TEXT-Fitch affirms PerkinElmer's IDR at 'BBB-'
Sept 21 - Fitch Ratings has affirmed PerkinElmer Inc.'s (PerkinElmer) ratings as follows: --Issuer Default Rating (IDR) at 'BBB-'; --Senior unsecured debt at 'BBB-'; --Senior unsecured bank loan rating at 'BBB-'. The Rating Outlook is Stable. The ratings apply to $914 million of outstanding debt. Digesting Caliper Acquisition Fitch recognizes that the company has fine-tuned its product portfolio to cater to two business segments - Human Health and Environmental Health - with a series of significant acquisitions dating back to 2009. So far in 2012, PerkinElmer has refrained from asset purchasing as the company integrates Caliper Life Sciences Inc. (Caliper), acquired in November 2011 for approximately $646 million. Fitch views as positive the hiring of the former CEO of Caliper to head the Human Health segment, facilitating the integration of the new entity. Fitch sees higher gross debt leverage, which resulted from incremental debt funding needed to complete the purchase of Caliper, as the limiting factor for further acquisition activity. However, Fitch expects the company to actively pursue tuck-in opportunities at a similar pace as in 2009 and 2010, once the company reduces debt leverage to below 2.5x - a level seen prior to the purchase of Caliper. Leverage Unwinding PerkinElmer reduced total debt leverage (gross debt to EBITDA) in the first half of 2012 through a combination of margin expansion and lower debt. Total debt leverage was 2.7x for the latest 12-month (LTM) period ending July 1, 2012, helped by a reduction in revolver borrowings of $34 million in the first half of 2012. The company utilized more cash and less debt than originally anticipated to fund the Caliper acquisition and as such leverage stood at 3.1x at the end of 2011 instead of Fitch's original leverage expectation of 3.7x at the end of last year. Fitch believes that debt repayment will be a focus for management in order to keep leverage at a level indicative of the present rating. Fitch forecasts leverage to remain at the current level of 2.7x at the end of 2012, but fall to 2.2x at the end of 2013, mainly due to continued pay down of outstanding bank debt. Margins Expanding from Restructuring PerkinElmer has expanded margins in the first half of 2012 providing testament to the company's efforts to lower operating costs through restructuring initiatives, including shifting manufacturing to low-cost regions and consolidating backoffice functions. EBITDA margin for the LTM period at the end of the second quarter was 16.6% compared to 15.7% for the same period in 2011. EBITDA margin in the first half of 2012 jumped to 16.8% from 15.0% in the first six months of 2011. Fitch recognizes PerkinElmer's current success in achieving its long-term goal of expanding adjusted operating margins by around 100 basis points annually through 2014 to 18%; however, margins remain weaker in relation to other participants in the life sciences technology space. Margins lag the industry from a legacy holding company operating structure that is changing through restructuring efforts, and product mix less weighted to higher margin consumable sales. Fitch is more modest in its expectation and forecasts EBITDA margin to expand to 17% in 2015, primarily from savings derived from backoffice consolidation. Solid Liquidity Profile Free cash flow (FCF) improved to $164.4 million for the LTM ending July 1, 2012 which yields an FCF margin of 8.1% compared to $97.7 million or a margin of 5.7% in 2010. During that time, capital expenditures as a percentage of revenues fell to 1.3% for the LTM ending July 1, 2012, from 2.0% in 2010. Fitch anticipates FCF and FCF margin of $153.2 million and 7.3%, respectively, in 2012, and FCF margins staying above 7% through 2015, as operating cash flow benefits from expanding operating margins from restructuring actions. A cash balance of $171.4 million and $436 million in unused revolver capacity provided additional liquidity at the end of the second quarter. The next significant long-term debt maturity occurs in May 2015, when $150 million in 6% unsecured notes are due. Guidelines for Further Rating Actions Positive rating action would be warranted if PerkinElmer continues to reduce acquisition debt and/or strengthen operations such that total debt leverage is sustained below 2.5x. Downward rating action would result from pressure on the operations or shareholder-friendly actions such that debt reduction efforts are hampered and leverage increases above 3.0x at the end of 2012. Operational weakness could stem from lower-than-anticipated results due to poorer-than-expected sales performance, or inability to improve margins to a level more commensurate with peers. 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