Fitch Assigns an 'AAA' Rating to Johnson & Johnson's Notes Issuance; Outlook
CHICAGO -- December 6, 2013
Fitch Ratings has assigned an 'AAA' rating to Johnson & Johnson's (JNJ) $3.5
billion senior unsecured notes issuance. The Rating Outlook is Stable. 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 $7.1 billion-$7.5 billion
in 2013 and $8.2 billion-$8.6 billion in 2014, driven by 5%-6% annual sales
growth and modestly improving margins.
--JNJ's pharmaceutical business has weathered significant patent expires and
has launched a number of medicines with meaningful sales potential. As such,
the business is positioned for long-term profitable growth.
--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 recent $2.5 billion settlement for patients who needed to have surgery
to replace the company's ASR hip implant was within Fitch's forecast range.
The settlement will be funded with cash on hand without stressing the
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 in that region. Fitch expects these issues will persist
at least through 2013.
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 $6.22
billion of FCF [cash flow from operations ($16.65 billion minus capital
expenditures ($3.32 billion) and dividends ($7.11 billion)] during the latest
12 month (LTM) period, ended Sept. 29, 2013.
On Sept. 29, 2013, JNJ had approximately $25.2 billion in cash plus short-term
marketable securities and access to $10 billion in short-term borrowings. JNJ
also had approximately $15.1 billion in debt, including roughly $2.93 billion
in short-term. Fitch estimates that JNJ had approximately $1.8 billion of
long-term debt maturing 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 Sept. 29, 2013, LTM selected credit metrics were as follows.
--Total debt/FCF was roughly 2.4x (including one-time adjustments).
--Total debt/EBITDA was 0.65x.
--JNJ had a net cash position of approximately $10.1 billion.
Fitch currently rates JNJ as follows:
--Issuer Default Rating (IDR) 'AAA';
--Senior unsecured debt 'AAA';
--Subordinated debt 'AAA';
--Short-term IDR 'F1+';
--Commercial paper 'F1+'.
The Rating Outlook is Stable.
The ratings apply to approximately $15.1 billion of debt.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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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, +1 212-908-0549
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