Fitch Affirms St. Jude Medical's at 'A'; Outlook Stable
CHICAGO -- August 20, 2014
Fitch Ratings has affirmed St. Jude Medical, Inc.'s (STJ) Issuer Default
Rating (IDR) at 'A' with a Stable Rating Outlook. Fitch has also affirmed the
company's short-term IDR at 'F1'. A full list of Fitch's rating actions is
available at the end of this release.
The ratings apply to approximately $4.21 billion of debt outstanding as of
June 28, 2014.
KEY RATING DRIVERS
Fitch's rating actions reflect the following:
--Fitch expects leverage (total debt/EBITDA) of 2.4 times (x) at June 28, 2014
to decline to 1.4x-1.5x during the next 12 - 18 months.
--The stabilizing domestic cardiac rhythm management (CRM) market, new product
introductions and emerging market strength support an expectation of low- to
mid-single-digit revenue growth during 2014 and 2015.
--Fitch believes STJ's focus on cost control and improving its sales mix will
partially offset the negative effect that pricing and excise taxes will have
--Moderate sales growth and modestly pressured margins should drive 2014 free
cash flow (FCF) of $750 million to $850 million.
--Fitch expects STJ will balance acquisitions, share repurchases and dividends
with a credit profile supportive of an 'A' rating.
--STJ is anticipated to maintain adequate liquidity through cash balances,
reliably positive FCF and ready access to the credit markets.
HIGH LEVERAGE TO DECLINE
Fitch expects STJ will decrease leverage to 1.4x-1.5x during the next 12 - 18
months through increased EBITDA and meaningful debt reduction. Continued
improving operational performance should provide for EBITDA growth as well as
increased cash generation. Current leverage of approximately 2.4x is largely
the result of acquisitions and to a lesser extent share repurchases.
REVENUE GROWTH EXPECTED IN ALL BUSINESS SEGMENTS
Fitch expects STJ to generate low- to mid-single-digit revenue growth during
the next 12-24 months. New product introductions, expansion into faster
growing product- and geographic markets, stabilization of the cardiac rhythm
market and two favorable facilities re-inspections by the FDA should more than
offset the negative effect of a weak domestic economic environment and the
relatively austere European markets.
STJ has recently launched, or expects to launch in the near term, devices in
all four of its business segments [Cardiac Rhythm Management (CRM), Atrial
Fibrillation (AF), Cardiovascular (CV) and Neuromodulation (NM)]. A number of
these are differentiated by their clinical effectiveness and safety profiles,
as well as by the ability to reduce medical costs compared to competing
devices. Fitch believes the company's new product development and
commercialization efforts will continue to support favorable pricing and
potentially incremental market share gains.
While markets outside of the three developed markets of U.S., Europe and Japan
account for only 16% of total firm sales in 2013, their contribution has
increased from roughly 13% in 2011. STJ's annual growth rate in the three
developed markets from 2011 to 2013 was a negative 2%, compared to a growth
rate of 6% for its other markets. Fitch expects positive growth rates to
return to the developed markets; however, growth in the other markets will
likely continue to outperform the developed markets.
CRM demand has somewhat stabilized despite a continued a weak employment
environment, and STJ's recently introduced quadripolar leads have enabled the
company to capture share. The negative effect on volumes from a January 2011
Journal of the American Medical Association (JAMA) article suggesting the
implantable cardioverter defibrillators (ICDs) are overused has likely run its
MARGIN HEADWINDS PARTIALLY OFFSET BY COST CONTROL AND MIX
Fitch forecasts incrementally stressed margins for STJ, given a number of
persistent headwinds. While STJ margins have remained relatively strong, owing
to mix shift to newer, higher margin devices and its ongoing focus on cost
control, a more challenging hospital reimbursement environment and the ACA
excise tax should modestly offset the supporting trends. Longer term, Fitch
expects that the company will incrementally improve its margins through
continued gains in efficiency and favorable mix shifts (product and
Fitch believes that increasing revenue with modestly pressured margins will
result in STJ generating $750 million - $850 million of annual FCF (cash flow
from operations minus capital expenditures of roughly $230 million and
dividends of roughly $300 million) during the next two years. Cash generation
should be sufficient to fund targeted acquisitions and moderate share
TARGETED ACQUISITIONS AND SHARE REPURCHASES LIKELY
Fitch believes that STJ will remain acquisitive, focusing on companies or
device platforms that offer innovation and growth, as technological
advancement in the device sector is still relatively fragmented. Share
repurchases will likely continue, especially in the absence of viable
acquisition targets. The company's recently instituted cash dividend may
moderate the level of share repurchases. Fitch expects STJ will balance its
transactions within the context of maintaining a credit profile supportive of
its 'A' ratings.
PLANO AND SYLMAR FACILITIES APPROVED TO PRODUCE NEW DEVICES
STJ has allayed concerns regarding device production for its CRM and NM
business. During the past few months, the company has resolved the
manufacturing issues that have slowed new product approvals at two of its
facilities in Sylmar, CA and Plano, TX. The FDA has greenlighted both
facilities to produce new devices following recent re-inspections. The Sylmar
facility manufactures CRM devices, such as Durata and Optim, while the Plano
facility makes NM devices.
ADEQUATE LIQUIDITY ANTICIPATED
At June 28, 2014, STJ had adequate liquidity, comprised of approximately $1.58
billion in cash plus short-term marketable securities and roughly $114 million
(net of $1,336 million commercial paper borrowings) in availability on its
$1.5 billion bank revolving credit facility, which expires in May 2018. STJ
generated approximately $641 million in FCF (net of $196 million of capital
expenditures and $292 million of dividends) during latest 12 months (LTM),
ended June 30, 2014.
The company had approximately $4.2 billion in debt with (excluding $1,336
million in commercial paper outstanding) approximately $64 million maturing in
2014, $500 million in 2015, $500 million in 2016 and $1,805 million
thereafter. Fitch expects the vast majority of STJ's maturities will be
refinanced with its ample access to credit markets.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include the following:
--Fitch does not anticipate an upgrade in the near to intermediate term.
--However, STJ would need to commit to and operate with leverage stronger than
1.3x-1.4x while maintaining relatively stable operations and solid FCF, in
order for Fitch to consider a positive rating action.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include the following:
--Debt sustained above 1.6x-1.7x EBITDA without the prospect for timely
--This could result from a scenario in which revenue and margins are
significantly stressed (more than Fitch anticipates); resulting FCF weakens;
and capital deployment not being adjusted to reduce the company's need for
--As such, significant debt-financed share repurchases or acquisitions in the
near term would likely prompt a negative rating action, given the limited
flexibility associated with the company's current leverage.
Fitch has affirmed STJ's ratings as follows:
--IDR at 'A';
--Senior unsecured bank debt at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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Fitch Ratings, Inc.
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