TEXT-S&P summary: Danaher Corp.
For 2013, we expect the company to continue to experience moderating demand in its industrial and medical markets, with some ongoing and likely protracted weakness in its more cyclical businesses amid a slowdown in China and weak European demand. We believe this would be offset by stability from a large recurring revenue base, margin expansion opportunities in acquired businesses (including the large Beckman Coulter acquisition completed in 2011), and growth initiatives.
We view the company's financial risk profile as modest. This takes into account its very active acquisition strategy, including the use of debt financing, which the company moderates with the occasional use of equity issuance for large transactions, and with consistent, steadily growing FOCF. FOCF provides ample capacity for Danaher to reduce debt or fund external growth. In addition, Danaher's dividends and share repurchases have historically been very modest, leading to very high discretionary cash flow conversion. We fully expect the company to continue to rely on debt-financed acquisitions to achieve its long-term growth objectives. Credit metrics are currently satisfactory for the rating, with leverage of about 1.5x, funds from operations (FFO) to total debt of over 50%, and FOCF to total debt of about 45%.
Our short-term rating is 'A-1'. We view Danaher's liquidity as "strong," reflecting our expectation that its liquidity sources can more than cover its needs for the foreseeable future, even if EBITDA were to unexpectedly decline by 30%.
Our liquidity assessment is based on the following factors and assumptions:
-- We expect the company's liquidity sources, including FFO and credit facility availability, to exceed uses by more than 1.5x over the next 12 to 24 months.
-- The company's debt maturities over the next two years are manageable in our view, consisting of $300 million and EUR500 million notes due 2013.
-- Even if EBITDA declines by 30%, we believe net sources would exceed cash requirements.
-- The company has good relationships with its banks, in our assessment, and a good standing in the credit markets.
In our analysis, we estimate liquidity sources will exceed $5 billion over the next 12 months. We believe sources will consist of discretionary cash flow of about $3 billion and about $2.5 billion available under a credit facility that expires in 2016. Proceeds from the sale of the Apex Tools joint venture we expect in 2013 should provide additional funds. Liquidity uses primarily consist of debt maturities: these include about $537 million of commercial paper borrowings, and $1 billion of notes due in fiscal 2013, and $400 million notes in 2014.
The outlook is stable. We fully expect the company to continue to rely on debt-financed acquisitions to achieve its long-term growth objectives, but its growing and consistent free cash flow and restrained shareholder distribution policies should continue to support the rating. With credit metrics currently adequate for the rating and our expectation for steady operating performance, annual free cash flow of $2.5 billion provide for at least $5 billion in acquisition capacity over the next two years.
We could lower the ratings if subdued growth in Danaher's key markets, difficulties integrating acquisitions, or severe cost inflation pressure the company's operating profits and cause annual FOCF to weaken below $2 billion, as this would likely impair credit ratios below our expectations. We could also lower the ratings if a larger-than-expected debt-financed acquisition cause FOCF to total debt to weaken below 35% for more than two years.
We could raise the rating if the company commits to a less acquisitive growth strategy, while at the same time maintaining disciplined shareholder distribution objectives, and if the outlook for its overall business portfolio points to continued solid operating performance.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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