Fitch Ratings has downgraded Thermo Fisher Scientific's long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-', and senior unsecured rating to 'BBB+' from 'A-'. Simultaneously, the 'F2' short-term IDR and commercial paper rating have been affirmed. The ratings apply to about $6.6 billion of debt outstanding at March 31, 2012. The Rating Outlook is Stable.
Leverage Above Fitch's Expectations:
Fitch believes that leverage as measured by total debt-to-EBITDA will not be maintained at or below 2.0x in light of the increased debt load resulting from acquisition activity over the past year, including the proposed purchase of One Lambda, and expected consummation of an expanded share repurchase program over 2012. Although periodic increases in debt leverage to fund acquisitions are tolerable, Fitch sees leverage around 2.8x at the end of 2012 and over 2.0x through 2014, levels commensurate with the current rating category.
Aggressive Capital Deployment Stresses Balance Sheet:
The acquisition of One Lambda for $925 million represents the third sizable acquisition over the past 12 months, following the purchases of Phadia AB and Dionex Corp. in 2011. Funding for the 2011 acquisitions resulted in a cumulative $4.8 billion in debt added to the company's capital structure that drove latest 12 months (LTM) total debt-to-EBITDA to 2.6x at March 31, 2012 versus about 1.0x before the transactions. Also announced today, the company's Board of Directors approved an incremental share repurchase authorization of $500 million (expiring at the end of 2012), which taken together with $400 million of its common stock purchased so far this year, brings the total to around $900 million expected this year. The expanding share purchase program and newly implemented dividend place added pressure on the balance sheet, especially if incremental debt funds the repurchasing activities.
Liquidity Remains Strong:
Fitch anticipates positive EBITDA growth for Thermo Fisher in 2012-2013, both organically and from recent acquisitions, that will produce discretionary free cash flow (FCF) of about $1.4 billion, on par with 2011. The level of discretionary FCF remains steady despite the initiation of a dividend that will consume $200 million on an annual run rate. Liquidity is also provided by $953 million in capacity (on March 31, 2012) of a $1 billion bank revolver maturing in April 2017. A separate 364-day $500 million credit revolver acts as incremental back-up to the company's $1 billion commercial paper program. Thermo Fisher is easily compliant with the financial maintenance covenant found in its bank credit facilities requiring leverage to be maintained below 3.5x. On March 31, 2012, the company had $788 million of cash on hand.
Debt Maturity Schedule is Manageable:
Thermo Fisher's long-term debt maturity schedule is well-spaced with the next debt maturity occurring in December 2012 when $350 million of senior unsecured notes mature. Fitch expects the company to pay down the nearing maturity with cash. Other debt maturities through 2016 include $700 million of senior unsecured notes in each of 2014 and 2015 and $900 million of senior unsecured notes in 2016. Thermo Fisher also had $550 million of commercial paper outstanding at March 31, 2012.
Ratings Triggers:
A downgrade or Negative Outlook from the 'BBB+' rating could result from total debt-to-EBITDA sustained above 3.0x. Fitch believes that the company is comfortable managing its balance sheet to a leverage target of about 2.5x, but would be willing to increase debt to up to 3.5x to fund an acquisition. Positive rating action, while unlikely at this time, could follow a return of leverage to 2.0x or below.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.
Contacts:
Fitch Ratings
Primary Analyst
Megan Neuburger, +1-212-908-0501
Senior
Director
Fitch, Inc.
One State Street Plaza
New York, NY
10004
or
Secondary Analyst
Michael Zbinovec,
+1-312-368-3164
Senior Director
or
Committee Chairperson
Michael
Weaver, +1-312-368-3156
Managing Director
or
Media
Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com