The ratings on Danaher reflect the firm's above-average business profile, together with a sound balance sheet, strong cash flow protection, and a moderately conservative financial policy.
Although Danaher's business is cyclical, factors such as strong brand-name recognition; customer, end-market, and geographic diversity; limited capital intensity; and a healthy portion of sales going to the more stable replacement markets mitigate earnings and cash flow volatility. This bodes well for continued strong operating performance. For 2001, net earnings, excluding restructuring charges, were $324.2 million, up 5% from 2000. Pretax return on permanent capital for 2001 was 24%, and is expected to average between 20%-30% over the economic cycle.
Danaher's business plan calls for it to exceed industry growth for existing units, to accelerate international growth, and to expand through acquisitions. With efficient operations and minimal dividends, Danaher generates substantial discretionary cash flow. This gives the firm the flexibility to pursue its aggressive growth strategy while maintaining a sound balance sheet. Debt to capital at Dec. 31, 2001, stood at 35%, within the firm's expected 25%-40% range, and the firm maintained good liquidity, with cash and equivalents of $706 million. Funds from operations to total debt for 2001, adjusted for excess cash balances, was 58%, and is expected to average between 50%-60%, appropriate for the ratings.
Limited cyclical exposure, strong cash flow generation, and very good financial flexibility reduce downside ratings risk. An aggressive growth appetite, which could result in periodic spikes in debt leverage, limits upside potential.