Fitch Rates CareFusion Corporation's Notes Offering 'BBB'
CHICAGO -- March 6, 2013
Fitch Ratings has assigned a 'BBB' rating to CareFusion Corporation's (NYSE:
CFN) $300 million 10-year notes offering, the net proceeds of which are to be
used for general corporate purposes. Fitch views the issuance as effectively a
refinancing of the $250 million notes that matured in August 2012. The Rating
Outlook is Stable. A full list of CFN's ratings follows at the end of this
KEY RATING DRIVERS:
CFN's 'BBB' IDR reflects the following factors:
--Improved profitability and the $250 million of notes that matured in August
2012 leave adequate financial flexibility within the CFN's 'BBB' rating
category to complete today's notes offering.
--Fitch expects that CFN's business model will continue to generate moderate
organic growth, despite relatively weak capital spending trends at hospitals
and a challenging economic/employment environment.
--Fitch forecasts that incrementally improving margins, moderate growth and
good working capital management will sustain solid FCF generation.
--Fitch anticipates that liquidity will remain strong as consistently positive
free cash flow and cash balances will be sufficient to fund moderate share
repurchases and targeted acquisitions. Adequate access to credit markets is
--The company has recently become current with Securities and Exchange
Commission (SEC) filings without any material restatements.
--Fitch believes CFN faces some risk regarding IRS audits for the 2003 - 2007
audit periods of Cardinal Health, Inc. (CAH), which owned CFN until it was
spun off from CAH effective Aug. 31, 2009.
IMPROVING PROFITABILITY PROVIDING SOME LEVERAGE HEADROOM:
During the latest 12 month (LTM) period ended Dec. 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 $901 million from $799 million,
while EBITA margins improved to 25.1% from 23.7%. Including a temporary $250
million pay down of maturing unsecured notes, leverage (total debt/EBITDA)
declined to 1.28 times (x) from 1.77x, providing the company adequate
flexibility within its 'BBB' rating category.
STABLE OPERATIONS SUPPORTING POSITIVE CASH FLOW:
Fitch expects that incremental margin improvement (through favorable mix
shifts and cost control somewhat offset by the healthcare reform device tax
that became effective in 2013), modest revenue growth, and good working
capital management will enable CFN to generate free cash flow (FCF) of $400
million to $460 million in fiscal year 2013. 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-1.7x 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 United States. 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 will remain somewhat muted in the near
term as a result of broader economic weakness, difficult comparisons and
customers waiting for CFN's near-term product launches.
COMPLIANT WITH SEC FILINGS:
CFN has become current with its SEC filings by recently issuing its 10-K
(period ending June 30, 2012), 10-Q (period ending Sep. 30, 2012) and 10-Q
(period ending Dec. 31, 2012). The company had delayed the filings as a result
of conversations the company had with the SEC regarding an alternative method
of revenue recognition accounting for sales-type leases brought up by CFN's
auditors, Ernst & Young, during the audit of the 2012 fiscal year-end filings.
CFN adopted a modified method for recognizing Pyxis revenues, and the
resulting restatements were essentially immaterial.
The IRS has conducted audits of fiscal years 2003 through 2007 and 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 Dec. 31, 2012, CFN had strong liquidity of approximately $1.56 billion in
cash ($390 million domiciled in the U.S.) and full availability under its $750
million unsecured bank facility, which expires in 2016. Fitch believes the
company has adequate access to the capital markets. Total debt outstanding was
roughly $1.15 billion. Debt maturities are manageable, with approximately $450
million maturing in 2014, $700 million in 2019 and $300 million (once the
offering is completed) in 2023.
Fitch believes a one-notch upgrade could be supported by the following:
--Stable or improving operational performance with prospects for continued
organic growth and relative price stability;
--Margin durability aided by appropriate cost management and stable or
improving mix that leads to 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 2.1x;
--Leveraging acquisitions without the prospect of timely debt/leverage
Fitch currently rates CFN as follows:
--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured bank facility 'BBB';
--Senior unsecured notes 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
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
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Bob Kirby, +1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
Jacob Bostwick, +1-312-368-3169
Michael Weaver, +1-312-368-3156
Brian Bertsch, +1-212-908-0549
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