(The following statement was released by the rating agency)
CHICAGO, March 21 (Fitch) Fitch Ratings has assigned an 'A'
rating to St. Jude
Medical, Inc.'s (STJ) notes offering. The company intends to use
proceeds of this offering for general corporate purposes, which
may include the
repayment of certain indebtedness.
The Rating Outlook is Stable, and the ratings apply to
billion of debt outstanding as of Dec. 31, 2012. A full list of
STJ's ratings is
available at the end of this release.
KEY RATING DRIVERS
STJ's ratings and Stable Outlook reflect the following:
--Leverage (total debt/EBITDA) of 1.66 times (x) at Dec. 31,
2012 leaves STJ no
flexibility for additional debt within its 'A' credit rating,
expects it to decline to 1.3x-1.5x during the next 12 months.
--Fitch believes STJ's broad device portfolio and new market
support low single-digit revenue growth and fairly stable
margins, driving 2013
free cash flow (FCF) of roughly $800 million.
--Volume pressure from the weak economy and pricing pressure
from hospitals will
likely continue through 2013.
--Fitch expects STJ will balance acquisitions, share repurchases
with a credit profile supportive of an 'A' rating.
DECLINING LEVERAGE EXPECTED
Fitch expects STJ will decrease leverage to 1.3x-1.5x during the
next 12 months
through increased EBITDA and debt reduction financed with cash
balances and FCF
generation. As such, Fitch expects that STJ will not refinance
the entire $450
million 2.20% notes due in September 2013. Current leverage of
1.66x is mainly the result of acquisition and share repurchase
SOFT VOLUME GROWTH
Fitch expects STJ will generate 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
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
demographics support a trend of increasing utilization. In
implementation of the Affordable Care Act (ACA) will likely
increase the number
of insured during 2014-2016, which should incrementally improve
Unrelated to the economy, surgeons are employing a more
judicious approach to
implanting cardioverter defibrillators, following a cautionary
in the Journal of the American Medical Association January 2011.
possible negative market reaction to STJ's formerly-manufactured
Riata leads may
temporarily soften sales growth in STJ's cardiac rhythm
business. Fitch expects the negative impact of the above two
issues on the CRM
segment will dissipate within the next 12-18 months, as the
market resets and
returns to a normal growth trend.
POTENTIAL MARGIN PRESSURE
Hospitals are reportedly becoming more aggressive in contract
However, margins for device makers have remained relatively
stable, likely due
to mix shift to newer, higher margin devices and focus on cost
believes hospitals will continue to pay for meaningful
improvements in medical
devices but probably at more restrictive rates than in the past.
consolidation continues within the hospital sector, some
participants will gain
even more negotiating leverage. However, it is worth noting that
market is still very fragmented, and consolidation will likely
The ACA could shift payer mix in a way that pressures hospital
causes hospitals to direct volume to lower cost procedures and
potentially pressuring device prices. In addition, the ACA began
imposing a 2.3%
excise tax on U.S. medical device sales in 2013. STJ's
restructuring efforts and
anticipated market launches of new higher-margin, value-added
should partially offset the negative effect on margins. As such,
potential margin compression will be modest.
Fitch believes that modest revenue growth and somewhat stable
enable STJ to generate $750 million - $850 million of annual FCF
(cash flow from
operations minus capital expenditures of roughly $300 million
minus dividends of
roughly $310 million)) during the next two years. Cash
generation should be
sufficient to fund targeted acquisitions and moderate share
Fitch believes 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
continue, especially in the absence of viable acquisition
targets. The company's
recently instituted cash dividend may moderate the level of
Fitch expects STJ will balance its transactions within the
maintaining an 'A' credit rating profile.
LIQUIDITY AND DEBT STRUCTURE
At Dec. 31, 2012, STJ had adequate liquidity, comprised of
billion in cash plus short-term marketable securities and
roughly $907 million
(net of $593 million commercial paper borrowings) in
availability on its $1.5
billion bank revolving credit facility, which expires on Feb.
28, 2015. STJ
generated approximately $771 million in FCF (net of $280 million
expenditures and $284 million of dividends) during latest 12
months (LTM), ended
Dec. 31, 2012. The company had approximately $3.06 billion in
approximately $526 million maturing or amortizing in 2013, $700
million in 2014,
$593 million in 2015, $500 million in 2016 and $754 million
expects the vast majority of STJ's maturities will be refinanced
with its ample
access to credit markets.
Fitch does not anticipate an upgrade in the near to intermediate
STJ would need to commit to and operate with leverage stronger
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 EBITDA
without the prospect for timely deleveraging. This could result
from a scenario
in which revenue and margins are significantly stressed (more
anticipates); resulting FCF weakens; and capital deployment not
to reduce the company's need for debt financing. As such,
repurchases or acquisitions in the near term would likely prompt
rating action, given the limited flexibility associated with the
Fitch rates STJ as follows:
--Issuer Default Rating (IDR) 'A';
--Senior unsecured bank debt 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The Rating Outlook is Stable.
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
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', dated Aug. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
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