Sept 6 (The following statement was released by the rating agency)
Fitch Ratings has affirmed St. Jude Medical, Inc.'s (STJ) Issuer Default Rating
(IDR) at 'A'. The Rating Outlook is Stable. Fitch has also affirmed the company's short-term IDR
at 'F1'. A full list of ratings follows at the end of this release.
The ratings apply to approximately $3.61 billion of debt outstanding as of June
KEY RATING DRIVERS
Fitch's rating actions reflect the following:
--Fitch expects leverage (total debt/EBITDA) of 2.0x at June 30, 2013 to decline
to 1.4x - 1.5x during the next 18 months.
--Fitch believes flat sales and incrementally improving margins will drive 2013
free cash flow (FCF) of $750 million to $850 million.
--Volume pressure from the weak economy and European austerity measures will
generally offset STJ's growth in emerging markets and new device platforms
--Fitch anticipates that STJ will maintain adequate liquidity through cash
balances, reliably positive FCF and ready access to the credit markets.
DECLINING LEVERAGE EXPECTED
Fitch expects STJ will decrease leverage to 1.4x - 1.5x during the next 18
months through increased EBITDA and debt reduction, financed with cash balances
and FCF generation. As such, Fitch expects that STJ will not refinance the $450
million 2.20% notes due in September 2013 with long-term debt, but rather with
short-term borrowings. Current leverage of approximately 2.0x is mainly the
result of acquisitions and share repurchases.
SOFT VOLUME GROWTH
Fitch looks for STJ to generate flat to low single-digit revenue growth during
the next 12 - 18 months. The weak economic/employment environment has reduced
the rolls of the insured and dampened procedure growth. STJ's continued
geographic expansion and sizeable pipeline of new devices should partially
offset the drivers of soft volume growth. The critical nature of many of STJ's
devices and aging demographics support a trend of increasing utilization. In
addition, the implementation of the Affordable Care Act (ACA) will likely
increase the number of insured during 2014 - 2016, which should modestly improve
Unrelated to the economy, surgeons are employing a more judicious approach to
implanting cardioverter defibrillators, following a cautionary study published
in the Journal of the American Medical Association January 2011. The reported
negative market reaction to STJ's formerly-manufactured Riata leads appears to
be abating, which should ease the pressure on sales growth in STJ's cardiac
rhythm management (CRM) business. Fitch expects the net impact of the above two
issues will be, at most, modestly negative to the CRM segment (accounts for
roughly 52% of total firm sales) during the next 12-24 months, as the market
appears to have stabilized during the last two quarters.
INCREMENTALLY IMPROVING MARGINS DESPITE LONG-TERM HEADWINDS
Fitch forecasts incrementally improving margins for STJ despite the
above-mentioned operating headwinds. Margins will be supported by mix shift to
newer, higher margin devices and a focus on cost control. These trends continue
to offset an increasingly challenging hospital contracting environment and the
2.3% ACA medical device sales tax which was implemented in January 2013. As
such, Fitch expects that any intermediate- to longer-term margin compression
will be modest and gradual.
Fitch believes that flat revenue and incrementally improving margins will enable
STJ to generate $750 million - $850 million of annual FCF (cash flow from
operations minus capital expenditures of roughly $280 million and dividends of
roughly $300 million) during the next two years. Cash generation should be
sufficient to fund targeted acquisitions and moderate share repurchases.
TRANSACTIONS TO CONTINUE
Fitch expects that STJ will remain acquisitive, focusing on companies or device
platforms that offer innovation and growth, as technological advancement in the
device sector is still relatively fragmented. Share repurchases will likely
continue, especially in the absence of viable acquisition targets. Fitch thinks
the company will continue to increase its cash dividend over time.
ADEQUATE LIQUIDITY ANTICIPATED
At June 30, 2013, STJ had adequate liquidity, comprised of approximately $1.22
billion in cash plus short-term marketable securities and roughly $1.23 billion
(net of $275 million commercial paper borrowings) in availability on its $1.5
billion bank revolving credit facility, which expires on May 31, 2018. STJ
generated approximately $589 million in FCF (net of $269 million of capital
expenditures and $284 million of dividends) during latest 12 months (LTM), ended
June 30, 2013. The company had approximately $3.6 billion in debt with
(excluding commercial paper borrowings) approximately $450 million maturing in
2013, $500 million in 2016, $500 million in 2015, $83 million in 2017 and $1.8
billion thereafter. After the Sept. 2013 maturity, Fitch expects the vast
majority of STJ's maturities will be refinanced with its ample access to credit
Fitch does not anticipate an upgrade in the near to intermediate term. STJ would
need to commit to and operate with leverage stronger than 1.3x - 1.4x while
maintaining relatively stable operations and solid FCF in order for Fitch to
consider a positive rating action.
A downgrade of the ratings could result from debt sustained above 1.6x - 1.7x
EBITDA without the prospect for timely deleveraging. This could result from a
scenario in which revenue and margins are significantly stressed; resulting FCF
weakens; and capital deployment not being adjusted to reduce the company's need
for debt financing. Debt-financed share repurchases or acquisitions in the near
term would likely prompt a negative rating action, given the limited flexibility
afforded by the company's current leverage of 2.0x at June 30, 2013.
Fitch has affirmed STJ's ratings as follows:
--Issuer Default Rating (IDR) at 'A';
--Senior unsecured bank debt at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
The Rating Outlook is Stable.