-- Long-term Issuer Default Rating (IDR) at 'BBB';
-- Senior unsecured bank facilities at 'BBB';
-- Senior unsecured notes at 'BBB'.
Fitch has also withdrawn the 'F2' short-term IDR and commercial paper rating. The Rating Outlook is Stable.
The rating actions apply to approximately
KEY RATING DRIVERS
-- CFN maintains a steady operating profile and good insight into future cash flows, driven by strong market shares and largely recurring cash flows. Fitch expects CFN's market positions to remain strong and that hospital capex will be relatively stable in the medium term.
-- Run rate debt leverage of around 2x in fiscal 2015 is at the upper end of the range appropriate for CFN's 'BBB' rating. However, a solid cash flow profile and Fitch's expectation for improving growth and profitability over the next several quarters offset this concern.
-- CFN's international exposure is relatively limited (23% of sales in fiscal 2014), thereby restricting longer-term growth potential. Recent M&A has improved CFN's non-U.S. exposure, but Fitch expects CFN to continue to aggressively yet responsibly pursue M&A targets - especially outside the U.S. - in calendar 2014-2015.
-- Fitch expects the realization of CFN's significant dispensing backlog to drive solid top-line growth of around 6% in fiscal 2015. Strong and steady free cash flow (FCF) approximating
-- Liquidity is sufficient to facilitate tuck-in M&A over the ratings horizon, particularly considering incremental cash on hand from the proceeds of the
CFN's 'BBB' ratings are currently somewhat constrained, with Fitch-estimated pro forma debt leverage of 2.2x at fiscal year end 2014 (FYE14). Maintenance of a 'BBB' IDR contemplates debt leverage generally maintained around 2.0x or below, accompanied by stable cash flows and steady profit margins.
Cash flows and liquidity are sufficient for the firm to accomplish its outlined share repurchase plans and to consummate small- to medium-sized deals over the ratings horizon. Nevertheless, Fitch expects CFN to be an active acquirer in calendar 2014-2015, possibly pushing debt leverage incrementally higher over the ratings horizon. Temporary increases in debt leverage above 2x could be appropriate at the current 'BBB' ratings to consummate larger strategic M&A, assuming the company has the financial flexibility and willingness necessary to wind down leverage in the 12-18 months post the transaction.
A downgrade could result from a material and lasting deterioration in operations or a debt-funded transaction that resulted in depressed cash flows and/or an expectation for debt leverage to be sustained above 2x. Fitch generally thinks CFN could maintain investment grade ratings in the event of a leveraging acquisition followed by a moderation of debt leverage to approximately 2.5x within 12-18 months.
An upgrade is unlikely in the near term but could be driven by robust cash flows and debt leverage expected to be sustained near or below 1.6x. Durable margin expansion, at least in line with the firm's articulated targets, and evidence of a sustained improvement in hospital capital spending would also be required to support an upgrade to 'BBB+'.
STRONG REVENUE GROWTH, MARGIN EXPANSION IN 2015 WITH BACKLOG REALIZATION
CFN maintains stable operations and cash generation, supported by a large proportion of its cash flows being recurring - either from lease payments or the sale of disposable products. Strong market share positions also support a stable operating profile. FCF as a percent of revenues is forecasted to be between 12% and 15% over the next few years.
Organic growth is relatively reliant on hospital capital spending (capex), which has been somewhat weak in recent years due to weak healthcare utilization and constrained reimbursement growth. Underlying hospital volumes and capex do seem to have stabilized in recent quarters; but Fitch expects reimbursement growth to remain under pressure.
Strong contract commitments for CFN's Alaris business drove growth in fiscal 2014, and Fitch expects a similar dynamic in the Pyxis business to support revenues in fiscal 2015. Committed contracts and installations support Fitch's expectations for strong market positioning for both businesses over at least the medium term. After the recognition of the sizeable Pyxis related revenue backlog in 2015, Fitch expects normalized top-line growth in CFN's core businesses in the low- to mid-single digits over the ratings horizon.
EBITDA margins were pressured by approximately 200 basis points (bps) in fiscal 2014, owing to delayed dispensing installations and the acquisition of lower-margin businesses (Vital Signs and Sendal). Nevertheless, Fitch expects CFN to continue to improve its cost structure and drive acquisition synergies, providing margin support over the ratings horizon. Fitch expects CFN to generate organic top-line growth of around 6%, with margin expansion approximating 100 bps in fiscal 2015.
EXPECTATION FOR ACQUISITIONS, FOCUSING ON INTERNATIONAL EXPANSION
Fitch expects CFN to be responsibly acquisitive in fiscal 2015-2016, especially with regards to bolstering its relatively small international exposure. Approximately 23% of CFN's 2014 revenues were generated outside the U.S. Management has articulated that it intends to aggressively yet responsibly pursue opportunities to expand its international footprint over the near-to-medium term. Increased exposure to non-U.S. markets could represent important growth opportunities for CFN. Larger deals could require debt funding, potentially leading to higher debt balances. But Fitch expects the majority of this M&A will be funded using cash held overseas.
AMPLE LIQUIDITY, MANAGABLE DEBT MATURITIES
CFN maintains a strong liquidity profile, consisting of approximately
Fitch expects most future M&A activity to be in non-U.S. markets, providing a potential use for CFN's sizeable offshore cash balance. U.S. cash flows are forecasted to be sufficient to fund operations, capital spending, and planned share repurchases. External financing may be required in the event of a sizeable acquisition of a U.S.-based firm.
CFN's only material debt maturity in the near-to-intermediate term is
Additional information is available at 'www.fitchratings.com'.
-- 'Corporate Rating Methodology' (
-- 'Fitch Rates CareFusion's Proposed
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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