ======== ======= ========
(4) EARNINGS PER SHARE (EPS):
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
29
shares outstanding during the period. Information related to the calculation of
earnings per share of common stock before the effect of the accounting change
and reduction of income tax reserves related to a previously discontinued
operation is summarized as follows:
For the Year Ended December 31, 2002,
-------------------------------------------
Net Earnings Before
the Effect of the
Accounting Change
and Reduction of
Income Tax Reserves Shares Per Share
(Numerator) (Denominator) Amount
------------------- ------------- ---------
(in thousands, except per share amounts)
Basic EPS.............................................................. $434,141 150,224 $2.89
Adjustment for interest on convertible debentures...................... 7,901 --
Incremental shares from assumed exercise of dilutive options........... -- 2,227
Incremental shares from assumed conversion of the convertible debenture -- 6,031
-------- -------
Diluted EPS............................................................ $442,042 158,482 $2.79
======== ======= =====
For the Year Ended December 31, 2001
-------------------------------------------
Net Earnings Shares Per Share
(Numerator) (Denominator) Amount
------------------- ------------- ---------
Basic EPS.............................................................. $297,665 143,630 $2.07
Adjustment for interest on convertible debentures...................... 7,246 --
Incremental shares from assumed exercise of dilutive options........... -- 2,618
Incremental shares from assumed conversion of the convertible debenture -- 5,600
-------- -------
Diluted EPS............................................................ $304,911 151,848 $2.01
======== ======= =====
For the Year Ended December 31, 2000
-------------------------------------------
Net Earnings Shares Per Share
(Numerator) (Denominator) Amount
------------------- ------------- ---------
Basic EPS.............................................................. $324,213 142,469 $2.28
Incremental shares from assumed exercise of dilutive options........... -- 3,030
-------- -------
Diluted EPS............................................................ $324,213 145,499 $2.23
======== ======= =====
(5) INVENTORY:
The major classes of inventory are summarized as follows (in thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
Finished goods. $165,061 $131,316
Work in process 119,872 95,119
Raw material... 200,654 181,801
-------- --------
$485,587 $408,236
======== ========
If the first-in, first-out (FIFO) method had been used for inventories valued
at LIFO cost, such inventories would have been $5,947,000 and $12,229,000
higher at December 31, 2002 and 2001, respectively.
30
(6) PROPERTY, PLANT AND EQUIPMENT:
The major classes of property, plant and equipment are summarized as follows
(in thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
Land and improvements........ $ 37,802 $ 31,641
Buildings.................... 350,293 287,655
Machinery and equipment...... 1,041,206 945,698
---------- ----------
1,429,301 1,264,994
Less accumulated depreciation (831,922) (731,422)
---------- ----------
$ 597,379 $ 533,572
========== ==========
(7) FINANCING:
Financing consists of the following (in thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
Notes payable due 2008....................... $ 250,000 $ 250,000
Notes payable due 2005....................... 314,760 266,850
Notes payable due 2003....................... 30,000 30,000
Zero-coupon convertible senior notes due 2021 541,737 529,096
Uncommitted lines of credit.................. -- 10,000
Other........................................ 173,467 105,743
---------- ----------
1,309,964 1,191,689
Less--currently payable...................... 112,542 72,356
---------- ----------
$1,197,422 $1,119,333
========== ==========
The Notes due 2008 were issued in October 1998 at an average interest cost of
6.1%. The fair value of the 2008 Notes, after taking into account the interest
rate swaps discussed below, is approximately $264 million at December 31, 2002.
In January 2002, the Company entered into two interest rate swap agreements for
the term of the notes due 2008 having a notional principal amount of $100
million whereby the effective net interest rate on $100 million of the Notes
will be the six-month LIBOR rate plus approximately .425%. Rates are reset
twice per year. At December 31, 2002, the net interest rate on $100 million of
the Notes was 2.15% after giving effect to the interest rate swap agreement. 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 Notes due 2005 (the Eurobond Notes), with a stated amount of EU 300 million
were issued in July 2000 and bear interest at 6.25% per annum. The fair value
of the Eurobond Notes is approximately $331 million at December 31, 2002.
The Notes due 2003 had an original average life of approximately 10 years and
an average interest cost of 7%. The carrying amount approximates fair value.
In January 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. The LYONs are convertible into approximately 6.0 million common shares
of the Company, and carry a yield to maturity of 2.375% (with contingent
interest payable as described below). 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
31
Company will not pay interest on the LYONs prior to maturity. The fair value of
the LYONs notes is approximately $558 million at December 31, 2002.
The borrowings under uncommitted lines of credit are principally short-term
borrowings payable upon demand. The carrying amount approximates fair value.
The weighted-average interest rate for short-term borrowings under the
uncommitted lines of credit was 5.0% and 6.2% at December 31, 2001 and 2000.
There were no outstanding amounts under uncommitted lines of credit at December
31, 2002.
The Company also has a bank credit facility which provides revolving credit
through June 26, 2006, of up to $500 million. The facility provides funds for
general corporate purposes at an interest rate of a Eurocurrency rate plus .21%
to .70%, depending on the Company's current debt rating. There were no
borrowings under bank facilities during the three years ended December 31,
2002. The Company is charged a fee of .065% to .175% per annum for the
facility, depending on the Company's current debt rating. Commitment and
facility fees of $406,000, $301,000 and $190,000 were incurred in 2002, 2001
and 2000, respectively.
The Company has complied with all debt covenants, 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.
The minimum principal payments during the next five years are as follows: 2003
- - $112,542,000; 2004 - $68,465,000; 2005 - $317,484,000; 2006 - $2,865,000;
2007 - $2,927,000; and $805,681,000 thereafter.
The Company made interest payments of $44,024,000, $38,789,000 and $21,057,000
in 2002, 2001 and 2000, respectively.
(8) ACCRUED EXPENSES AND OTHER LIABILITIES:
Selected accrued expenses and other liabilities include the following (in
thousands):
December 31, 2002 December 31, 2001
------------------- -------------------
Current Noncurrent Current Noncurrent
-------- ---------- -------- ----------
Compensation and benefits.......................... $308,156 $134,760 $157,516 $ 71,959
Claims, including self-insurance and litigation.... 33,011 61,306 44,951 79,468
Postretirement benefits............................ 7,000 100,800 5,000 74,600
Environmental and regulatory compliance............ 32,094 82,528 36,202 62,541
Taxes, income and other............................ 110,142 133,247 146,717 148,209
Sales and product allowances....................... 53,443 -- 51,063 --
Warranty........................................... 46,539 14,696 30,542 10,180
Restructuring costs (See Note 3)................... 10,942 -- 51,365 --
Other, individually less than 5% of overall balance 184,856 29,475 186,081 8,313
-------- -------- -------- --------
$786,183 $556,812 $709,437 $455,270
======== ======== ======== ========
Approximately $58 million of accrued expenses and other liabilities were
guaranteed by bank letters of credit as of December 31, 2002.
(8) PENSION AND EMPLOYEE BENEFIT PLANS:
The Company has noncontributory defined benefit pension plans which cover
certain of its domestic hourly employees. Benefit accruals under most of these
plans have ceased, and pension expense for defined benefit plans is not
significant for any of the periods presented. It is the Company's policy to
fund, at a minimum, amounts required by the Internal Revenue Service.
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for some of its retired employees. Certain
employees may become eligible for these benefits as they reach normal
retirement age while working for the Company. The following sets forth the
funded status of the plans as of the most recent actuarial valuations using a
measurement date of September 30 (in millions):
32
Pension Benefits Other Benefits
-------------- ---------------
2002 2001 2002 2001
------ ------ ------- ------
Change in benefit obligation
Benefit obligation at beginning of year........ $333.5 $322.5 $ 78.7 $ 67.0
Service cost................................... 18.5 9.7 1.1 0.6
Interest cost.................................. 33.5 24.0 9.4 5.0
Amendments..................................... (14.1) -- 0.5 --
Actuarial loss................................. 19.9 4.1 39.9 12.7
Acquisitions................................... 168.4 -- 24.9 --
Benefits paid.................................. (33.1) (26.8) (7.5) (6.6)
------ ------ ------- ------
Benefit obligation at end of year.............. 526.6 333.5 147.0 78.7
Change in plan assets
Fair value of plan assets at beginning of year. 352.7 421.5 -- --
Actual return on plan assets................... (45.8) (42.1) -- --
Employer contribution.......................... 0.5 0.1 -- --
Acquisition.................................... 172.6 --
Benefits paid.................................. (33.1) (26.8) -- --
------ ------ ------- ------
Fair value of plan assets at end of year....... 446.9 352.7 -- --
Funded status.................................. (79.7) 19.2 (147.0) (78.7)
Accrued contribution........................... -- -- 2.0 1.7
Unrecognized transition obligation............. (0.3) (0.4) -- --
Unrecognized loss (gain)....................... 175.5 61.7 36.9 (1.7)
Unrecognized prior service cost................ (26.9) (14.8) 0.3 (0.9)
------ ------ ------- ------
Prepaid (accrued) benefit cost................. $ 68.6 $ 65.7 $(107.8) $(79.6)
====== ====== ======= ======
Weighted-average assumptions as of December 31:
Discount rate............................... 7.0% 7.5% 7.0% 7.5%
Expected return on plan assets.............. 9.0% 10.0% -- --
For measurement purposes, an eleven percent and ten percent annual rate of
increase in the per capita cost of covered health care benefits was assumed in
2003 and 2004, respectively. The rate was assumed to decrease to six percent by
2008 and remain at that level thereafter.
Pension Benefits Other Benefits
-------------- ------------
2002 2001 2002 2001
------ ------ ----- -----
Components of net periodic benefit cost
Service cost........................... $ 18.5 $ 9.7 $ 1.1 $ 0.6
Interest cost.......................... 33.5 24.0 9.4 5.0
Expected return on plan assets......... (48.1) (39.7) -- --
Amortization of transition obligation.. (0.1) (0.2) -- --
Amortization of (gain) loss............ -- (0.6) 1.3 (0.6)
Amortization of prior service cost..... (1.9) (1.9) (.7) (1.0)
------ ------ ----- -----
Net periodic (benefit) cost............ $ 1.9 $ (8.7) $11.1 $ 4.0
====== ====== ===== =====
The Company acquired Gilbarco, Inc. on February 1, 2002, Videojet Technologies
on February 5, 2002, Viridor Instrumentation Limited on February 4, 2002 and
Thomson Industries on October 18, 2002, including each of their pension and
post retirement plans.
The Company acquired Kollmorgen Corporation on June 20, 2000, including their
pension and postretirement benefit plans. The Company acquired American
Precision Industries on March 27, 2000, including their pension plans.
33
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components $ 1.2 $ (1.0)
Effect on postretirement benefit obligation............ 14.7 (12.7)
Substantially all employees not covered by defined benefit plans are covered by
defined contribution plans, which generally provide funding based on a
percentage of compensation.
Pension expense for all plans amounted to $45,490,000, $38,002,000, and
$36,555,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
In addition, due to declining investment returns on the Company's plan assets,
the Company recorded a $76,941,000 minimum pension liability adjustment (net of
tax benefit of $39,637,000). In accordance with SFAS No. 87, "Employers'
Accounting for Pensions", the Company recorded the charge as a direct
adjustment to stockholders' equity and thus, does not impact net income, but is
included in comprehensive income. For 2003, the Company anticipates lowering
the expected long-term rate of return assumption from 9% to 8.5% for the
Company's defined benefit pension plans. The Company anticipates there will be
no funding requirements for the defined benefit plans in 2003.
(10) STOCK TRANSACTIONS:
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 to
500,000,000 shares. This amendment was approved by the Company's shareholders
at its May 7, 2002 annual meeting.
On March 8, 2002, the Company completed the issuance of 6.9 million shares of
the Company's common stock for net proceeds to the Company of $467 million.
On March 1, 2001, the Company's Board of Directors authorized an increase in
the number of common shares to be issued under the Company's non-qualified
stock option plan to 22.5 million from 15.0 million. The Company's stockholders
approved this increase in May 2001. Under the plan, options are granted at not
less than existing market prices, expire ten years from the date of grant and
generally vest ratably over a five-year period.
Changes in stock options were as follows:
Number of Shares
Under Option
-------------------------------------
(in thousands, except per share data)
Outstanding at December 31, 1999 (average $20.48 per share) 10,217
Granted (average $52.56 per share)......................... 3,268
Exercised (average $12.95 per share)....................... (1,615)
Cancelled (average $23.59 per share)....................... (1,119)
------
Outstanding at December 31, 2000 (average $31.65 per share) 10,751
Granted (average $48.21 per share)......................... 1,546
Exercised (average $14.13 per share)....................... (1,677)
Cancelled (average $49.17 per share)....................... (597)
------
Outstanding at December 31, 2001 (average $38.28 per share) 10,023
Granted (average $62.37 per share)......................... 1,524
Exercised (average $22.38 per share)....................... (1,872)
Cancelled (average $47.24 per share)....................... (275)
------
Outstanding at December 31, 2002
(at $7.97 to $69.98 per share, average $45.09 per share)... 9,400
======
34
As of December 31, 2002, options with a weighted average remaining life of 5.0
years covering 3,581,927 shares were exercisable at $7.97 to $68.31 per share
(average $32.80 per share) and options covering 5,864,000 shares remain
available to be granted.
Options outstanding at December 31, 2002 are summarized below:
Outstanding Exercisable
------------------------------ --------------------
Average Average Average
Shares Exercise Remaining Shares Exercise
Exercise Price (thousands) Price Life (thousands) Price
-------------- ----------- -------- --------- ----------- --------
$ 7.97 to $11.75 397 $10.49 1 year 397 $10.49
$15.63 to $20.88 333 16.53 3 years 333 16.53
$21.25 to $32.22 1,466 25.33 4 years 1,466 25.33
$35.19 to $59.59 4,926 46.89 8 years 1,104 46.65
$60.38 to $69.98 2,278 64.11 9 years 282 68.02
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 a 3.3% risk-free interest rate,
a 8-year life for the option, a 33.79% expected volatility and dividends at the
current annual rate. The weighted-average grant date fair market value of
options issued was $28 per share in 2002, $27 per share in 2001, and $32 per
share in 2000. Had this method been used in the determination of income, net
earnings would have decreased by approximately $21.0 million in 2002, $20.3
million in 2001, and $17.9 million in 2000 and diluted earnings per share would
have decreased by $.13 in 2002, $.13 in 2001, and $.12 in 2000. These proforma
amounts may not be representative of the effects on proforma net earnings for
future years.
During 2002, the Company issued approximately 400,000 shares of the Company's
common stock to a former officer of the Company pursuant to a previously
existing employment contract, earned in prior years. These amounts are included
as a component of common stock issued for options exercised in the Consolidated
Statement of Stockholders' Equity.
In the third and fourth quarters of 2001, the Company repurchased 375,500
shares of the Company's common stock for total consideration of $17.3 million.
In the first quarter of 2000, the Company repurchased 2,042,300 shares of the
Company's common stock for total consideration of $82.2 million.
(11) LEASES AND COMMITMENTS:
The Company's leases extend for varying periods of time up to 10 years and, in
some cases, contain renewal options. Future minimum rental payments for all
operating leases having initial or remaining noncancelable lease terms in
excess of one year are $54,000,000 in 2003, $43,000,000 in 2004, $35,000,000 in
2005, $30,000,000 in 2006, $26,000,000 in 2007, and $73,000,000 thereafter.
Total rent expense charged to income for all operating leases was $56,000,000,
$42,000,000, and $35,000,000, for the years ended December 31, 2002, 2001, and
2000, respectively.
(12) LITIGATION AND CONTINGENCIES:
Certain of the Company's operations are subject to environmental laws and
regulations in the jurisdictions in which they operate, which impose
limitations on the discharge of pollutants into the ground, air and water and
establish standards for the generation, treatment, use, storage and disposal of
solid and hazardous wastes. The Company must also comply with various health
and safety regulations in both the United States and abroad in connection with
its operations. The Company believes that it is in substantial compliance with
applicable environmental, health and safety laws and regulations. Compliance
with these laws and regulations has not had and, based on current information
and the applicable laws and regulations currently in effect, is not expected to
have a material adverse effect on the Company's capital expenditures, earnings
or competitive position.
In addition to environmental compliance costs, the Company may incur costs
related to alleged environmental damage associated with past or current waste
disposal practices or other hazardous materials handling practices. For
example, generators of hazardous substances found in disposal sites at which
environmental problems are alleged to exist, as well as the owners of those
sites and certain other classes of persons, are subject to claims brought by
state and federal regulatory agencies pursuant to statutory authority. In
addition to clean-up actions brought by governmental authorities, private
parties could bring personal injury or other claims due to the presence of or
exposure to hazardous substances. The Company has received notification from
the U.S. Environmental Protection Agency, and from state and foreign
environmental agencies, that conditions at a number of sites where
35
the Company and others disposed of hazardous wastes require clean-up and other
possible remedial action and may be the basis for monetary sanctions, including
sites where the Company has been identified as a potentially responsible party
under federal and state environmental laws and regulations. The Company has
projects underway at several current and former manufacturing facilities, in
both the United States and abroad, to investigate and remediate environmental
contamination resulting from past operations. In particular, Joslyn
Manufacturing Company ("JMC"), a subsidiary of the Company, previously operated
wood treating facilities that chemically preserved utility poles, pilings and
railroad ties. All such treating operations were discontinued or sold prior to
1982. These facilities used wood preservatives that included creosote,
pentachlorophenol and chromium-arsenic-copper. While preservatives were handled
in accordance with then existing law, environmental law now imposes retroactive
liability, in some circumstances, on persons who owned or operated
wood-treating sites. JMC is remediating some of its former sites and will
remediate other sites in the future.
The Company has made a provision for environmental remediation; however, there
can be no assurance that estimates of environmental liabilities will not
change. The Company generally makes an assessment of the costs involved for its
remediation efforts based on environmental studies as well as its prior
experience with similar sites. If the Company determines that it has potential
liability for properties currently owned or previously sold, it accrues the
total estimated costs, including investigation and remediation costs,
associated with the site. While the Company actively pursues appropriate
insurance recoveries, it does not recognize any insurance recoveries for
environmental liability claims until realized. The ultimate cost of site
cleanup is difficult to predict given the uncertainties of the Company's
involvement in certain sites, uncertainties regarding the extent of the
required cleanup, the availability of alternative cleanup methods, variations
in the interpretation of applicable laws and regulations, the possibility of
insurance recoveries with respect to certain sites and the fact that imposition
of joint and several liability with right of contribution is possible under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
and other environmental laws and regulations. As such, there can be no
assurance that the Company's estimates of environmental liabilities will not
change. In view of the Company's financial position and reserves for
environmental matters, the Company believes that its liability, if any, for
past or current waste disposal practices and other hazardous materials handling
practices will not have a material adverse effect on its results of operation,
financial condition and cash flow.
The Company has been engaged in product liability litigation related to an air
tool product line that was disposed in 1987. The Company has accepted an
agreement, in principle, to settle the claims related to this litigation. The
Company believes that completion of this settlement will not result in a
material adverse effect on the Company's results of operations or financial
condition.
In addition to the litigation noted above, the Company is, from time to time,
subject to routine litigation incidental to its business. These lawsuits
primarily involve claims for damages arising out of the use of the Company's
products, allegations of patent and trademark infringement, and litigation and
administrative proceedings involving employment matters and commercial
disputes. Some of these lawsuits include claims for punitive as well as
compensatory damages. The Company estimates its exposure for product liability
and accrues for this estimated liability up to the limits of the deductibles
under available insurance coverage. All other claims and lawsuits are handled
on a case-by-case basis. The Company believes that the results of the
above-noted litigation and other pending legal proceedings will not have a
materially adverse effect on the Company's results of operations or financial
condition, notwithstanding any related insurance recoveries.
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 $93 million, $92 million
and $70 million as of December 31, 2002, 2001 and 2000, respectively. The
subsidiary accounts for such sales in accordance with Statement of Financial
Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities--a replacement of FASB
Statement No. 125." A provision for estimated losses as a result of the
recourse has been included in accrued expenses. No gain or loss arose from
these transactions.
As of December 31, 2002, the Company had no known probable but inestimable
exposures that are expected to have a material effect on the Company's
financial position and results of operations.
(13) INCOME TAXES:
The provision for income taxes for the years ended December 31 consists of the
following (in thousands):
36
2002 2001 2000
-------- -------- --------
Federal:
Current.......... $ -- $ 76,666 $ 85,955
Deferred......... 160,302 60,601 67,150
State and local..... 15,315 12,483 12,645
Foreign............. 47,710 28,849 32,961
-------- -------- --------
Income tax provision $223,327 $178,599 $198,711
======== ======== ========
Deferred income taxes are reflected in prepaid expenses and other current
assets and in other assets. Deferred tax assets consist of the following (in
thousands):
Year Ended December 31,
----------------------
2002 2001
--------- --------
Bad debt allowance.................. $ 13,394 $ 20,784
Inventories......................... 33,207 7,929
Property, plant and equipment....... (32,317) (48,655)
Postretirement benefits............. 66,823 39,053
Insurance, including self--insurance 21,846 22,860
Basis difference in LYONs Notes..... (20,614) (9,374)
Environmental compliance............ 14,667 25,239
Other accruals...................... (26,073) (26,166)
Deferred service income............. (126,806) (61,702)
All other accounts.................. 40,993 (25,844)
--------- --------
Net deferred tax liability.......... $ (14,880) $(55,876)
========= ========
The effective income tax rate for the years ended December 31 varies from the
statutory federal income tax rate as follows:
Percentage of Pre-tax Earnings
-----------------------------
2002 2001 2000
---- ---- ----
Statutory federal income tax rate..................... 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:.......
Permanent differences in amortization of goodwill..... -- 2.9 3.1
State income taxes (net of Federal income tax benefit) 1.5 1.6 1.6
Taxes on foreign earnings............................. (2.5) (2.0) (1.7)
---- ---- ----
Effective income tax rate............................. 34.0% 37.5% 38.0%
==== ==== ====
The Company provides income taxes for unremitted earnings of foreign
subsidiaries which are not considered permanently reinvested in that operation.
As of December 31, 2002, the approximate amount of earnings from foreign
subsidiaries that the Company considers permanently reinvested and for which
deferred taxes have not been provided was approximately $410 million. It is not
practical to estimate the additional Federal income taxes, if any, that might
be payable on the remittance of such earnings.
The Company made income tax payments of $98,773,000, $52,048,000 and
$40,102,000 in 2002, 2001 and 2000, respectively. The Company recognized a tax
benefit of approximately $28,267,000, $12,562,000, and $9,165,000 in 2002,
2001, and 2000, respectively, related to the exercise of employee stock
options, which has been recorded as an increase to additional paid-in capital.
In connection with the completion of a federal income tax audit, the Company
adjusted certain income tax related reserves established related to the sale of
a previously discontinued operation and recorded a $30 million credit to its
fourth quarter 2002 income statement. This credit has been classified
separately below net earnings from continuing operations since the tax reserves
related to a previously discontinued operation.
37
(14) SEGMENT DATA:
Operating profit represents total revenues less operating expenses, excluding
other expense, interest and income taxes. The identifiable assets by segment
are those used in each segment's operations. Intersegment amounts are
eliminated to arrive at consolidated totals.
Detailed segment data is presented in the following table (in thousands):
Operations in Different Industries Year Ended December 31
2002 2001 2000
---------- ---------- ----------
Total Sales:
Process/Environmental Controls. $3,385,154 $2,616,797 $2,441,986
Tools and Components........... 1,192,078 1,165,647 1,335,791
---------- ---------- ----------
$4,577,232 $3,782,444 $3,777,777
========== ========== ==========
Operating Profit:
Process/Environmental Controls. $ 540,457 $ 388,616 $ 382,354
Tools and Components........... 181,359 131,810 189,062
Other.......................... (20,694) (18,415) (19,267))
---------- ---------- ----------
$ 701,122 $ 502,011 $ 552,149
========== ========== ==========
Identifiable Assets:
Process/Environmental Controls. $4,691,604 $3,180,092 $2,863,930
Tools and Components........... 811,803 967,983 987,207
Other.......................... 525,738 672,408 180,542
---------- ---------- ----------
$6,029,145 $4,820,483 $4,031,679
========== ========== ==========
Liabilities:
Process/Environmental Controls. $1,149,800 $1,092,012 $1,026,463
Tools and Components........... 311,106 337,512 347,484
Other.......................... 1,558,640 1,162,373 715,399
---------- ---------- ----------
$3,019,546 $2,591,897 $2,089,346
========== ========== ==========
Depreciation and Amortization:
Process/Environmental Controls. $ 93,176 $ 124,194 $ 101,605
Tools and Components........... 36,389 54,196 48,116
---------- ---------- ----------
$ 129,565 $ 178,390 $ 149,721
========== ========== ==========
Capital Expenditures, Net:
Process/Environmental Controls. $ 26,887 $ 59,832 $ 51,067
Tools and Components........... 12,077 20,753 37,436
---------- ---------- ----------
$ 38,964 $ 80,585 $ 88,503
========== ========== ==========
Operations in Geographical Areas
Year Ended December 31
2002 2001 2000
---------- ---------- ----------
Total Sales:
United States.. $3,304,796 $2,622,077 $2,883,392
Germany........ 256,131 292,712 199,064
United Kingdom. 209,954 143,404 154,731
All other...... 806,351 724,251 540,590
---------- ---------- ----------
$4,577,232 $3,782,444 $3,777,777
========== ========== ==========
Long-lived assets:
United States.. $3,104,370 $2,596,063 $2,418,590
Germany........ 147,790 95,512 29,405
United Kingdom. 169,676 54,951 22,134
38
All other.................... 220,043 199,342 87,244
Less: Deferred Taxes............ -- -- (778)
---------- ---------- ----------
$3,641,879 $2,945,868 $2,556,595
========== ========== ==========
Sales outside the United States:
Direct Sales................. $1,272,436 $1,160,367 $ 894,385
Exports...................... 384,000 324,000 298,000
---------- ---------- ----------
$1,656,436 $1,484,367 $1,192,385
========== ========== ==========
Sales by Major Product Group:
2002 2001 2000
---------- ---------- ----------
(in thousands)
Analytical and physical instrumentation.. $1,784,955 $1,204,683 $1,140,633
Motion and industrial automation controls 869,820 902,664 801,400
Mechanics and related hand tools......... 760,533 747,605 784,332
Product identification................... 285,857 -- --
Aerospace and defense.................... 278,066 259,395 196,443
Power quality and reliability............ 251,783 325,072 376,374
All other................................ 346,218 343,025 478,595
---------- ---------- ----------
Total.................................... $4,577,232 $3,782,444 $3,777,777
========== ========== ==========
(15) QUARTERLY DATA-UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA):
2002
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net sales................................................................... $1,004,207 $1,146,326 $1,151,721 $1,274,978
Gross profit................................................................ 376,023 444,418 460,073 505,543
Operating profit............................................................ 137,221 169,575 187,430 206,896
Net earnings, before change in accounting principle and reduction of income
tax reserves.............................................................. 82,735 103,665 116,029 131,712
Net earnings................................................................ (91,015) 103,665 116,029 161,712
Earnings per share:
Basic--before change in accounting principle and reduction in income tax
reserves............................................................... $ .57 $ .69 $ .76 $ .87
Diluted--before change in accounting principle and reduction in income
tax reserves........................................................... $ .55 $ .66 $ .74 $ .84
Basic.................................................................... $ (.63) $ .69 $ .76 $ 1.07
Diluted.................................................................. $ (.58) $ .66 $ .74 $ 1.03
2001
-----------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Net sales................................................................... $1,005,283 $ 956,641 $ 901,588 $ 918,932
Gross profit................................................................ 376,885 375,341 353,958 338,233
Operating profit............................................................ 138,418 156,613 147,640 59,340
Net earnings................................................................ 82,577 94,230 87,746 33,112
Earnings per share:
Basic.................................................................... $ .58 $ .65 $ .61 $ .23
Diluted.................................................................. $ .56 $ .63 $ .59 $ .23
(16) NEW ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This statement requires that goodwill and intangible assets deemed to have an
indefinite life not be amortized. Instead of amortizing goodwill and intangible
assets deemed to have an indefinite life, the statement requires a test for
impairment to be
39
performed annually, or immediately if conditions indicate that such an
impairment could exist. The Company adopted the statement effective January 1,
2002 and will no longer record goodwill amortization. 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 of $200 million ($173.8 million after
tax). The evaluation of goodwill of reporting units on a fair value basis from
the implementation of SFAS No. 142, indicated that an impairment existed at the
Company's power quality business unit. In accordance with SFAS No. 142, once
impairment is determined at a reporting unit, SFAS No. 142 requires that the
amount of goodwill impairment be determined based on what the balance of
goodwill would have been if purchase accounting were applied at the date of
impairment. Under SFAS No. 142, if the carrying amount of goodwill exceeds its
fair value, an impairment loss must be recognized in an amount equal to that
excess. Once an impairment loss is recognized, the adjusted carrying amount of
goodwill will be its new accounting basis.
The following table provides the comparable effects of adoption of SFAS No. 142
for the two years ended December 31, 2001 and 2000 (in thousands, except per
share data).
2001 2000
-------- --------
Reported Net Earnings....................... $297,665 $324,213
Add back: Goodwill Amortization (net of tax) 54,978 45,995
-------- --------
Adjusted Net Earnings....................... $352,643 $370,208
======== ========
2001 2000
Basic Earnings per Share -------- --------
Reported Net Earnings....................... $ 2.07 $ 2.28
Add back: Goodwill Amortization (net of tax) .39 .32
-------- --------
Adjusted Net Earnings per Basic Share....... $ 2.46 $ 2.60
======== ========
2001 2000
Diluted Net Earnings per Share -------- --------
Reported Net Earnings....................... $ 2.01 $ 2.23
Add back: Goodwill Amortization (net of tax) .36 .31
-------- --------
Adjusted Net Earnings per Diluted Share..... $ 2.37 $ 2.54
======== ========
The carrying amount of goodwill changed by approximately $600.0 million in
2002. The components of the change were $834 million of additional goodwill
associated with business combinations completed in the year ended December 31,
2002, a net decrease of $34 million in other adjustments, primarily related to
adjustments to goodwill associated with acquisitions consummated in prior years
and foreign currency translation adjustments, and lastly, a $200 million
reduction of goodwill related to the impairment charge recorded in connection
with the adoption of SFAS No. 142.
There were no dispositions of businesses with related goodwill during the year
ended December 31, 2002. Both the acquired goodwill change in the period and
the impairment charge related to the Company's Process/Environmental Controls
segment. The carrying value of goodwill, at December 31, 2002, for the Tools
and Components segment and Process/Environmental Controls segment is $211.9
million, and $2,564.9 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.
The following table shows the rollforward of goodwill reflected in the
financial statements resulting from the Company's acquisition activities for
2000, 2001 and 2002 (in millions).
Balance January 1, 2000............................................................................. $1,189
Attributable to 2000 acquisitions................................................................ 608
Amortization..................................................................................... (47)
Other Changes, including adjustments to purchase price, purchase allocations and the effect of
foreign currency translations.................................................................... 12
------
Balance December 31, 2000........................................................................... 1,762
------
Attributable to 2001 acquisitions................................................................ 369
Amortization..................................................................................... (62)
Other Changes, including adjustments to purchase price, purchase allocations and the effect of
foreign currency translations.................................................................... 108
------
Balance December 31, 2001........................................................................... 2,177
------
Attributable to 2002 acquisitions................................................................ 834
Other Changes, including adjustments to purchase price, purchase allocations and the effect of
foreign currency translations.................................................................... (34)
Write down associated with Power Quality Business................................................ (200)
------
Balance December 31, 2002........................................................................... $2,777
------
40
Included in other changes in goodwill for 2001 are changes made to the
preliminary purchase price allocations made in 2000 for acquired assets and
liabilities ($58.3 million) related to finalization of estimated fair market
values associated with these acquisitions as well as accruals for direct costs
related to exiting certain acquired operations ($53.9 million) arising from the
Company's integration plan with respect to these businesses. In 2002, the
Company recorded a reduction of goodwill related to certain acquisitions that
occurred in 2000 of approximately $27 million related to reserves that were not
necessary and reserves associated with facilities that were not closed due to
unexpected delays in commencing certain planned integration activities.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company does not believe that implementation of this
SFAS will have a material impact on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it
retains the basic requirements of SFAS No. 121 regarding when and how to
measure an impairment loss, SFAS No. 144 provides additional implementation
guidance. SFAS No. 144 applies to long-lived assets to be held and used or to
be disposed of, including assets under capital leases of lessees; assets
subject to operating leases of lessors; and prepaid assets. SFAS No. 144 also
expands the scope of a discontinued operation to include a component of an
entity, and eliminates the current exemption to consolidation when control over
a subsidiary is likely to be temporary. This statement was effective January 1,
2002. Implementation of this SFAS did not 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.
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 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 will be effective
for the Company's financial statements issued for the first quarter of 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 will not
have a material impact on the Company's financial position or results of
operations.
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 additions, 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 for the fiscal
year ended December 31, 2002. The adoption of this interpretation did not have
a material impact on the Company's financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
41
Report of Independent Auditors
To the Board of Directors and Shareholders of Danaher Corporation and
subsidiaries
We have audited the consolidated balance sheet of Danaher Corporation and
subsidiaries as of December 31, 2002 and the related consolidated statements of
earnings, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of Danaher Corporation and
subsidiaries as of December 31, 2001 and for each of the years in the two year
period then ended were audited by other auditors who have ceased operations and
whose report dated January 23, 2002, (except with respect to the matters
discussed in Note 17 as to which the date is March 8, 2002) expressed an
unqualified opinion on those financial statements, prior to the disclosures
related to the adoption of Statement of Financial Accounting Standards
(Statement) No. 142, "Goodwill and Other Intangible Assets", discussed in Note
16.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Danaher
Corporation and subsidiaries at December 31, 2002 and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 16 to the financial statements the Company adopted
Statement No.142, "Goodwill and Other Intangible Assets" as of January 1, 2002.
As discussed above, the financial statements of Danaher Corporation and
subsidiaries as of December 31, 2001 and for each of the years in the two year
period then ended were audited by other auditors who have ceased operations. As
described in Note 16, these financial statements have been revised to include
disclosures required by Statement No. 142. Our procedures with respect to the
disclosures in Note 16 included (a) agreeing the previously reported goodwill
and net income to the previously issued financial statements and agreeing the
changes in goodwill and the adjustments to reported net income representing
amortization expense, net of tax, recognized in those periods related to
goodwill to the Company's underlying records obtained from management, (b)
testing the mathematical accuracy of (i) the reconciliation of adjusted net
income to reported net income, and the related earnings-per-share amounts and
(ii) the roll forward of goodwill balances. In our opinion, the disclosures for
2001 and 2000 in Note 16 are appropriate. However, we were not engaged to
audit, review, or apply any procedures to the 2001 or 2000 financial statements
of the Company other than with respect to such disclosures and, accordingly, we
do not express an opinion or any other form of assurance on the 2001 or 2000
financial statements taken as a whole.
Ernst & Young LLP
Baltimore, Maryland
January 29, 2003
42
REPORT OF INDEPENDENT ACCOUNTANTS
The following report is a copy of a report previously issued by Arthur Andersen
LLP ("Andersen"), which report has not been reissued by Andersen. Certain
financial information for each of the two years in the period ended December
31, 2001 was not reviewed by Andersen and includes: (i) reclassifications to
conform to our fiscal 2002 financial statement presentation and (ii) additional
disclosures to conform with new accounting pronouncements and SEC rules and
regulations issued during such fiscal year. The reference to Note 17 in the
dating of their opinion refers to a footnote regarding certain acquisition and
divestiture events that occurred subsequent to December 31, 2001, which is not
repeated in the current year financial statements.
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF DANAHER CORPORATION
We have audited the accompanying consolidated balance sheets of Danaher
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Danaher Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Baltimore, Maryland
January 23, 2002
(except with respect to the
matter discussed in Note 17,
as to which the date is
March 8, 2002)
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ H. LAWRENCE CULP, JR.
-----------------------------
H. Lawrence Culp, Jr.
President and Chief
Executive Officer
Date: March 28, 2003
/s/ H. LAWRENCE CULP, JR. President, Chief Executive
- ----------------------------- Officer and Director
H. Lawrence Culp, Jr.
/s/ STEVEN M. RALES Chairman of the Board
- -----------------------------
Steven M. Rales
/s/ MITCHELL P. RALES Chairman of the Executive
- ----------------------------- Committee
Mitchell P. Rales
/s/ WALTER G. LOHR, JR. Director
- -----------------------------
Walter G. Lohr, Jr.
/s/ DONALD J. EHRLICH Director
- -----------------------------
Donald J. Ehrlich
/s/ MORTIMER M. CAPLIN Director
- -----------------------------
Mortimer M. Caplin
/s/ ALAN G. SPOON Director
- -----------------------------
Alan G. Spoon
/s/ A. EMMET STEPHENSON, JR. Director
- -----------------------------
A. Emmet Stephenson, Jr.
/s/ PATRICK W. ALLENDER Executive Vice President -
- ----------------------------- Chief Financial Officer and
Patrick W. Allender Secretary
/s/ CHRISTOPHER C. MCMAHON Vice President and Controller
- -----------------------------
Christopher C. McMahon
/s/ ROBERT S. LUTZ Vice President and Chief
- ----------------------------- Accounting Officer
Robert S. Lutz
44
CERTIFICATIONS
I, H. Lawrence Culp, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Danaher Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual 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 officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
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 officer and I have indicated in this
annual report whether 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: March 28, 2003 By: /s/ H. Lawrence Culp, Jr.
---------------------------------
Name: H. Lawrence Culp, Jr.
Title: President and Chief Executive
Officer
45
I, Patrick W. Allender, certify that:
1. I have reviewed this annual report on Form 10-K of Danaher Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual 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 officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
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 officer and I have indicated in this
annual report whether 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: March 28, 2003 By: /s/ PATRICK W. ALLENDER
---------------------------------
Name: Patrick W. Allender
Title: Executive Vice President--Chief
Financial Officer and Secretary
46
SHAREHOLDER INFORMATION
www.Danaher.com
ACCOUNT QUESTIONS
Our transfer agent can help you with a variety of
shareholder related services including:
.. Change of address
.. Lost stock certificates
.. Transfer of stock to another person
.. Additional administrative services
CONTACTING OUR TRANSFER AGENT
Sun Trust Bank
Stock Transfer Department
Mail Code 528
P.O. Box 4625
Atlanta, Georgia 30302
Toll Free: 800-568-3476
Outside of the U.S.: 404-588-7815
Fax: 404-332-3875
INVESTOR RELATIONS
This annual report, along with a variety of other
financial materials, can be viewed at www.Danaher.com.
Additional inquiries may be directed to the
Danaher Investor Relations Group at:
Danaher Corporation
2099 Pennsylvania Avenue NW
Washington, D.C. 20006-1813
Phone: 202-828-0850
Fax: 202-828-0860
Email: ir@Danaher.com
ANNUAL MEETING
Danaher's annual shareholder meeting
will be held on May 6, 2003 in Washington, D.C.
Shareholders who would like to attend the meeting
should register with Investor Relations by calling
202-828-0850 or via e-mail at ir@Danaher.com.
AUDITORS
Ernst & Young LLP
Baltimore, Maryland
STOCK LISTING
Symbol: DHR
New York and Pacific Stock Exchanges
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