Fitch Affirms CareFusion's Ratings at 'BBB'; Outlook Stable
CHICAGO -- August 28, 2013
Fitch Ratings has affirmed the long-term ratings of CareFusion Corp. (NYSE:
CFN) at 'BBB'. The Rating Outlook is Stable. A full list of rating actions
follows at the end of this release.
KEY RATING DRIVERS
--CFN has maintained a steady operating profile since being spun out of
Cardinal Health, Inc. (NYSE: CAH) in 2009, despite a generally pressured
hospital capital spending environment. A steady operating profile is supported
by strong market shares and a majority of revenues which are recurring.
--Debt leverage of 1.6x at June 30, 2013 is low compared to Fitch's universe
of 'BBB' rated firms. Low leverage gives CFN good flexibility to pursue
targeted acquisitions over the ratings horizon.
--Limited international exposure somewhat restricts CFN's growth potential.
However, company management has clearly stated that international expansion is
one of its key strategic objectives. To that end, Fitch expects CFN to be
responsibly acquisitive in fiscal 2014 - 2015.
--Cash flows are steady and strong, supported in fiscal 2013 by successful
restructuring programs which drove about 200 bps of EBITDA margin expansion.
Fitch expects incremental margin expansion and continued robust cash flows in
CFN generally has good flexibility at its current 'BBB' ratings. Maintenance
of a 'BBB' IDR will require debt leverage generally maintained near or below
2.0x, accompanied by stable cash flows and steady profit margins. Temporary
increases in leverage above this range could be appropriate to consummate
An upgrade could be driven by continued durable margin expansion with improved
top-line growth, indicating an improvement in hospital capital spending
environment. Robust cash flows and debt leverage expected to be sustained near
or below 1.6x will be required to support an upgrade to 'BBB+'. Though current
metrics could possibly give support for a one-notch upgrade, Fitch expects CFN
to be an active acquirer in fiscal 2014 - 2015, possibly pushing leverage
incrementally higher over the ratings horizon. Furthermore, the outlook for
hospital capital spending remains somewhat uncertain, given the dynamic
healthcare landscape and the many unanswered questions surrounding the
beginnings of the coverage expansion in 2014 -2015.
A downgrade could result from a material and lasting deterioration in
operations or a debt-funded transaction that resulted in materially depressed
cash flows and/or an expectation for debt leverage to be sustained above 2.0x.
STEADY OPERATIONS DESPITE WEAK HOSPITAL CAPITAL SPENDING ENVIRONMENT
Since being spun off from CAH in 2009, CFN has maintained a stable operating
profile. With a large proportion of its cash flows being recurring - either
from lease payments or the sale of disposables - CFN has good insight into
future cash inflows. Strong market share positions also support stable
operations. Growth, however, is relatively reliant on hospital capital
Hospital operators have moderated capital spending in recent years in response
to weak healthcare utilization and constrained reimbursement growth.
Underlying hospital volumes and CapEx do seem to have stabilized in recent
quarters; but Fitch expects reimbursement growth to remain under pressure.
Normalized growth will remain in the low- to mid-single digits. According to
management, second-half fiscal 2013 saw stronger contract commitments for
CFN's Alaris and Pyxis businesses, which should begin to be realized as
revenues and cash inflows toward the middle of fiscal 2014.
MARGIN EXPANSION TO CONTINUE, SUPPORTING CASH FLOWS AND LOW LEVERAGE
Fitch expects CFN to continue to improve its cost structure, providing margin
support over the ratings horizon. Cost savings drove EBITDA margin expansion
of approximately 200 bps in fiscal 2013, despite overall revenue declines from
continuing difficult economic/employment environment and weak capital spending
by hospitals. Margins were also partially aided by better infusion pump
pricing and a higher mix of disposables.
Fitch expects CFN to generate organic top-line growth in the low- to
mid-single digits, with further margin expansion of 50-100 bps in fiscal 2014.
Free cash flow (FCF) is forecasted to approximate $415 million, reduced by
more than $100 million of one-time cash outflows related to regulatory
settlements. Fitch notes that future payouts may be required related to
ongoing IRS audits. While the magnitude of these payments is uncertain, they
will likely be manageable.
FOCUSING ON INTERNATIONAL EXPANSION
Fitch expects CFN to be responsibly acquisitive in fiscal 2014 -2015,
especially with regards to bolstering its currently small international
exposure. Approximately 78% of CFN's 2013 revenues were generated in the U.S.
Management has articulated that it intends to aggressively yet responsibly
pursue opportunities to expand its international footprint over the near- to
medium-term. Increased exposure to non-U.S. markets could represent important
growth opportunities for CFN. These deals could require debt funding,
potentially leading to higher debt balances. But Fitch expects the majority of
this M&A will be funded using cash held overseas.
STRONG LIQUIDITY PROFILE, MANAGEMENT DEBT MATURITIES
CFN maintains a strong liquidity profile, consisting of approximately $1.8
billion in cash on hand ($1.3 billion held overseas) and its undrawn $750
million unsecured revolver due July 2016, as of June 30, 2013. Fitch also
believes the company has adequate access to the capital markets, as
illustrated by its $300 million 3.3% notes issuance in March 2013.
Fitch expects most future M&A activity to be in non-U.S. markets, providing an
effective use for the growing non-U.S. cash balance. Fitch anticipates CFN
will generate cash flows in the U.S. sufficient to fund operations, capital
spending, and planned share repurchases. External financing may be required in
the event of a sizeable acquisition of a U.S.-based firm.
CFN's only material debt maturity in the near-to-intermediate term is $450
million of notes due in August 2014. Fitch expects the company to refinance
this amount closer to maturity. The company also has $700 million of notes due
in 2019 and $300 million due in 2023.
Fitch has affirmed CareFusion Corp.'s ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Unsecured bank facility rating at 'BBB';
--Unsecured notes rating at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper rating at 'F2'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage' (August 5, 2013)
--'U.S. Healthcare Stats Quarterly - First-Quarter 2013' (June 25, 2013)
--'Hospitals Credit Diagnosis - First-Quarter 2013' (June 27, 2013)
Applicable Criteria and Related Research:
U.S. Healthcare Stats Quarterly - First-Quarter 2013
Hospitals Credit Diagnosis (Implications of the ACA Slowly Taking Shape)
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Jacob Bostwick, CPA, +1 312-368-3169
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
Bob Kirby, CFA, +1 312-368-3147
Michael Weaver, +1 312-368-3156
Brian Bertsch, +1 212-908-0549
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