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
--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.
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
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.
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
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
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