TEXT-Fitch affirms CareFusion Corp's ratings at 'BBB'
Aug 30 - Fitch Ratings has affirmed CareFusion Corporation's (NYSE: CFN) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. The rating action applies to approximately $1.15 billion in debt. Fitch does not expect the Securities and Exchange Commission (SEC) determination on accounting for Pyxis receivables to affect CFN's ratings. CFN had delayed filing of its FYE 2012 10-K pending an SEC review of its historical accounting of Pyxis sales-type leases. A change in the accounting methodology would lead to a higher portion of lease-related revenue and profit recognized up-front but would have no effect on cash flows or debt leverage. The company intends to resolve this matter as quickly as possible and file its 2012 10-K. A protracted delay of the 10-K could prompt a review of CFN's ratings. CFN's 'BBB' IDR reflects the following factors: --CFN's business model is generating moderate organic growth, despite relatively weak capital spending trends at hospitals and a challenging economic/employment environment. --Improving margins, moderate growth and stable debt levels have reduced leverage and sustained solid FCF generation. --Liquidity remains strong as consistently positive free cash flow, cash balances and adequate access to credit markets are sufficient to fund operations, share repurchases, targeted acquisitions and debt maturities. --CFN faces some risk regarding IRS audits of Cardinal Health, Inc. (CAH), which owned CFN during the 2003 - 2009 audit periods. IMPROVING PROFITABILITY DRIVING LOWER LEVERAGE: During the latest 12 month (LTM) period ended March 31, 2012, CFN increased profitability in the face of a challenging economic/employment environment and weak capital spending by hospitals. The company improved its cost structure and generated a more favorable sales mix of higher margin products. As a result, EBITDA increased during the period to $816 million from $760 million, while EBITA margins improved to 23.80% from 19.94%. With debt remaining flat, leverage (total debt/EBITDA) declined to 1.72 times (x) from 1.84x, providing the company meaningful flexibility within its 'BBB' rating category. STABLE OPERATIONS SUPPORTING POSITIVE CASH FLOW: Fitch expects continued margin improvement (through favorable mix shifts and cost control), modest revenue growth, and good working capital management will enable CFN to generate free cash flow (FCF) of $400 million to $500 million in fiscal year 2013. Cash balances and FCF should provide CFN with the flexibility to pursue targeted acquisitions without the need to incur additional long-term debt. Fitch anticipates that the company will balance potential acquisitions and share repurchases within the context of maintaining leverage consistent with at least a 'BBB' credit profile. As such, CFN is expected operate with leverage of 1.5x - 1.6x during the next 12 months. INTERNATIONAL EXPANSION: In addition to expanding around its core competencies, Fitch expects CFN will continue to expand its operations outside of the U.S. Europe, in particular will likely be a focus, given that CFN currently has a limited market presence in that market. The European market is fragmented with respect to medical protocols, delivery and reimbursement. As such, CFN will likely proceed with international expansion at a judicious pace. RELIANCE ON CAPITAL SPENDING BY HOSPITALS: Roughly 40% of CFN's revenues are dependent on hospital capital spending, which has remained sluggish during the past two years. The financing of some of CFN's products through operating leases and the inherent need for some of CFN's products help to mitigate the dampening effect of sluggish capital spending on revenue growth. Nevertheless, Fitch believes growth of infusion pumps, medication delivery equipment and respirators will remain somewhat muted in the near term. IRS AUDITS: CFN is currently before the Internal Revenue Service (IRS) Office of Appeals for financial years 2003 - 2007. The IRS claims that Cardinal Health, Inc. (CAH) owes additional taxes related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among its subsidiaries. CFN agreed to assume the responsibility for this issue at the spin-off from CAH in 2009. The timing and ultimate outcome of this issue remain uncertain. As such, the audit poses some financial risk to CFN. STRONG LIQUIDITY: At March 31, 2012, CFN had strong liquidity of approximately $1.44 billion in cash and short-term investments and full availability under its $550 million unsecured bank facility, which expires in 2016. Fitch believes the company has adequate access to the capital markets. Total debt outstanding was roughly $1.40 billion. Debt maturities are manageable, with approximately $250 million maturing in 2012 (subsequently paid down), $450 million in 2014 and $700 million in 2019. WHAT COULD TRIGGER A RATING ACTION Fitch believes a one-notch upgrade could be supported by the following: --Stable or improving operational performance; --Margin durability and solid free cash flow generation; --Leverage sustainably below 1.6x. A negative rating action could result from some combination of the following: --Material and lasting deterioration in operations and operational and FCF relative to Fitch's forecasts; --Persistent increase in leverage above 2.0x; --Leveraging acquisitions without the prospect of timely debt/leverage reduction. Fitch has affirmed the following ratings for CFN: --IDR at 'BBB'; --Senior unsecured bank facility at 'BBB'; --Senior unsecured notes at 'BBB'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. The Rating Outlook is Stable. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology
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