Fitch Affirms Johnson & Johnson at 'AAA'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Johnson & Johnson's (JNJ) Issuer Default Rating (IDR) and long-term debt at 'AAA'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.

Key Rating Drivers:

--The rating action reflects Fitch's expectation that JNJ will continue to generate strong operational and financial performance, supported by all three of its business segments.

--The company's agreement to sell its Ortho-Clinical Diagnostics business for $4.15 billion makes strategic sense and preserves its broad-based business model.

--Favorable mix trends and ongoing efforts at cost control should provide support to gross and operating margins, despite some operational headwinds.

--Fitch forecasts free cash flow (FCF) generation of $7.4 billion - $7.7 billion in 2014, driven by 4%-6% sales growth and relatively stable margins.

--Fitch anticipates that JNJ will continue to invest in long-term growth and operate with leverage and liquidity consistent with its 'AAA' rating.

Durable Growth:

JNJ's recently launched pharmaceutical businesses and an expanding pipeline in its pharmaceutical and medical device businesses support the prospects for continued low single-digit 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:

The expectation for continued weak economic and employment environment will 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 2014.

Sensible Strategic Pruning:

In January 2014, the company received a binding offer from The Carlyle Group to acquire the Ortho-Clinical Diagnostics business for $4.15 billion. Fitch believes the margins and long-term growth opportunities for this business had been lower versus those for the total firm. While the sale will incrementally improve JNJ's total profitability, it should only modestly reduce the diversification of its portfolio, given that the diagnostics business accounts for roughly only 2.7% of total firm sales.

Margin Support:

Fitch expects JNJ's improving sales mix and continued focus on costs will support margins. The company's recently approved pharmaceutical products line 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, Fitch expects that JNJ's management will continue to focus on generating greater operational efficiencies in administration, manufacturing and distribution.

Solid Liquidity:

JNJ has significant liquidity and access to the credit markets. Moderate growth and relatively stable margins enabled the company to generate $6.5 billion of FCF [cash flow from operations ($17.4 billion minus capital expenditures ($3 billion) and dividends ($7.3 billion)] during the LTM period ended Dec. 29, 2013. On Dec. 29, 2013, JNJ had approximately $29.2 billion in cash plus short-term marketable securities and access to $10 billion in short-term borrowings.

Debt Structure

JNJ had approximately $18.2 billion in debt, with approximately $4.8 billion maturing in 2014, $2.1 billion in 2016, $1 billion in 2017 and $1.5 billion in 2018. Debt increased by about $2 billion during the LTM period, as the company took advantage of a continuing favorable long-term interest rate environment. Resulting TD/EBITDA remained essentially flat at 0.77x, primarily because of the growth in EBITDA. JNJ's current capital structure is supportive of its 'AAA' rating given a number of measures, including the following three credit metrics that Fitch uses as criteria for a an issuer such as JNJ as of Dec. 29, 2013.

Rating Sensitivities:

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 broadly diversified health-care related franchises make it more likely that a negative rating action would be prompted by a leveraging transaction, as opposed to operational stress.

Key rating metrics include 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 Dec. 29, 2013, latest 12 month (LTM) selected credit metrics were as follows:

--Total debt/FCF was nearly 2.8x.

--Total debt/EBITDA was 0.77x.

--JNJ had a net cash position of $11 billion.

Fitch has affirmed JNJ's ratings as follows:

--IDR at 'AAA';

--Senior unsecured debt at 'AAA';

--Subordinated debt at 'AAA';

--Short-term IDR at 'F1+';

--Commercial paper at 'F1+'.

The Rating Outlook is Stable.

The ratings apply to approximately $18.2 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 Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825356

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Contacts

Fitch Ratings
Primary Analyst
Bob Kirby
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Megan Neuburger
Senior Director
+1-212-908-0501
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Bob Kirby
Director
+1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Michael Zbinovec
Senior Director
+1-312-368-3164
or
Committee Chairperson
Megan Neuburger
Senior Director
+1-212-908-0501
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com