10-Q 1 d10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Quarter ended June 28, 2002 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission File Number: 1-8089 DANAHER CORPORATION (Exact name of registrant as specified in its charter) Delaware 59-1995548 ---------------------- ---------------------- (State of incorporation) (I.R.S. Employer Identification number) 2099 Pennsylvania Ave., N.W. Washington, D.C. 20006 ---------------------------------------- --------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 202-828-0850 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of common stock outstanding at July 15, 2002 was 151,215,745. DANAHER CORPORATION INDEX FORM 10-Q PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Condensed Balance Sheets at June 28, 2002 and December 31, 2001 1 Consolidated Condensed Statements of Earnings for the three months and six months ended June 28, 2002 and June 29, 2001 2 Consolidated Condensed Statements of Stockholders' Equity for the six months ended June 28, 2002 3 Consolidated Condensed Statements of Cash Flow for the six months ended June 28, 2002 and June 29, 2001 4 Notes to Consolidated Condensed Financial Statements 5-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-20 Item 3. Quantitative and Qualitative Disclosures 20 About Market Risk PART II - OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 20 Item 4. Submission of Matters to a Vote of 21 Security Holders Item 6. Exhibits and Reports on Form 8K 21 DANAHER CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (000's omitted)
June 28, December 31, 2002 2001 ---- ---- (unaudited) (Note 1) ASSETS ------ Current Assets: Cash and cash equivalents $ 705,075 $ 706,559 Accounts receivable, net 746,405 585,318 Inventories: Finished goods 157,849 131,316 Work in process 112,277 95,119 Raw material and supplies 206,783 181,801 ---------- ---------- Total inventories 476,909 408,236 Prepaid expenses and other current assets 202,594 174,502 ---------- ---------- Total current assets 2,130,983 1,874,615 Property, plant and equipment, net of accumulated depreciation of $782,000 and $731,000, respectively 572,555 533,572 Other assets 71,291 119,639 Excess of cost over net assets of acquired companies, net 2,869,972 2,292,657 ---------- ---------- Total assets $5,644,801 $4,820,483 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Notes payable and current portion of long-term debt $ 108,832 $ 72,356 Accounts payable 328,117 235,501 Accrued expenses 881,357 709,437 ---------- ---------- Total current liabilities 1,318,306 1,017,294 Other liabilities 476,056 455,270 Long-term debt 1,112,649 1,119,333 Stockholders' equity: Common stock-$.01 par value 1,652 1,573 Additional paid-in capital 863,024 375,279 Retained earnings 1,928,077 1,921,470 Accumulated other comprehensive income (54,963) (69,736) ---------- ---------- Total stockholders' equity 2,737,790 2,228,586 ---------- ---------- Total liabilities and stockholders' equity $5,644,801 $4,820,483 ========== ==========
See notes to consolidated condensed financial statements. 1 DANAHER CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (000's omitted except per share amounts) (unaudited)
Quarter Ended Six Months Ended June 28, June 29, June 28, June 29, 2002 2001 2002 2001 ---- ---- ---- ---- Net sales $1,146,326 $ 956,641 $2,150,533 $1,961,924 Operating costs and expenses: Cost of sales 701,908 581,300 1,330,092 1,209,698 Selling, general and administrative expenses 273,576 203,347 509,629 427,209 Goodwill and other amortization 1,267 15,381 _4,016 29,986 --------- --------- ---------- ---------- Total operating expenses 976,751 800,028 1,843,737 1,666,893 --------- --------- ---------- ---------- Operating profit 169,575 156,613 306,796 295,031 Interest expense, net 11,308 5,845 22,216 12,141 --------- --------- ---------- ---------- Earnings before income taxes and effect of accounting change 158,267 150,768 284,580 282,890 Income taxes 54,602 56,538 98,180 106,083 --------- --------- ---------- ---------- Net earnings, before effect of accounting change 103,665 94,230 186,400 176,807 Effect of accounting change, net of tax, adoption of SFAS No. 142 -- -- (173,750) -- --------- --------- ---------- ---------- Net earnings $ 103,665 $ 94,230 $ 12,650 $ 176,807 ========== ========= ========== ========== Per share amounts before accounting change Basic earnings per share $ .69 $ .65 $1.26 $1.23 ========== ========= ========== ========== Weighted average shares outstanding - Basic 151,274 144,016 148,223 143,445 ========== ========= ========== ========== Diluted earnings per share $ .66 $ .63 $1.21 $1.19 ========== ========= ========== ========== Weighted average shares outstanding - Diluted 160,045 152,642 156,994 151,554 ========== ========= ========== ========== Per share amounts after accounting change Basic earnings per share $ .69 $ .65 $ .09 $1.23 Diluted earnings per share $ .66 $ .63 $ .11 $1.19 Per share effect of accounting change - Basic -- -- $1.17 -- Per share effect of accounting change - Diluted -- -- $1.10 --
See notes to consolidated condensed financial statements. 2 DANAHER CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (000's omitted) (unaudited)
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Comprehensive Shares Amount Capital Earnings Income Income ------------------------------------------------------------------------------- Balance, December 31, 2001 157,327 $1,573 $375,279 $1,921,470 $(69,736) -- Net earnings for the period -- -- -- 12,650 -- $12,650 Dividends declared -- -- -- (6,043) -- -- Sale of common stock 6,900 69 466,936 Common stock issued for options exercised 992 10 20,809 -- -- -- Increase (decrease)from translation of foreign financial statements -- -- -- -- 14,773 14,773 ------- ------ -------- ---------- --------- -------- Balance, June 28, 2002 165,219 $1,652 $863,024 $1,928,077 $(54,963) $ 27,423 ======= ====== ======== ========== ========= ========
See notes to consolidated condensed financial statements. 3 DANAHER CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (000's omitted) (unaudited)
Six Months Ended June 28, June 29, 2002 2001 ---- ---- Cash flows from operating activities: Net earnings from operations $ 12,650 $ 176,807 Effect of change in accounting principle 173,750 -- --------- --------- 186,400 176,807 Noncash items, depreciation and amortization 65,684 86,117 Change in accounts receivable 32,916 52,015 Change in inventories 42,985 10,915 Change in accounts payable 29,292 (6,365) Change in other assets and liabilities 36,169 (8,236) --------- --------- Total operating cash flows 393,446 311,253 --------- --------- Cash flows from investing activities: Payments for additions to property, plant, and equipment, net (16,506) (39,418) Cash paid for acquisitions, net (827,282) (193,578) --------- --------- Net cash used in investing activities (843,788) (232,996) --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 487,824 23,449 Proceeds from (repayments of) debt, net (45,084) 403,072 Payment of dividends (6,043) (5,700) --------- --------- Net cash provided by financing activities 436,697 420,821 --------- --------- Effect of exchange rate changes on cash 12,161 (692) --------- --------- Net change in cash and cash equivalents (1,484) 498,386 Beginning balance of cash and cash equivalents 706,559 176,924 --------- --------- Ending balance of cash and cash equivalents $ 705,075 $ 675,310 ========= ========= Supplemental disclosures: Cash interest payments $ 13,514 $ 13,014 ========= ========= Cash income tax payments $ 7,868 $ 15,992 ========= =========
See notes to consolidated condensed financial statements. 4 DANAHER CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) NOTE 1. GENERAL The consolidated condensed financial statements included herein have been prepared by Danaher Corporation (the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed financial statements included herein should be read in conjunction with the financial statements and the notes thereto included in the Company's 2001 Annual Report on Form 10-K. In the opinion of the registrant, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position of the Company at June 28, 2002 and December 31, 2001, its results of operations for the three months and six months ended June 28, 2002 and June 29, 2001, and its cash flows for the six months ended June 28, 2002 and June 29, 2001. Total comprehensive income was as follows: 2002 2001 ------ ------ (millions) Quarter $117.1 $ 76.0 Six Months $ 27.4 $159.5 Total comprehensive income for all periods represents net income and the change in cumulative foreign translation adjustment. NOTE 2. SEGMENT INFORMATION Segment information is presented consistently with the basis described in the 2001 Annual Report. There has been no material change in total assets or liabilities by segment, except for 2002 acquisitions and divestitures (see Note 4) and the write down of $200 million of goodwill taken in the first quarter of 2002 related to the Company's power quality business units, as more fully explained in Note 6. Segment results for 2002 and 2001 are shown below: 5
Sales-Quarter Sales-Six Months 2002 2001 2002 2001 ---- ---- ---- ---- Process/Environmental Controls $ 843,527 $666,948 $1,577,756 $1,391,118 Tool and Components 302,799 289,693 572,777 570,806 ---------- -------- ---------- ---------- $1,146,326 $956,641 $2,150,533 $1,961,924 ========== ======== ========== ========== Op Profit-Quarter Op Profit-Six Months 2002 2001 2002 2001 ---- ---- ---- ---- Process/Environmental Controls $130,228 $117,356 $237,672 $233,126 Tool and Components 45,453 43,342 80,233 71,420 Other (6,106) (4,085) (11,109) (9,515) -------- -------- -------- -------- $169,575 $156,613 $306,796 $295,031 ======== ======== ======== ========
NOTE 3. EARNINGS PER SHARE Basic EPS is calculated by dividing earnings by the weighted average number of common shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the numerator and the denominator of the basic EPS calculation for the effect of all potential dilutive common shares outstanding during the period. Information related to the calculation of earnings per share of common stock before the effect of the Company's first quarter goodwill write down is summarized as follows:
Earnings Before Effect of Accounting Change Shares Per Share (Numerator) (Denominator) Amount ---------------------------------------------- For the Three Months Ended June 28, 2002 Basic EPS: $103,665 151,274 $.69 Adjustment for interest on convertible debentures: 1,969 - Incremental shares from assumed exercise of dilutive options: - 2,740 Incremental shares from assumed conversion of the convertible debenture: - 6,031 -------------------------- Diluted EPS: $105,634 160,045 $.66 ======== ======= ====
6
Net Earnings Shares Per Share (Numerator) (Denominator) Amount ------------ ------------- --------- For the Three Months Ended June 29, 2001 Basic EPS: $ 94,230 144,016 $.65 Adjustment for interest on convertible debentures 1,691 Incremental shares from assumed exercise of dilutive options: - 2,595 Incremental shares from assumed conversion of of convertible debentures - 6,031 ------------------------- Diluted EPS: $ 95,921 152,642 $.63 ======== ======= ==== Earnings Before Effect of Accounting Change Shares Per Share (Numerator) (Denominator) Amount ----------------- ------------- --------- For the Six Months Ended June 28, 2002 Basic EPS: $186,400 148,223 $1.26 Adjustment for interest on convertible debentures: 3,927 - Incremental shares from assumed exercise of dilutive options: - 2,740 Incremental shares from assumed conversion of the convertible debenture: - 6,031 ------------------------- Diluted EPS: $190,327 156,994 $1.21 ======== ======= =====
7 Net Earnings Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ For the Six Months Ended June 29, 2001 Basic EPS: $176,807 143,445 $1.23 Adjustment for interest on convertible debentures 3,368 Incremental shares from assumed exercise of dilutive options: - 2,938 Incremental shares from assumed conversion of the convertible debentures - 5,171 ----------------------- Diluted EPS: $180,175 151,554 $1.19 ======== ======= ===== NOTE 4. ACQUISITIONS AND DIVESTITURES In connection with its acquisitions, the Company assesses and formulates a plan related to the future integration of the acquired entity. This process begins during the due diligence process and is concluded within twelve months of the acquisition. The Company accrues estimates for certain costs related to these acquisitions, in accordance with Emerging Issues Task Force Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." On February 25, 2002, the Company completed the divestiture of API Heat Transfer, Inc. to an affiliate of Madison Capital Partners for approximately $66 million (including $56 million in cash and a note receivable in the principal amount of $10 million), less certain liabilities of API Heat Transfer, Inc. paid by Danaher at closing and subsequent to closing. API Heat Transfer, Inc. was part of the Company's acquisition of American Precision Industries, Inc. and was recorded as an asset held for sale as of the time of the acquisition. No gain or loss was recognized at the time of sale. On February 5, 2002, the Company closed the acquisition of Marconi Data Systems, formerly known as Videojet Technologies, from Marconi plc for approximately $400 million. Videojet Technologies, with approximately $300 million in revenues, is a worldwide leader in the market for non-contact product marking equipment and consumables for the product identification market. Videojet Technologies has been included in the Company's Process/Environmental Controls segment. The fair value of the assets acquired was approximately $471.8 million, and approximately $82.9 million of liabilities were assumed and accrued. 8 Based on the preliminary allocation of purchase price, Videojet Technologies fair value of assets acquired includes approximately $13.6 million of intangible assets with an average life of 8 years, primarily patents and proprietary technologies, and $37 million of trade names, with the remainder of the intangible assets allocated to goodwill. On February 4, 2002, the Company closed the acquisition of Viridor Instrumentation Limited from the Pennon Group plc for approximately $135 million in cash. Viridor, with $75 million in revenues, designs and manufactures analytical instruments for clean water, wastewater, ultrapure water and other fluids and materials. Viridor has been included in the Company's Process/Environmental Controls segment. The fair value of the assets acquired was approximately $153.7 million, and approximately $18.9 million of liabilities were assumed and accrued. Based on the preliminary allocation of purchase price, Viridor's fair value of assets acquired includes approximately $1.4 million of patents and technology, and $6.0 million of trade names, with the remainder of intangible assets allocated to goodwill. On February 1, 2002, the Company closed the acquisition of Marconi Commerce Systems, formerly known as Gilbarco, from Marconi plc for approximately $318 million in cash in addition to $7 million of assumed net debt. Gilbarco, with approximately $500 million in revenues, is a global leader in retail automation and environmental products and services. Gilbarco has been included in the Company's Process/ Environmental Controls segment. The fair value of the assets acquired was approximately $444.0 million, and approximately $125.9 million of liabilities were assumed and accrued. Based on the preliminary allocation of purchase price, Gilbarco's fair value of assets acquired included approximately $4.8 million of intangible assets with an average life of 4 years, primarily patents and software, and $26 million of trade names with the remainder of intangible assets allocated to goodwill. In addition, during the first six months of 2002, the Company acquired three smaller companies, additions to the Process/Environmental Controls segment, for total consideration of $35.8 million. The fair value of the three smaller acquired companies was approximately $51.2 million, and approximately $15.4 million of liabilities were assumed and accrued. On January 2, 2001, the Company acquired United Power Corporation. The consideration was approximately $108 million. The fair value of the assets acquired was approximately $117 million, and approximately $9 million of liabilities were assumed. The transaction was accounted for as a purchase. 9 NOTE 5. RESTRUCTURING CHARGE In the fourth quarter of 2001, the Company recorded a restructuring charge of $69.7 million ($43.5 million after tax, or $.29 per share). During the fourth quarter of 2001, management determined that it would restructure certain of its product lines, principally its power quality, industrial controls, and drill chuck businesses, due to dramatic changes in end user demand within power quality, as well as opportunities to exit high cost and/or low capacity utilization facilities. Severance costs for the termination of approximately 1,100 employees approximates $49 million. Approximately $16 million of the charge was to write-off assets associated with the closure of 16 facilities in North America and Europe. The remainder of the charge of $5 million was for other exit costs including lease termination costs. The majority of the cash expenditures and cost savings related to the restructuring are expected to be spent and realized in 2002. As of June 28, 2002, the Company had cumulatively spent $25.4 million ($10.4 million in the second quarter of 2002) in cash and written down approximately $16 million in assets in connection with the charge. By the end of the second quarter, nine of the sixteen facilities had been closed. NOTE 6. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued statement of Financial Accounting Standards No. 141, "Business Combinations." This statement requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of intangible assets separately from goodwill. The Company has followed the requirements of this statement for business acquisitions made after June 30, 2001. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." This statement requires that goodwill and intangible assets deemed to have an indefinite life not be amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. The Company adopted the statement effective January 1, 2002. As a result of adopting SFAS No. 142, the Company will no longer record goodwill amortization of approximately $62 million (pre-tax) per year. Using the fair value measurement requirement, rather than the undiscounted cash flows approach, the Company has recorded an impairment from the implementation of SFAS No. 142 as a change in accounting principle in 10 the first quarter of 2002. The evaluation of reporting units on a fair value basis, adjusted for what the balance of goodwill would have been if purchase accounting were applied at the date of impairment, as required from the implementation of SFAS No. 142, indicates that an impairment exists at the Company's power quality business unit. Based upon the evaluation, impairment is approximately $200.0 million ($173.8 million after tax), approximately 8.7% of intangible assets recorded as of December 31, 2001. In accordance with SFAS No. 142, once impairment is determined at a reporting unit, SFAS No. 142 requires that the amount of goodwill impairment be determined based on what the balance of goodwill would have been if purchase accounting were applied at the date of impairment. Under SFAS No. 142, if the carrying amount of goodwill exceeds its fair value, an impairment loss must be recognized in an amount equal to that excess. Once an impairment loss is recognized, the adjusted carrying amount of goodwill will be its new accounting basis. The following table provides the comparable effects of adoptions of SFAS No. 142 for the quarters and six months ended June 28, 2002 and June 29, 2001. Quarter Ended Six Months Ended June 28 June 29 June 28 June 29 (in thousands, except per share data) 2002 2001 2002 2001 --------- -------- ------- ------- Reported net income, before change in accounting principle $ 103,665 $ 94,230 $ 186,400 $ 176,807 Add back: goodwill amortization (net of tax) -- 13,174 -- 25,664 --------- --------- --------- --------- Adjusted net income $ 103,665 $ 107,404 $ 186,400 $ 202,471 ========= ========= ========= ========= Basic Net Income Per Share, Before Change in Accounting Principle Reported net income, before change in accounting principle $ .69 $ .65 $ 1.26 $ 1.23 Add back: goodwill amortization (net of tax) -- .10 -- .18 --------- --------- --------- --------- Adjusted net income per basic share $ .69 $ .75 $ 1.26 $ 1.41 ========= ========= ========= ========= Diluted Net Income Per Share, Before Change in Accounting Principle Reported net income, before change in accounting principle $ .66 $ .63 $ 1.21 $ 1.19 Add back: goodwill amortization (net of tax) -- .08 -- .16 --------- --------- --------- --------- Adjusted net income per diluted Share $ .66 $ .71 $ 1.21 $ 1.35 ========= ========= ========= ========= 11 In June, 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for fiscal years beginning after June 15, 2002. The Company does not believe that implementation of this SFAS will have a material impact on its financial statements. In October 2001, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which supersedes SFAS No. 121. Though it retains the basic requirements of SFAS No. 121 regarding when and how to measure an impairment loss, SFAS No. 144 provides additional implementation guidance. SFAS No. 144 applies to long-lived assets to be held and used or to be disposed of, including assets under capital leases of lessees; assets subject to operating leases of lessors; and prepaid assets. SFAS No. 144 also expands the scope of a discontinued operation to include a component of an entity, and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not believe that implementation of this SFAS will have a material impact on its financial statements. In April 2002, the Financial Accounting Standards Board approved SFAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS 13, and Technical Corrections. SFAS 145 rescinds previous accounting guidance, which required all gains and losses from extinguishment of debt be classified as an extraordinary item. Under SFAS 145, classification of debt extinguishment depends on the facts and circumstances of the transaction. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Company does not expect SFAS 145 to have a material impact on its financial statements. NOTE 7. COMMON STOCK On March 8, 2002, the Company completed the issuance of 6.9 million shares of the Company's common stock. On July 1, 2002, the Company amended its certificate of incorporation to increase its authorized number of shares of common stock from 300,000,000 shares to 500,000,000 shares. This amendment was approved by the Company's shareholders at its May 7, 2002 annual meeting. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information included or incorporated by reference in this document may be deemed to be "forward looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, that address activities, events or developments that the Company intends, expects, projects, believes or anticipates will or may occur in the future are forward looking statements. Such statements are characterized by terminology such as "believe," "anticipate," "should," "intend," "plan," "will," "expects," "estimates," "projects," "positioned," "strategy," and similar expressions. These statements are based on assumptions and assessments made by the Company management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. These forward looking statements are subject to a number of risks and uncertainties, including but not limited to continuation of the Company's longstanding relationship with major customers, the Company's ability to integrate acquired businesses into its operations and realize planned synergies, the extent to which acquired businesses are able to meet the Company's expectations and operate profitably, changes in regulations (particularly environmental regulations) which could affect demand for products in the Process/Environmental Controls segment and unanticipated developments that could occur with respect to contingencies such as environmental matters and litigation. In addition, the Company is subject to risks and uncertainties that affect the manufacturing sector generally including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices. Any such forward looking statements are not guarantees of future performances and actual results, developments and business decisions may differ from those envisaged by such forward looking statements. The Company disclaims any duty to update any forward looking statements, all of which are expressly qualified by the foregoing. Results of Operations Danaher Corporation (the "Company") designs, manufactures and markets industrial and consumer products with strong brand names, proprietary technology and major market positions in two business segments: Process/Environmental Controls and Tools and Components. The Process/Environmental Controls Segment is a leading producer of environmental products, including water quality analytical instrumentation and leak detection systems for underground fuel storage tanks; compact professional electronic test tools; product identification equipment and consumables; retail petroleum automation products; and motion, position, speed, temperature, pressure, level, flow, particulate and power reliability and quality control and safety devices. In its Tools and Components Segment, the Company is a leading producer and distributor of general-purpose mechanics' hand tools and 13 automotive specialty tools, as well as of toolboxes and storage devices, diesel engine retarders, wheel service equipment, drill chucks, and hardware and components for the power generation and transmission industries. Process/Environmental Controls Sales of the Process/Environmental Controls segment in the second quarter of 2002 of $843.5 million were 26.5% higher than the 2001 second quarter. The acquisitions in February 2002 of Gilbarco, Videojet Technologies and Viridor as well as several smaller 2001 acquisitions provided a 38% increase from the 2001 second quarter. The remainder of the sales change was generated by a decrease in core volume of 12%, offset by a 1% favorable currency translation impact. Overall segment prices remained relatively flat for the 2002 second quarter compared to the 2001 second quarter. Core volume for the environmental business, approximately 30% of segment revenue, declined at low single-digit rates in the quarter, with slight growth in water quality markets due to relative strength in both lab and process sales offset by weakness in demand for ultrapure instrumentation and in Veeder-Root's leak detection market. Core volume for the motion control businesses, representing approximately 20% of segment revenues, decreased at rates in the low teens from 2001 levels, driven by weakness in end markets, particularly semiconductor and electronic assembly. The electronic test businesses, with approximately 20% of segment revenues, reported high single digit core volume declines for the quarter, with the rate of decline somewhat higher at Fluke Networks largely due to slowing demand for cable media test products. Power quality revenues declined over 30% in the 2002 second quarter, primarily due to significant declines in data center and web hosting end-user demand. Segment sales for the six month period of 2002 of $1,577.8 million were 13.4% higher than the 2001 period. Acquisitions accounted for 29% of the increase, and the remainder of the sales change was generated by a decrease in core volume of 16%. Currency translation impacts were nominal for the period, and overall segment prices remained relatively flat compared to 2001. For the six month period, core volume for the environmental business declined at low single-digit rates, with flat performance in water quality markets offset by weakness in demand for ultrapure instrumentation and in Veeder- Root's leak detection market. Core volume for the motion control businesses was down approximately 20% for the period, resulting from softness in end market demand, particularly semiconductor and electronic assembly. The electronic test businesses reported core volume declines in the low teens for the six month period due to weakness in both industrial and network test equipment sales. Core volume declined over 40% in the 14 power quality platform, due to the significant decline in end-user demand that began in 2001. For the second quarter, operating profit margins for the segment decreased from 17.6% in 2001 to 15.4% in 2002. Approximately 200 basis points of this decline resulted from the dilutive impact of lower operating margins of the new businesses acquired during 2001 and 2002. Additionally, margin declines resulting from lower core volumes at the business units noted above were partially offset by the cessation of goodwill amortization as of January 1, 2002. For the six month period, operating profit margins for the segment decreased from 16.8% in 2001 to 15.1% in 2002. Approximately 200 basis points of this decline resulted from the dilutive impact of lower operating margins of the new businesses acquired during 2001 and 2002. Additionally, margin declines from lower core volumes at the business units noted above were partially offset by the cessation of goodwill amortization as of January 1, 2002. Tools and Components Sales in the second quarter of 2002 of $302.8 million were 4.5% higher than the 2001 second quarter. The entirety of this growth represents core volume growth, as there were no acquisitions in this segment during 2001 and 2002, and price and currency impacts were negligible. Hand Tool Group revenues, approximately 65% of segment sales, grew at mid-single digit rates for the quarter, due to increases in both the Craftsman and Matco sales channels. Sales of diesel engine retarders grew over 25% for the quarter, as OEM customers accelerated deliveries that were scheduled for later in 2002. Other product lines were flat to slightly down. Segment sales for the six month period of 2002 were essentially flat compared to 2001. The product line sales trends for the period were generally similar to those noted for the second quarter, with modest growth in the Hand Tool Group offset by a low double digit sales decline of the Joslyn hardware and electrical apparatus product lines in the first quarter of 2002. Diesel engine retarder sales were flat in the first quarter of 2002. Operating profit margins for the second quarter of 15.0% were flat versus 2001. Margins for the six month period increased from 12.5% to 14.0% due to the impact of cost reduction actions and the cessation of goodwill amortization as of January 1, 2002. Gross Profit Gross profit margin for the second quarter of 2002, as a percentage of sales, was 38.8%, 0.4 points lower than 2001 levels. Lower gross margins in businesses acquired in 2002 and lower fixed cost 15 absorption from lower core sales volumes were partially offset by cost reduction programs implemented across both business segments. Gross profit margin for the six month period of 38.2% was down only slightly from the 38.3% reported in 2001. Operating Expenses Selling, general and administrative expenses for the 2002 second quarter were 34.5% higher than in 2001. Acquisitions completed since the second quarter of 2001 added approximately $68 million to second quarter spending levels, accounting for essentially all of the $70 million increase. As a percentage of sales, these costs were 23.9% and 21.3% in 2002 and 2001, respectively, reflecting the higher relative spending levels of recently acquired businesses and the fixed cost component of these expenses combined with core volume declines. Selling, general and administrative expenses for the 2002 six month period were 19% higher than in 2001. Acquisitions accounted for a 26% increase in spending levels, while cost reductions in core businesses generated an overall 7% decline. Interest Expense The Company's debt financing as of June 28, 2002 is composed primarily of $534 million of zero coupon convertible notes due 2021 ("LYONs"), $297 million of 6.25% Eurobond notes due 2005, $250 million of 6% notes due 2008, uncommitted lines and a revolving credit facility which provides senior financing of $500 million for general corporate purposes. The interest rates for borrowing under the revolving credit facility float with base rates. Net interest expense of $11.3 million in the second quarter of 2002 was $5.5 million higher than the corresponding 2001 period. Returns on invested cash balances fell significantly, as general short-term market interest rates declined throughout 2001. Net interest expense for the six month period rose $10.1 million compared to 2001, driven also by the steep decline in short-term interest rates, reducing our interest income, and higher average net debt levels during 2002. Interest income of $2.5 million and $6.7 million was recognized in the 2002 and 2001 second quarters, and interest income of $4.5 million and $12.0 million was recognized in the 2002 and 2001 six month periods. Income Taxes The 2002 effective tax rate of 34.5% is 3.0% lower than the 2001 effective rate, mainly due to the effect of adopting SFAS No. 142 and its resulting cessation of goodwill amortization, and also due to a higher proportion of foreign earnings in 2002 compared to 2001. 16 Liquidity and Capital Resources Operating cash flow grew $82 million, or 26% during the first six months of 2002 as compared to 2001. All working capital components showed improvement during the first six months of 2002, driven both by Danaher Business System efforts to improve asset turnover, and by reductions in accounts receivable and inventories resulting from declining core sales volumes. Net capital spending decreased $22.9 million from the 2001 period, primarily due to the sale of three facilities in the second quarter of 2002 for total cash proceeds of $10.2 million. A net after-tax gain of $1.6 million, approximately $0.01 per share, was recorded on the facility sales. In March 2002, the Company completed the issuance of 6.9 million shares of the Company's common stock. Proceeds of the common stock issuance, net of the related expenses, were approximately $467 million. The Company has used the proceeds to repay approximately $230 million of short-term borrowings incurred in the 2002 first quarter and intends to use the remainder for general corporate purposes, including future acquisitions. Total debt under the Company's borrowing facilities increased to $1,221.5 million at June 28, 2002, compared to $1,191.7 million at December 31, 2001. This increase was due primarily to the change in the U.S dollar/Euro exchange rates and the resulting impact on the Company's Euro denominated debt. During the first quarter of 2001, the Company issued $830 million (value at maturity) in zero-coupon convertible senior notes due 2021 known as Liquid Yield Option Notes or LYONS. The net proceeds to the Company were approximately $505 million, of which approximately $100 million was used to pay down debt, and the balance was used for general corporate purposes, including acquisitions. The LYONS are convertible into approximately 6.0 million common shares of the Company, and carry a yield to maturity of 2.375%. The Company may redeem all or a portion of the LYONs for cash at any time on or after January 22, 2004. Holders may require the Company to purchase all or a portion of the notes for cash and/or Company common stock, at the Company's option, on January 22, 2004 or on January 22, 2011. Net cash paid for acquisitions was $827.3 million for the first six months of 2002. On February 25, 2002, the Company completed the divestiture of API Heat Transfer, Inc. to an affiliate of Madison Capital Partners for approximately $66 million (including $56 million in cash and a note receivable in the principal amount of $10 million), less certain liabilities of API Heat Transfer, Inc. paid by Danaher at closing and subsequent to closing. On February 5, 2002, the Company acquired Marconi Data Systems, formerly known as Videojet Technologies, from Marconi plc for approximately $400 million. On February 4, 2002, the Company acquired Viridor Instrumentation Limited from the Pennon Group plc for approximately $135 million. On February 1, 2002, the Company acquired Marconi Commerce Systems, formerly known as Gilbarco, 17 from Marconi plc for approximately $318 million in cash in addition to $7 million of assumed net debt. In addition, the Company acquired three smaller companies during the first half of 2002 for a total cash consideration of approximately $36 million. On January 2, 2001, the Company acquired United Power Corporation for approximately $108 million in cash. The Company also disposed of two small product lines during the 2001 first quarter, yielding cash proceeds of approximately $32 million. There was no material gain or loss recognized on the sale of these product lines. In January 2002, the Company entered into two interest rate swap agreements for the term of the Company's 6% notes due 2008 having a notional principal amount of $100 million whereby the effective interest rate on $100 million of the notes will be the six month LIBOR rate plus approximately 0.425%. In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, the Company accounts for these swap agreements as fair value hedges. Since these instruments qualify as "effective" or "perfect" hedges, they will have no impact on net income or stockholders' equity. The Company's Matco subsidiary has sold, with limited recourse, certain of its accounts and notes receivable. Amounts outstanding under this program approximated $93 million as of June 28, 2002. The subsidiary accounts for this sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - a replacement of FASB Statement No. 125." A provision for estimated losses as a result of the limited recourse has been included in accrued expenses. No gain or loss arose from these transactions. On June 28, 2001, the Company replaced its $250 million bank credit facility with a new $500 million credit facility. The new facility provides funds for general corporate purposes and has a five year term. There have been no borrowings under either facility during 2001 or 2002. The Company declared a regular quarterly dividend of $0.02 per share payable on July 31, 2002, to holders of record on June 28, 2002. Operating cash flow is an important source of liquidity for the Company. The Company attempts to maximize the cash flow from its operating businesses and attempts to keep the working capital employed in the business to the minimum level required for efficient operations. A decrease in demand for the Company's products would reduce the availability of funds generated from operations. The cash and cash equivalents of $705.1 million on the Company's June 28, 2002 balance sheet were invested in highly liquid investment grade short term instruments. The Company's cash provided from operations, as well as credit facilities available, should provide sufficient available funds to meet normal working capital requirements, capital expenditures, dividends, scheduled debt repayments, and to fund acquisitions, if applicable. 18 Accounting Policies Management's discussion and analysis of the Company's financial condition and results of operations are based upon the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates these estimates, including those related to bad debts, inventories, intangible assets, pensions, and other post-retirement benefits, income taxes, and contingencies and litigation. The Company bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect management's more significant judgments and estimates used in the preparation of its Consolidated Financial Statements. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the 2001 Consolidated Financial Statements. Accounts receivables - The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company's customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory - The Company records inventory at the lower of cost or market. The estimated market value is based on assumptions for future demand and related pricing. If actual market conditions are less favorable than those projected by management, reductions in the value of inventory may be required. Acquired intangibles - The Company's business acquisitions typically result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that the Company will incur. The determination of the value of such intangible assets requires management to make estimates and assumptions that affect the Company's Consolidated Financial Statements. Long-lived assets - The Company periodically evaluates the net realizable value of long-lived assets, including property, plant and equipment, relying on a number of factors including operating results, 19 budgets, economic projections and anticipated future cash flows. Purchase accounting - In connection with its acquisitions, management assesses and formulates a plan related to the future integration of the acquired entity. This process begins during the due diligence process and is concluded within twelve months of the acquisition. The Company accrues estimates for certain costs related to these acquisitions, in accordance with Emerging Issues Task Force Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." Disclosures regarding new accounting standards are included in this report in footnote 6 to the financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in foreign currency exchange rates and interest rates, which could impact its results of operations and financial condition. The Company manages its exposure to these risks through its normal operating and financing activities. In January 2002, the Company entered into two interest rate swap agreements for the term of the 6% notes due 2008 having a notional principal amount of $100 million whereby the effective interest rate on $100 million of these notes will be the six month LIBOR rate plus approximately 0.425%. See Note 7 of the Company's December 31, 2001 Consolidated Financial Statements for further discussion. The Company's issuance of Eurobond notes in 2000 provided an offset to a portion of the Company's European net asset position. The Company has generally accepted the exposure to exchange rate movements relative to its investment in foreign operations without using derivative financial instruments to manage this risk. Additionally, the Company does not generally utilize or trade commodity contracts or derivatives. The fair value of the Company's fixed-rate long-term debt is sensitive to changes in interest rates. The value of this debt is subject to change as a result of movements in interest rates. Sensitivity analysis is one technique used to evaluate this potential impact. Based on a hypothetical, immediate 100 basis point increase in interest rates at June 28, 2002, the market value of the Company's fixed-rate long-term debt would be impacted by a net decrease of $18 million. This methodology has certain limitations, and these hypothetical gains or losses would not be reflected in the Company's results of operations or financial conditions under current accounting principles. PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 7, 2002, shareholders approved an amendment to the Company's Certificate of Incorporation to increase the number of 20 authorized shares of common stock to 500,000,000. On July 1, 2002, the Company's Certificate of Incorporation was amended to reflect this increase in authorized shares. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Shareholders on May 7, 2002, our stockholders voted on the following proposals: 1. Proposal to elect three directors: For Withheld --- -------- H. Lawrence Culp, Jr. 124,313,820 13,642,312 Mitchell P. Rales 124,319,245 13,636,887 A. Emmet Stephenson, Jr. 135,905,555 2,049,577 2. Proposal to amend the Company's certificate of incorporation to increase the number of authorized shares of common stock of the Company to a total of five hundred million (500,000,000) shares, $.01 par value per share: For 120,612,432 Against 16,784,891 Abstain 554,692 Broker non-vote 4,117 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 3 - Certificate of Incorporation of Danaher Corporation, as amended (b) Reports on Form 8-K: The Company filed a current report on Form 8-K dated May 29, 2002 reporting on its dismissal of Arthur Andersen, LLP as its Independent Accountant and its intention to engage Ernst & Young LLP. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DANAHER CORPORATION: Date: July 17, 2002 By: /s/ Patrick W. Allender ----------------------- Patrick W. Allender Chief Financial Officer Date: July 17, 2002 By: /s/ Christopher C. McMahon -------------------------- Christopher C. McMahon Vice President and Controller 22