OREANDA-NEWS. Fitch Ratings has affirmed Thermo Fisher Scientific's (Thermo Fisher) ratings, including the 'BBB' Issuer Default Rating (IDR). The Rating Outlook is Stable. The ratings apply to $12.5 billion of debt at Dec. 31, 2015. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS
--Thermo Fisher has demonstrated solid and consistently paced improvement in credit metrics since its Life Tech acquisition, using free cash flow (FCF) and proceeds from business divestitures to reduce post-acquisition debt by about $4.6 billion. Thermo Fisher's current leverage of 3.0x is consistent with Fitch's target for the 'BBB' rating.

--Fitch views the possibility of aggressive capital management, not operating risk, as Thermo Fisher's key credit risk. Capital deployment for acquisitions and shareholder payments has 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 FCF, which could exceed $3 billion in 2016, should be sufficient to repay any debt issued to finance bolt-on acquisitions, as well as to fund share repurchases of at least $1 billion in 2016.

--The integration of the Life Tech business is proceeding smoothly, demonstrated by Thermo Fisher raising the target for cost synergies; revenue synergies were a tailwind to growth in 2015 and this should continue in 2016. These benefits have helped Thermo Fisher generate EBITDA growth despite meaningful headwinds from foreign currency translation.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Thermo Fisher include:
--Thermo Fisher's gross debt leverage drops to 2.8x by the end of 2016 and 2.5x by year-end 2018, reflecting stable debt levels 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 (CFO) is more than sufficient to fund a slightly increasing dividend, 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.

RATING SENSITIVITIES
Thermo Fisher's favorable business profile, with significant scale, good end-market diversification and improved product mix following the Life Tech acquisition, supports 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 the company 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.

DEBT REDUCTION COMPLETED ON SCHEDULE

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.

Upon the announcement of the Life Tech acquisition in second-quarter 2013, the company suspended its share repurchase program and management made debt reduction the priority for cash deployment during 2014 and 2015. In those years, Thermo Fisher applied the majority of FCF (CFO less capital expenditures and dividends) plus about $1 billion in proceeds from business divestitures to debt reduction, reducing the post-acquisition debt balance by about $4.6 billion. As a result, Thermo Fisher has demonstrated solid and consistently paced improvement in credit metrics since first-quarter 2014.

At Dec. 31, 2015, Fitch calculates gross leverage of roughly 3.0x, versus a pro forma 4.5x at the end of 2013, which included $11.3 billion of additional debt used to help finance the Life Tech acquisition. Thermo Fisher's current leverage is consistent with the 3.0x target that Fitch stated as consistent with a 'BBB' rating in the wake of the company's acquisition of Life Tech.

AGGRESSIVE CAPITAL DEPLOYMENT PRESSURES CREDIT PROFILE

Fitch notes that several facets of the firm's credit profile could support higher ratings than the current 'BBB'. These include the company's significant scale, good end-market diversification and product mix, as well as its constructive growth outlook, solid margins, and robust cash flow profile. Thus we view the possibility of aggressive capital management, and not operating risk, as Thermo Fisher's key credit risk.

Aside from Thermo Fisher's publicly stated leverage target of 2.5x-3.0x (calculated on a gross, unadjusted basis), the company has shown that it is comfortable increasing leverage well above this level to fund a large acquisition. The downgrades of Thermo Fisher's IDR in 2012 and 2013 reflected aggressive capital deployment that contributed to higher debt levels and deterioration of credit metrics. Although funding sources for the Life Tech acquisition included approximately $3 billion of equity proceeds and $2 billion of cash on hand, debt funding drove pro forma leverage to nearly 4.5x versus a pre-acquisition level of 2.6x.

Fitch continues to expect that Thermo Fisher will be an active acquirer while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x, which we view as supportive of Thermo Fisher's 'BBB' ratings.

Fitch notes that the company funded three fairly sizeable acquisitions in 2011-2012, as well as a high level of share repurchases, although it did suspend share repurchases in right after the Life Tech acquisition, before resuming stock buybacks of $500 million in 2015. Thermo Fisher also instituted a regular dividend in 2012, which now consumes about $240 million of CFO annually. Fitch currently models $1 billion of share repurchases and $240 million of dividends for calendar year 2016, in addition to $1.8 billion of acquisitions.

LIFE TECH INTEGRATION AHEAD OF SCHEDULE

Thermo Fisher appears to be making good progress in the integration of Life Tech. The Life Solutions Segment, which is primarily composed of the Life Tech business, posted organic revenue growth of 7% in 2015. Fitch believes this business could continue to post above market organic growth given the potential for revenue synergies in end markets where the companies had significant overlap, including academic, government and biopharmaceutical research settings.

Another benefit of the business combination is improved profitability and greater sales predictability for Thermo Fisher. In 2015, the company's gross operating margin improved by about 150 bps compared to the prior year period, while the operating margin improved by about 140 bps. In part, this reflects Life Tech's high proportion of consumables sales. The addition of the Life Tech portfolio of products increased the proportion of Thermo Fisher's sales that can be classified as 'recurring' consumables or services to 62% from 56% before the acquisition. Sales of consumable products are highly profitable and fairly predictable, since demand is somewhat less susceptible to the headwinds that are influencing sales of larger-capital equipment in the life sciences sector.

The realization of cost synergies is also supporting growth in the operating margin. The company reports that it realized $130 million in cost synergies in 2015, ending the year at its original targeted three-year run-rate. This is somewhat above the original synergy target of $115 million for 2015. Thermo Fisher also achieved $90 million of revenue synergies in 2015.

Thermo Fisher expects to deliver an additional $55 million of year-over-year cost synergy benefits in 2016, as well as a further $60 million of revenue synergies that would enable Thermo Fisher to achieve its three-year goal of $350 million of total cost and revenue synergies in 2016.

AMPLE LIQUIDITY

Thermo Fisher's solid financial flexibility and strong liquidity is an important factor supporting the investment-grade credit profile. At Dec. 31, 2015, Thermo Fisher's sources of liquidity included $452 million of cash on hand and $1.935 billion of capacity under the $2 billion revolving credit facility. The credit facility 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 Dec. 31, 2015, $50 million of CP was outstanding, versus no amounts outstanding at Dec. 31, 2014.

Cash generation has historically been strong and consistent. Fitch forecasts that Thermo Fisher will produce at least $3 billion in FCF annually for the next several years. The company's senior notes debt maturity schedule is laddered, following recent refinancing of $1.3 billion of 2016 debt.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Thermo Fisher
--Long-term IDR and senior notes at 'BBB';
--Bank revolving credit facility at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.

Life Technologies
--Long-term IDR and senior notes at 'BBB'.

The Rating Outlook is Stable.