Fitch Rates Thermo Fisher's USD Senior Notes Offering 'BBB'; Outlook Stable
The ratings apply to approximately $15 billion of debt at June 30, 2016. A full list of current ratings follows at the end of this release.
KEY RATING DRIVERS
--Fitch calculates pro forma gross leverage of around 3.5x when Thermo Fisher completes its acquisition of FEI Company (FEIC; NASDAQ: FEIC), for $4.2 billion in cash. Fitch expects gross leverage to return to around 3.0x within 12 months after the deal is completed in late 2016, a level that we view as consistent with the 'BBB' rating.
--Flexibility at Thermo Fisher's current 'BBB' rating is limited until its de-levering plan is complete. This should be achievable if near-term targets are bolt-on acquisitions that augment the company's product portfolio. Larger transactions during this timeframe would likely require a component of equity financing to maintain the current rating category.
--Fitch views the possibility of aggressive capital management, and not operating risk, as Thermo Fisher's key credit risk. Capital deployment for acquisitions and shareholder payments have occasionally contributed to higher debt levels and deterioration of credit metrics, reducing financial flexibility in the aftermath of leveraging transactions.
--Thermo Fisher's diversification across customer markets and product categories helps to mitigate the impact of cyclical downturns or secular headwinds to sales or profitability in any one of the company's end markets.
--Thermo Fisher's ample free cash flow (FCF), which could exceed $3 billion in 2017, should be sufficient to repay debt issued to finance bolt-on acquisitions, as well as to fund share repurchases of at least $1 billion in 2016.
Fitch's key assumptions within the rating case for Thermo Fisher include:
--Thermo Fisher's gross debt leverage rises to between 3.5x-3.6x by the end of 2016 but returns closer to 3.0x by year-end 2017, benefitting from debt repayment and EBITDA growth.
--Revenue growth of about 3%-4% over the forecast period. This reflects Fitch's general expectations for growth in the life sciences sector. Persistent headwinds in developed industrial markets will be offset by stronger growth in emerging markets and biopharmaceutical end markets.
--The operating EBITDA margin rises slightly through the end of 2018 due to some continued cost benefits from the integration of Life Tech, as well as a stable pricing environment.
--Cash from operations is more than sufficient to fund a slightly increasing dividend and greater than $4 billion of bolt-on acquisitions and over $4 billion of share repurchases over the next three years.
--Annual FCF exceeds $3 billion throughout the forecast period.
Thermo Fisher's favorable business profile, with significant scale, good end-market diversification and improved product mix following the Life Tech acquisition all support the ratings. Therefore, rating actions are more likely to be triggered by capital deployment decisions than by an operational stress scenario.
Maintenance of the 'BBB' Issuer Default Rating considers Fitch's continued expectation that Thermo Fisher will be an active acquirer going forward while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x in most periods. Fitch recognizes that gross leverage may occasionally exceed this range in the immediate aftermath of leveraging transactions. If Thermo Fisher were to complete a leveraging transaction that cast doubt on its ability to return leverage to roughly 3.0x within the following 18-24 months, it could result in a downgrade.
A near-term positive rating action is not anticipated, since it would require a commitment from the company to maintain leverage below 2.5x.
COMMITMENT TO DEBT REDUCTION FOLLOWING ACQUISITIONS
In assessing Thermo Fisher's commitment to maintaining a financial profile consistent with solid investment-grade ratings, Fitch strongly considers the successful execution of its de-levering plan following its acquisition of Life Technologies Corp. (Life Tech) for $16.8 billion in 2014.
Despite funding a high level of business development activities and returns to shareholders, Thermo Fisher has a generally strong track record of maintaining gross leverage within a publicly stated target range of 2.5x-3.0x over most periods.
LIMITED FLEXIBILITY AT 'BBB' RATING
Flexibility at Thermo Fisher's current 'BBB' rating is limited until its de-levering plan is complete. This should be achievable if most targets in 2016-2017 are similar in size or smaller than FEIC - bolt-on acquisitions that augment the company's product portfolio. Larger transactions during this timeframe would require a component of equity financing in order to maintain the company's credit metrics at levels commensurate with the current rating category.
Thermo Fisher's solid financial flexibility and strong liquidity is an important factor supporting the investment-grade credit profile. At June 30, 2016, the company's sources of liquidity included $663 million of cash on hand and $2.4 billion of capacity under the $2.5 billion revolving credit facility (RCF). The RCF is back-up for the commercial paper (CP) program and if the revolver is drawn the company intends to leave an available balance at least equal to the amount of CP outstanding; at June 30, 2016, this was $989.4 million.
Cash generation has historically been strong and consistent. Fitch forecasts that Thermo Fisher could produce at least $3 billion in FCF annually for the next several years. The debt maturity schedule of the company's senior notes is laddered.
FULL LIST OF RATING ACTIONS
Fitch currently rates Thermo Fisher as follows:
Thermo Fisher Scientific, Inc.
--Long-Term IDR and senior notes 'BBB';
--Bank revolving credit facility 'BBB';
--Short-Term IDR 'F2';
--Commercial paper 'F2'.
Life Technologies Corp.
--Long-Term IDR and senior notes 'BBB'.
The Rating Outlook is Stable.