Danaher 2011 Annual Report Download - page 59

Table of Contents
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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. The Company bases these estimates and judgments on historical experience, the current economic environment
and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates and judgments.
The Company believes the following accounting estimates are most critical to an understanding of its financial statements. Estimates are considered to be
critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the estimate is
made, and (2) material changes in the estimate are reasonably likely from period to period. For a detailed discussion on the application of these and other
accounting estimates, refer to Note 1 in the Company’s Consolidated Financial Statements.
Accounts Receivable. The Company maintains allowances for doubtful accounts to reflect probable credit losses inherent in its portfolio of receivables.
Determination of the allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect
the allowances for doubtful accounts and, therefore, net income. The allowances for doubtful accounts represent management’s best estimate of the credit
losses expected from the Company’s trade accounts, contract and finance receivable portfolios based on ongoing assessments and evaluations of collectability
and historical loss experience. The level of the allowances is based on many quantitative and qualitative factors including historical loss experience by
receivable type, portfolio duration, delinquency trends, economic conditions and credit risk quality. The Company regularly performs detailed reviews of its
accounts receivable portfolio to determine if an impairment has occurred and to assess the adequacy of the allowances. Additions to the allowances for doubtful
accounts are charged to current period earnings; amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered
on accounts previously determined to be uncollectible increase the allowances. If the financial condition of the Company’s customers were to deteriorate
resulting in an impairment of their ability to make payments, additional allowances would be required and net earnings would be adversely impacted.
Inventories. The Company records inventory at the lower of cost or market value. The Company estimates the market value of its inventory based on
assumptions for future demand and related pricing. Estimating the market value of inventory is inherently uncertain because levels of demand, technological
advances and pricing competition in many of the Company’s markets can fluctuate significantly from period to period due to circumstances beyond the
Company’s control. As a result, such fluctuations can be difficult to predict. If actual market conditions are less favorable than those projected by
management, the Company could be required to reduce the value of its inventory, which would adversely impact the Company’s net earnings and financial
condition.
Acquired Intangibles. The Company’s business acquisitions typically result in the recognition of goodwill and other intangible assets, which affect the amount
of future period amortization expense and possible impairment charges that the Company may incur. The Company does not amortize goodwill but does
amortize certain identifiable intangible assets, primarily customer relationships and acquired technology, over the estimated useful life of the identified asset.
On an annual basis (the first day of the Company’s fiscal fourth quarter) the Company estimates the fair value of each of its reporting units and compares the
estimated fair value of each reporting unit to its carrying value. If the estimated fair value of the reporting unit is less than its carrying value, the Company
must perform additional analysis to determine if the reporting unit’s goodwill has been impaired. If circumstances or events prior to the date of the required
annual assessment indicate that, in management’s judgment, it is more likely than not that there has been diminution of fair value of a reporting unit below its
carrying value, the Company performs an impairment analysis at the time of such circumstance or event. The Company estimates the fair value of its
reporting units primarily using a market based approach. The Company estimates fair value based on earnings before interest, taxes depreciation and
amortization (“EBITDA”) multiples determined by current trading market multiples of earnings for companies operating in businesses similar to each of the
Company’s reporting units in addition to market available precedent transactions of comparable businesses. In evaluating the estimates derived by the market
based approach, management assesses the relevance and reliability of the multiples by considering factors unique to its reporting units, including operating
results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data. In certain circumstances the Company
also estimates fair value utilizing a discounted cash flow analysis (i.e., an income approach) in order to validate the results of the market approach. Once
completed, the results of the income and market approaches are reconciled and compared. The discounted cash flow model requires judgmental assumptions
about projected revenue growth, future operating margins, discount rates and
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Source: DANAHER CORP /DE/, 10-K, February 24, 2012 Powered by Morningstar® Document Research℠
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