Fitch Ratings has affirmed Johnson & Johnson's (JNJ) long-term 'AAA' debt ratings and removed the Negative Rating Watch. 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.
--The Stable Outlook reflects Fitch's expectation that JNJ will operate with leverage consistent with its 'AAA' rating within a short period following the Synthes, Inc. (Synthes) acquisition, given the company's diverse operational profile and significant cash position.
--Fitch expects that JNJ's broad-based business model will generate improving operational/financial performance.
--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.
--Fitch forecasts free cash flow (FCF) generation of $6.5 billion - $7 billion in 2012, supported by increasing sales and improving margins.
--Fitch believes JNJ's acquisition of Synthes offers JNJ meaningful growth opportunities in the orthopedics market.
Key Rating Drivers:
Three of the key rating drivers for JNJ's 'AAA' rating are as follows:
--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 Jan. 1, 2012, latest 12 month (LTM) selected credit metrics were as follows.
--Total debt/FCF was nearly 3.0x (including one-time adjustments).
--Total debt/EBITDA was 0.98x.
--JNJ had a net cash position of $12.6 billion.
Acceleration of Growth:
Recently launched products and an advancing pipeline support the prospects for accelerating growth in the JNJ's pharmaceutical business. In addition, strong demand for many of the company's products in developing markets and the anticipated acquisition of Synthes, which Fitch believes is strategically sound, should help to offset dampened performance of a few of JNJ's U.S. consumer and medical device franchises.
Some Operational Headwinds:
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.
Fitch expects the recovery of JNJ's pharmaceutical business and the acquisition of Synthes will serve to support margins, given the segments' higher margins as compared to the company's consumer segment. In addition, management is consistently mindful of operating costs and adjusts its cost structure when necessary.
JNJ has significant liquidity and access to the credit markets. Moderate growth and relatively stable margins enabled the company to generate $5.2 billion of FCF (cash flow from operations minus capital expenditures and dividends) during the LTM period, ended Jan. 1, 2012, which includes one-time cash outlays.
On Jan. 1, 2012, JNJ had approximately $32.3 billion in cash plus short-term marketable securities and access to $10 billion in short-term borrowings. JNJ also had approximately $19.6 billion in debt, including approximately $5.3 billion in commercial paper. JNJ has approximately $616 million of long-term debt maturing in 2012, $1,545 million in 2013 and $1,816 billion in 2014.
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. Fitch expects that JNJ will finance the vast majority of these activities with FCF.
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 $19.6 billion of debt.
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. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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