CHICAGO--()--Fitch Ratings has assigned a 'BBB' rating to CareFusion Corporation's (NYSE: CFN) $300 million 10-year notes offering, the net proceeds of which are to be used for general corporate purposes. Fitch views the issuance as effectively a refinancing of the $250 million notes that matured in August 2012. The Rating Outlook is Stable. A full list of CFN's ratings follows at the end of this release.
KEY RATING DRIVERS:
CFN's 'BBB' IDR reflects the following factors:
--Improved profitability and the $250 million of notes that matured in August 2012 leave adequate financial flexibility within the CFN's 'BBB' rating category to complete today's notes offering.
--Fitch expects that CFN's business model will continue to generate moderate organic growth, despite relatively weak capital spending trends at hospitals and a challenging economic/employment environment.
--Fitch forecasts that incrementally improving margins, moderate growth and good working capital management will sustain solid FCF generation.
--Fitch anticipates that liquidity will remain strong as consistently positive free cash flow and cash balances will be sufficient to fund moderate share repurchases and targeted acquisitions. Adequate access to credit markets is also anticipated.
--The company has recently become current with Securities and Exchange Commission (SEC) filings without any material restatements.
--Fitch believes CFN faces some risk regarding IRS audits for the 2003 - 2007 audit periods of Cardinal Health, Inc. (CAH), which owned CFN until it was spun off from CAH effective Aug. 31, 2009.
IMPROVING PROFITABILITY PROVIDING SOME LEVERAGE HEADROOM:
During the latest 12 month (LTM) period ended Dec. 31, 2012, CFN increased profitability in the face of a challenging economic/employment environment and weak capital spending by hospitals. The company improved its cost structure and generated a more favorable sales mix of higher margin products. As a result, EBITDA increased during the period to $901 million from $799 million, while EBITA margins improved to 25.1% from 23.7%. Including a temporary $250 million pay down of maturing unsecured notes, leverage (total debt/EBITDA) declined to 1.28 times (x) from 1.77x, providing the company adequate flexibility within its 'BBB' rating category.
STABLE OPERATIONS SUPPORTING POSITIVE CASH FLOW:
Fitch expects that incremental margin improvement (through favorable mix shifts and cost control somewhat offset by the healthcare reform device tax that became effective in 2013), modest revenue growth, and good working capital management will enable CFN to generate free cash flow (FCF) of $400 million to $460 million in fiscal year 2013. Fitch anticipates that the company will balance potential acquisitions and share repurchases within the context of maintaining leverage consistent with at least a 'BBB' credit profile. As such, CFN is expected operate with leverage of 1.5x-1.7x during the next 12 months.
In addition to expanding around its core competencies, Fitch expects CFN will continue to expand its operations outside of the United States. Europe, in particular will likely be a focus, given that CFN currently has a limited market presence in that market. The European market is fragmented with respect to medical protocols, delivery and reimbursement. As such, CFN will likely proceed with international expansion at a judicious pace.
RELIANCE ON CAPITAL SPENDING BY HOSPITALS:
Roughly 40% of CFN's revenues are dependent on hospital capital spending, which has remained sluggish during the past two years. The financing of some of CFN's products through operating leases and the inherent need for some of CFN's products help to mitigate the dampening effect of sluggish capital spending on revenue growth. Nevertheless, Fitch believes growth of infusion pumps, medication delivery equipment will remain somewhat muted in the near term as a result of broader economic weakness, difficult comparisons and customers waiting for CFN's near-term product launches.
COMPLIANT WITH SEC FILINGS:
CFN has become current with its SEC filings by recently issuing its 10-K (period ending June 30, 2012), 10-Q (period ending Sep. 30, 2012) and 10-Q (period ending Dec. 31, 2012). The company had delayed the filings as a result of conversations the company had with the SEC regarding an alternative method of revenue recognition accounting for sales-type leases brought up by CFN's auditors, Ernst & Young, during the audit of the 2012 fiscal year-end filings. CFN adopted a modified method for recognizing Pyxis revenues, and the resulting restatements were essentially immaterial.
The IRS has conducted audits of fiscal years 2003 through 2007 and claims that Cardinal Health, Inc. (CAH) owes additional taxes related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among its subsidiaries. CFN agreed to assume the responsibility for this issue at the spin-off from CAH in 2009. The timing and ultimate outcome of this issue remain uncertain. As such, the audit poses some financial risk to CFN.
At Dec. 31, 2012, CFN had strong liquidity of approximately $1.56 billion in cash ($390 million domiciled in the U.S.) and full availability under its $750 million unsecured bank facility, which expires in 2016. Fitch believes the company has adequate access to the capital markets. Total debt outstanding was roughly $1.15 billion. Debt maturities are manageable, with approximately $450 million maturing in 2014, $700 million in 2019 and $300 million (once the offering is completed) in 2023.
Fitch believes a one-notch upgrade could be supported by the following:
--Stable or improving operational performance with prospects for continued organic growth and relative price stability;
--Margin durability aided by appropriate cost management and stable or improving mix that leads to solid free cash flow generation;
--Leverage sustainably below 1.6x.
A negative rating action could result from some combination of the following:
--Material and lasting deterioration in operations and operational and FCF relative to Fitch's forecasts;
--Persistent increase in leverage above 2.1x;
--Leveraging acquisitions without the prospect of timely debt/leverage reduction.
Fitch currently rates CFN as follows:
--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured bank facility 'BBB';
--Senior unsecured notes 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology