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Fitch Affirms Johnson & Johnson's IDRs at 'AAA/F1+'; Outlook Stable
April 17, 2013 / 1:56 PM / 5 years ago

Fitch Affirms Johnson & Johnson's IDRs at 'AAA/F1+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, April 17 (Fitch) Fitch Ratings has affirmed Johnson & Johnson's (JNJ) long-term 'AAA' debt ratings. The Rating Outlook is Stable. In addition, Fitch has affirmed JNJ's short-term Issuer Default Rating (IDR) at 'F1+'. A complete list of JNJ's ratings is provided at the end of this press release. Key Rating Drivers: --The rating action reflects Fitch's expectation that JNJ's broad-based business model will generate improving operational and financial performance. --Fitch anticipates that JNJ will operate with leverage consistent with its 'AAA' rating and solid liquidity, supported by significant cash balances and ample access to credit markets. --Fitch forecasts free cash flow (FCF) generation of $7 billion - $7.5 billion in 2013, driven by 5%-6% sales growth and modestly improving margins. --JNJ's pharmaceutical business has weathered significant patent expiries and has launched a number of medicines with meaningful sales potential. As such, the business is positioned for long-term profitable growth. --Fitch believes that JNJ is proceeding with the Synthes integration as planned and will be able to drive profitable long-term growth in the acquired business. --The ratings also incorporate anticipated softness in a number of JNJ's domestic consumer franchises and the cost of the remediation of select manufacturing issues. Durable Growth: JNJ's recently launched products in its medical device and pharmaceutical businesses and an expanding pipeline in both businesses support the prospects for continued growth. In addition, strong demand for many of the company's products in developing markets should more than offset dampened performance of a few of JNJ's U.S. consumer and medical device franchises. Other Operational Headwinds to Persist: Select manufacturing problems will likely weigh on revenues and costs in select franchises in the near term, as JNJ works to remediate these issues. The expectation for continued weak economic and employment environment will also moderate growth to varying degrees in most of the company's franchises. In addition austerity measures in Europe will likely weigh on the company's revenues and margins that region. Fitch expects these issues will persist at least through 2013. Synthes Integration: Fitch believes that JNJ is making substantial progress with integrating the Synthes acquisition. JNJ had a substantial orthopedic franchise, DePuy, before acquiring Synthes in June 2012. Given the limited overlap in product portfolios, Fitch continues to view the transaction as strategically sound. In addition to cross-selling opportunites/greater distribution potential of legacy Synthes devices, Fitch also expects that JNJ will achieve significant cost synergies from the integration. Margin Support: Fitch expects JNJ's improving sales mix and continued focus on costs will support margins. The company's recently approved pharmaceutical products and continued expansion of its medical device segment will support faster growth for these segments relative to JNJ's lower-margin consumer business. In addition, management should continue to focus on generating greater operational efficiencies in administration, manufacturing and distribution. Solid Liquidity: JNJ has significant liquidity and access to the credit markets. Moderate growth and relatively stable margins enabled the company to generate $5.85 billion of FCF [cash flow from operations ($15.40 billion minus capital expenditures ($2.93 billion) and dividends ($6.61 billion)] during the LTM period, ended Dec. 30, 2012. On Dec. 30, 2012, JNJ had approximately $21.1 billion in cash plus short-term marketable securities and access to $10 billion in short-term borrowings. JNJ also had approximately $16.2 billion in debt, including approximately $2.4 billion in commercial paper. JNJ has approximately $1.5 billion of long-term debt maturing in 2013, $1.8 billion in 2014 $900 million in 2016 and $1 billion in 2017. Cash Deployment for Growth and Shareholder Returns: Fitch believes JNJ will remain acquisitive, focusing on targets or products that offer innovation and growth in the health care sector. The company will likely finance its transactions within the context of its 'AAA' credit profile. Shareholder-focused activities, such as dividend increases and share repurchases are also expected to continue, which Fitch believes will largely be financed with FCF. Rating Sensitivities: While Fitch does not anticipate a downgrade during its four-year forecast horizon, a negative rating action could occur if some combination of deteriorating operational performance and leveraging transactions stress the company's credit profile. Fitch believes the company's widely diversified health care related franchises make it more likely that a negative rating action would be prompted by a leveraging transaction, as opposed to operational stress. Three of the key rating metrics for JNJ's 'AAA' rating that Fitch believes investors should consider are the following: --Total debt/FCF of 3.0 times (x) gives no flexibility. --Total debt/EBITDA of 1.0x gives no flexibility. --Net debt of $4 billion - $5 billion gives no flexibility. On Dec. 30, 2012, latest 12 month (LTM) selected credit metrics were as follows. --Total debt/FCF was nearly 2.8x (including one-time adjustments). --Total debt/EBITDA was 0.76x. --JNJ had a net cash position of $4.9 billion. Fitch affirms JNJ's ratings as follows: --Issuer Default Rating (IDR) at 'AAA'; --Senior unsecured debt at 'AAA'; --Subordinated debt at 'AAA'; --Short-term IDR at 'F1+'; --Commercial paper at 'F1+'. The Rating Outlook is Stable. The ratings apply to approximately $16.2 billion of debt. Contact: Primary Analyst Bob Kirby Director +1-312-368-3147 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Michael Zbinovec Senior Director +1-312-368-3164 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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