Fitch Rates Thermo Fisher's EUR600MM Senior Notes 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB' rating to Thermo Fisher Scientific Inc.'s (Thermo Fisher) EUR600 million floating rate two-year senior notes offering. The notes will be issued by Thermo Fisher Scientific (Finance I) B.V. and will be fully and unconditionally guaranteed by Thermo Fisher. Fitch expects that the proceeds of the issue will be used to redeem the entire $600 billion principal amount outstanding under the company's term loan facility due 2016. The Rating Outlook is 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 press 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 Fitch views 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 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 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.

KEY ASSUMPTIONS

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.

--CFO 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.

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 (IDR) contemplates 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 heavily 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 that are commensurate with the current rating category.

AGGRESSIVE CAPITAL DEPLOYMENT PRESSURES CREDIT PROFILE

Several facets of the firm's credit profile could support higher ratings than the current 'BBB'. These factors 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. Fitch therefore views the possibility of aggressive capital management, and not operating risk, as Thermo Fisher's key credit risk.

Notwithstanding 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 expects that Thermo Fisher will continue to be an active acquirer going forward, while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x, which Fitch views as supportive of Thermo Fisher's 'BBB' ratings.

AMPLE LIQUIDITY

Thermo Fisher's solid financial flexibility and strong liquidity is an important factor supporting the investment grade credit profile. At June 30, 2016, Thermo Fisher's sources of liquidity included $663 million of cash on hand and $2.436 billion of capacity under the $2.5 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 June 30, 2016, $989.4 million of CP was outstanding, down from $1.2 billion outstanding at March 31, 2016.

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';

--Short-Term IDR 'F2';

--Commercial paper 'F2'.

Life Technologies Corp.

--Long-Term IDR and senior notes 'BBB'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: March 1, 2016.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009844

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gregory Dickerson
Director
+1-212-908-0220
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Gregory Dickerson
Director
+1-212-908-0220
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
Hannah James, +1-646-582-4947
hannah.james@fitchratings.com