Fitch Affirms Johnson & Johnson's IDRs at 'AAA/F1+'; Outlook Stable
CHICAGO -- April 17, 2013
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
--The ratings also incorporate anticipated softness in a number of JNJ's
domestic consumer franchises and the cost of the remediation of select
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.
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 opportunities/greater distribution potential of
legacy Synthes devices, Fitch also expects that JNJ will achieve significant
cost synergies from the integration.
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.
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.
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
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
--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.
Additional information is available at 'www.fitchratings.com'.
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 Street
Chicago, IL 60602
Michael Zbinovec, +1-312-368-3164
Michael Weaver, +1-312-368-3156
Brian Bertsch, New York, +1 212-908-0549
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