Danaher
Annual Report 2002

Plain-text annual report

DANAHER 2002 ANNUAL REPORT R e l e n t l e s s l y L i s t e n . F o c u s . I m p r o v e . G r o w . 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 EXCEPT PER SHARE DATA AND NUMBER OF ASSOCIATES) Year ended December 31 Sales Operating Profit Net earnings before accounting change and tax reserve reduction Net earnings Earnings per share before accounting change and tax reserve reduction Earnings per share Operating cash flow Capital expenditures Free cash flow 2002 2001 $4,577,232 $3,782,444 $ 701,122 $ 502,011 $ 434,141 $ 297,665 $ 290,391 $ 297,665 $ 2.79 $ 2.01 $ 1.88 $ 2.01 $ 710,347 $ 608,471 $ 65,430 $ 84,457 (operating cash flow less capital expenditures) $ 644,917 $ 524,014 Number of associates (permanent and temporary) 29,000 23,000 Total assets Total debt Stockholders’ equity Total debt as a percent of total capitalization Return on equity before accounting change and tax reserve reduction $6,029,145 $4,820,483 $1,309,964 $1,191,689 $3,009,599 $2,228,586 30.3% 34.8% 13.8% 13.4% YEAR-END MARKET PRICE OF STOCK (in dollars) $54.31 $48.25 $68.38 $60.31 $65.70 80 60 40 20 0 98 99 00 01 02 TOOLS AND COMPONENTS 75+% OF REVENUES FROM 5 STRATEGIC PLATFORMS Motion Environmental Electronic Test Mechanics Hand Tools Product ID Focused Niche Businesses PROCESS/ ENVIRONMENTAL CONTROLS 2099 Pennsylvania Avenue NW Washington, D.C. 20006 202.828.0850 www.Danaher.com D A N A H E R AT- A - G L A N C E Fluke Corporation is a world leader in the manufacture, dis- tribution and service of electronic test tools and software. From industrial electronic installation, maintenance and service, to precision measurement and quality control, Fluke tools help keep business and industry around the globe up and running. Fluke Networks is a leading provider of innovative solutions for ensuring data communications and Internet uptime. Fluke Networks products combine speed, accuracy and ease of use for maximizing network performance. Hach/Lange is a worldwide market leader in analytical instru- mentation for water quality and applications. Hach/Lange provides advanced analytical systems and technical support for water quality testing with solutions for the lab, plant, and field. ELECTRONIC TEST ENVIRONMENTAL KEY BRANDS KEY CUSTOMERS/VERTICAL MARKETS Fluke, Meterman, Fluke Biomedical, Raytek Technicians, Engineers, Metrologists, Commercial and Residential Electricians Fluke Networks, OptiView, MicroTools,OmniScanner, DSP Network Engineers and Technicians, Network Installation and Maintenance Professionals, Telecommunication Technicians Hach, Lange, Orbisphere, OTT, McCrometer, Pacific Scientific Drinking Water Facilities, Waste Water Plants, Pharmaceuticals, Environmental Monitoring Agencies Gilbarco Veeder-Root enjoys a leading position providing solu- tions and technologies that provide convenience, control, and environmental integrity for retail fueling and adjacent markets. Gilbarco, Veeder-Root, Red Jacket, Gasboy Major Oil Companies, Convenience Stores, Retail Fueling Franchises, Commercial Fueling Operators MOTION Danaher Motion is changing the way things move through innovation in flexibility, precision, efficiency, and reliability for applications as diverse as robotics, wheelchairs, lift trucks, electric vehicles, and packaging machines. Kollmorgen, Pacific Scientific, Thomson, Superior Electric, Portescap, Dover Factory Automation, Medical Equipment, Aerospace and Defense, Electronic Vehicles, Lift Trucks, Health and Fitness Machines PRODUCT IDENTIFICATION The output of our product identification technology can be seen every day, from the lot code on a pill bottle to the expiration date on a beverage can. Videojet technology applies codes to more than one trillion products each year worldwide. Videojet, Willett, Marsh Consumer Packaged Goods, Pharmaceuticals, Automotive, Aerospace, Building Materials MECHANICS HAND TOOLS Danaher Tool Group and Matco enjoy a leading share position in the billion dollar U.S. mechanics hand tool market. Danaher is committed to deliver customer-driven innovation with new products that improve safety, strength, speed and access. Sears Craftsman®, Armstrong, Matco, AllenTM, KD-Tools, Holo-Krome, NAPA®, SATA Sears, Professional Automotive Mechanics, NAPA, Industrial Maintenance and Repair FOCUSED NICHE BUSINESSES Aerospace and Defense Industrial Control Power Quality Delta Consolidated Industries Hennessy Industries Jacobs Chuck Manufacturing Company Jacobs Vehicle Systems Joslyn Manufacturing Company 5.00 3.75 2.50 1.25 0 800 600 400 200 0 3.00 2.25 1.50 0.75 0 800 600 400 200 0 Danaher 2002 Form 10-K SALES (dollars in billions) $3.05 $3.20 $3.78 $3.78 $4.58 98 99 00 01 02 OPERATING PROFIT (dollars in millions) $384 $458 $552 $502 $701 11% compounded annual growth rate SHAREHOLDER INFORMATION www.Danaher.com ANNUAL MEETING ACCOUNT QUESTIONS Our transfer agent can help you with a variety of shareholder related services including: • Change of address • Lost stock certificates 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. • Transfer of stock to another person AUDITORS • Additional administrative services Ernst & Young LLP Baltimore, Maryland 16% compounded annual growth rate 98 99 00 01 02 EARNINGS PER SHARE* (in dollars) $2.23 $1.79 $2.01 $2.79 $1.33 20% compounded annual growth rate *before effect of accounting change and reduction of income tax reserves related to previously discontinued operations. 98 99 00 01 02 OPERATING CASH FLOW (dollars in millions) $353 $419 $512 $608 $710 19% compounded annual growth rate 98 99 00 01 02 STOCK LISTING Symbol: DHR New York and Pacific Stock Exchanges 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 i D e s g n e d a n d p r o d u c e d b y C o r p o r a t e R e p o r t s I n c . / A t l a n t a 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 cus- tomers 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 under- stand 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 manu- facturing 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. 1 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 con- tinuous 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 increas- ingly 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 understand- ing 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 capi- tal 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, gen- erating 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 con- tinues 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 instrumen- tation 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 hand- held test instrumentation, gained momentum throughout the year with new product launches and creative mar- keting 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 com- mercial 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 envi- ronment, gained market share due to the introduction of several unique products, including the OptiView Wireless 2 and Workgroup Analyzers, LinkRunner, WaveRunner and Optifiber, all key products for the enterprise network engineer. Motion: The integration of our precision motion busi- nesses under the Danaher Motion banner continued with design wins and new distribution partners providing evi- dence 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 rev- enues by 2005. The addition of Thomson, a U.S. leader in precision mechanical devices, strengthens our system offering for our OEM customers while providing signifi- cant 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 imple- menting DBS across its operations. The addition of Willett in January 2003 raised platform revenues in excess of $400 million and, more importantly, dramat- ically 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 our- selves, “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 cor- poration 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 perform- ance 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, H. Lawrence Culp, Jr. President and Chief Executive Officer March 28, 2003 3 KEY QUESTIONS INVESTORS ARE ASKING A Q & A w i t h M a n a g e m e n t 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 eco- nomic 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 4 H. LAWRENCE CULP, JR. President and Chief Executive Officer both capital and talent from across Danaher to maximize our potential for success. Today, we fund 22 such proj- ects 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. 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 partic- ular 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 work- ing 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 business- es, which are substantially less capital intensive than our Tools and Components businesses, has contrib- uted 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 acqui- sitions. 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 dif- ficult market with sales down more than 10% for the year. Videojet, our newest platform business, exited the year at an even higher ROIC rate. PATRICK W. ALLENDER Executive Vice President, Chief Financial Officer and Secretary 5 W H AT I S T H E D A N A H E R B U S I N E S S S Y S T E M ? 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 ini- tiative succeeded beyond anyone’s expectations – reinforcing the division’s industry leadership as well as spawning the Danaher Business System (DBS). Since this mod- est 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. THE BEST TEAM WINS TA L E N T D E V E L O P M E N T P R O C E S S O R G A N I Z AT I O N P L A N N I N G E X E C U T I V E L E A D E R S H I P T R A I N I N G E X E C U T I V E C H A M P I O N O R I E N TAT I O N CUSTOMERS CUSTOMERS TALK, WE LISTEN D T O TA L I N S T R U C T I O N WE COMPETE FOR SHAR 6 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 sustain- able 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. DANAHER KAIZEN IS OUR WAY OF LIFE P L A N INNOVATION DEFINES OUR FUTURE S T R AT E G I C P L A N N I N G P O L I C Y D E P L O Y M E N T VA L U E S T R E A M M A P P I N G K A I Z E N E V E N T B A S I C S 5 S V I S U A L M A N A G E M E N T S TA N D A R D W O R K C O O P E R AT I V E B U S I N E S S P L A N N I N G VA L U E S E L L I N G V O I C E O F T H E C U S T O M E R P R O D U C T L A U N C H D A N A H E R D E V E L O P M E N T S Y S T E M S T R AT E G I C S U P P L I E R I N T E G R AT I O N P R O D U C T I O N P R E PA R AT I O N P R O C E S S T R A N S A C T I O N A L P R O C E S S I M P R O V E M E N T P R O B L E M S O LV I N G VA R I AT I O N R E D U C T I O N K A I Z E N S I X S I G M A D E S I G N F O R S I X S I G M A M E A S U R E M E N T S Y S T E M A N A LY S I S D B S B O O T C A M P A C Q U I S I T I O N I N T E G R AT I O N M O D E L C E L L S E T U P R E D U C T I O N D A N A H E R M AT E R I A L S P R O C E S S P R O D U C T I V E M A I N T E N A N C E N A L T E C H N I Q U E S REHOLDERS 7 T h e D a n a h e r B u s i n e s s S y s t e m i s Who W e A r e a n d How W e D o W h a t W e D o . O n t h e f o l l o w i n g p a g e s , t h r e e c a s e s t u d i e s s h o w D B S i n a c t i o n . R e l e n t l e s s l y . Listen. Focus. Improve. Grow. 8 H o w D o Yo u Ta k e An Existing Brand And Make It A Leader I n A N e w M a r k e t ? 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 techni- cians, 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 chan- nel 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 exist- ing 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 lever- age 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. 9 H o w D o Yo u Dramatically Change A Market? Relentlessly FocusOn 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 perform- ance 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. 10 H o w D o Yo u Make A Great Partnership E v e n B e t t e r ? 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 administra- tive concerns instead of servicing their customers is considered non-value added activity. Using its Matco Distributor Advisory Council to gather feedback, Matco identi- fied 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 map- ping 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 map- ping identified non-value added activities, and paved the way for sustainable improve- ments 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. 11 D I R E C TO R S Mortimer M. Caplin Senior Member Caplin & Drysdale Donald J. Ehrlich Chief Executive Officer Schwab Corporation Mitchell P. Rales Chairman of the Executive Committee Danaher Corporation Alan G. Spoon Managing General Partner Polaris Venture Partners H. Lawrence Culp, Jr. President and Chief Executive Officer Danaher Corporation Walter G. Lohr, Jr. Steven M. Rales Partner Hogan & Hartson Chairman of the Board Danaher Corporation A. Emmet Stephenson, Jr. Chairman of the Board StarTek, Inc. E X E C U T I V E O F F I C E R S C O R P O R AT E O F F I C E R S H. Lawrence Culp, Jr. Daniel L. Comas Thomas P. Joyce President and Chief Executive Officer Vice President – Corporate Development Vice President and Group Executive 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 James H. Ditkoff Vice President – Finance & Tax Dennis A. Longo Vice President – Human Resources James A. Lico Vice President and Group Executive Jeffrey A. Svoboda Vice President and Group Executive Robert S. Lutz Donald E. Doles Vice President – Chief Accounting Officer Vice President – Corporate Procurement Christopher C. McMahon Vice President – Controller Daniel A. Pryor Vice President – Strategic Development Frank T. McFaden Vice President – Treasurer Frank Anders Wilson Vice President – Investor Relations M A J O R O P E R AT I N G C O M PA N Y P R E S I D E N T S PROCESS / ENVIRONMENTAL CONTROLS TOOLS AND COMPONENTS M O T I O N E L E C T R O N I C T E S T Industrial Control Danaher Precision Systems Fluke Jeffrey A. Beck James A. Lico General Purpose Systems John S. Stroup Fluke Networks Chris L. Odell M E C H A N I C S H A N D TO O L S F O C U S E D N I C H E B U S I N E S S E S Danaher Tool Group Professional Tools Division Jake R. Nichol Danaher Tool Group Special Markets Division Thomas R. Sulentic Matco Tools Corporation Thomas N. Willis 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 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 P R O D U C T I D E N T I F I C AT I O N Videojet Technologies, Inc. Craig B. Purse F O C U S E D N I C H E B U S I N E S S E S Joslyn Hi-Voltage Company Robert E. Joyce QualiTROL Corporation Ronald N. Meyer 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 Linear Motion Systems Gary A. Masse Specialty Motors William T. Fejes, Jr. E N V I R O N M E N TA L 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 12 D A N A H E R AT- A - G L A N C E Fluke Corporation is a world leader in the manufacture, dis- tribution and service of electronic test tools and software. From industrial electronic installation, maintenance and service, to precision measurement and quality control, Fluke tools help keep business and industry around the globe up and running. Fluke Networks is a leading provider of innovative solutions for ensuring data communications and Internet uptime. Fluke Networks products combine speed, accuracy and ease of use for maximizing network performance. Hach/Lange is a worldwide market leader in analytical instru- mentation for water quality and applications. Hach/Lange provides advanced analytical systems and technical support for water quality testing with solutions for the lab, plant, and field. ELECTRONIC TEST ENVIRONMENTAL KEY BRANDS KEY CUSTOMERS/VERTICAL MARKETS Fluke, Meterman, Fluke Biomedical, Raytek Technicians, Engineers, Metrologists, Commercial and Residential Electricians Fluke Networks, OptiView, MicroTools,OmniScanner, DSP Network Engineers and Technicians, Network Installation and Maintenance Professionals, Telecommunication Technicians Hach, Lange, Orbisphere, OTT, McCrometer, Pacific Scientific Drinking Water Facilities, Waste Water Plants, Pharmaceuticals, Environmental Monitoring Agencies Gilbarco Veeder-Root enjoys a leading position providing solu- tions and technologies that provide convenience, control, and environmental integrity for retail fueling and adjacent markets. Gilbarco, Veeder-Root, Red Jacket, Gasboy Major Oil Companies, Convenience Stores, Retail Fueling Franchises, Commercial Fueling Operators MOTION Danaher Motion is changing the way things move through innovation in flexibility, precision, efficiency, and reliability for applications as diverse as robotics, wheelchairs, lift trucks, electric vehicles, and packaging machines. Kollmorgen, Pacific Scientific, Thomson, Superior Electric, Portescap, Dover Factory Automation, Medical Equipment, Aerospace and Defense, Electronic Vehicles, Lift Trucks, Health and Fitness Machines PRODUCT IDENTIFICATION The output of our product identification technology can be seen every day, from the lot code on a pill bottle to the expiration date on a beverage can. Videojet technology applies codes to more than one trillion products each year worldwide. Videojet, Willett, Marsh Consumer Packaged Goods, Pharmaceuticals, Automotive, Aerospace, Building Materials MECHANICS HAND TOOLS Danaher Tool Group and Matco enjoy a leading share position in the billion dollar U.S. mechanics hand tool market. Danaher is committed to deliver customer-driven innovation with new products that improve safety, strength, speed and access. Sears Craftsman®, Armstrong, Matco, AllenTM, KD-Tools, Holo-Krome, NAPA®, SATA Sears, Professional Automotive Mechanics, NAPA, Industrial Maintenance and Repair FOCUSED NICHE BUSINESSES Aerospace and Defense Industrial Control Power Quality Delta Consolidated Industries Hennessy Industries Jacobs Chuck Manufacturing Company Jacobs Vehicle Systems Joslyn Manufacturing Company 5.00 3.75 2.50 1.25 0 800 600 400 200 0 3.00 2.25 1.50 0.75 0 800 600 400 200 0 Danaher 2002 Form 10-K SALES (dollars in billions) $3.05 $3.20 $3.78 $3.78 $4.58 98 99 00 01 02 OPERATING PROFIT (dollars in millions) $384 $458 $552 $502 $701 11% compounded annual growth rate SHAREHOLDER INFORMATION www.Danaher.com ANNUAL MEETING ACCOUNT QUESTIONS Our transfer agent can help you with a variety of shareholder related services including: • Change of address • Lost stock certificates 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. • Transfer of stock to another person AUDITORS • Additional administrative services Ernst & Young LLP Baltimore, Maryland 16% compounded annual growth rate 98 99 00 01 02 EARNINGS PER SHARE* (in dollars) $2.23 $1.79 $2.01 $2.79 $1.33 20% compounded annual growth rate *before effect of accounting change and reduction of income tax reserves related to previously discontinued operations. 98 99 00 01 02 OPERATING CASH FLOW (dollars in millions) $353 $419 $512 $608 $710 19% compounded annual growth rate 98 99 00 01 02 STOCK LISTING Symbol: DHR New York and Pacific Stock Exchanges 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 i D e s g n e d a n d p r o d u c e d b y C o r p o r a t e R e p o r t s I n c . / A t l a n t a DANAHER 2002 ANNUAL REPORT R e l e n t l e s s l y L i s t e n . F o c u s . I m p r o v e . G r o w . 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 EXCEPT PER SHARE DATA AND NUMBER OF ASSOCIATES) Year ended December 31 Sales Operating Profit Net earnings before accounting change and tax reserve reduction Net earnings Earnings per share before accounting change and tax reserve reduction Earnings per share Operating cash flow Capital expenditures Free cash flow 2002 2001 $4,577,232 $3,782,444 $ 701,122 $ 502,011 $ 434,141 $ 297,665 $ 290,391 $ 297,665 $ 2.79 $ 2.01 $ 1.88 $ 2.01 $ 710,347 $ 608,471 $ 65,430 $ 84,457 (operating cash flow less capital expenditures) $ 644,917 $ 524,014 Number of associates (permanent and temporary) 29,000 23,000 Total assets Total debt Stockholders’ equity Total debt as a percent of total capitalization Return on equity before accounting change and tax reserve reduction $6,029,145 $4,820,483 $1,309,964 $1,191,689 $3,009,599 $2,228,586 30.3% 34.8% 13.8% 13.4% YEAR-END MARKET PRICE OF STOCK (in dollars) $54.31 $48.25 $68.38 $60.31 $65.70 80 60 40 20 0 98 99 00 01 02 TOOLS AND COMPONENTS 75+% OF REVENUES FROM 5 STRATEGIC PLATFORMS Motion Environmental Electronic Test Mechanics Hand Tools Product ID Focused Niche Businesses PROCESS/ ENVIRONMENTAL CONTROLS 2099 Pennsylvania Avenue NW Washington, D.C. 20006 202.828.0850 www.Danaher.com 

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