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Fitch Affirms Baxter International Inc.'s IDR at 'BBB+'; Outlook Stable
October 3, 2016 / 1:31 PM / 10 months ago

Fitch Affirms Baxter International Inc.'s IDR at 'BBB+'; Outlook Stable

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(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has affirmed Baxter International Inc.'s (BAX/Baxter) Long-Term Issuer Default Rating at 'BBB+'. The Rating Outlook is Stable. Baxter had approximately $3.2 billion in outstanding debt at June 30, 2016. A full list of Baxter's ratings follows at the end of this release. KEY RATING DRIVERS --The 'BBB+' rating reflects Baxter's significant deleveraging and strong operating performance post the spin-off of the company's biosciences business in June 2015. --Baxter's operating profile benefits from good organic growth prospects in its primary business lines. --Fitch expects the company will continue to generate solid free cash flow (FCF) and deploy capital consistent with its current rating. --Baxter will likely remain acquisitive, but Fitch believes the company will focus on targeted acquisitions that deepen its existing product portfolio or add adjacencies. Meaningful Deleveraging Post Spin: Baxter has reduced leverage to below 2.0x within 12 months of the Baxalta spinoff on July 1, 2015. Immediately after the spinoff, Fitch estimated pro forma leverage (unadjusted gross debt to forecasted standalone EBITDA) was roughly 6x with total debt of roughly $9.2 billion. During the next 12 months, the company reduced debt by roughly $6 billion, funded by the $4 billion cash distribution received from Baxalta and the disposition of its roughly 19.5% equity stake in Baxalta. On May 6, 2016, the company contributed roughly 17 million Baxalta shares to its U.S. qualified pension plan (shares since sold for cash), reducing the unfunded liability of the benefit obligation. Continued Operational Strength: Fitch expects Baxter to generate 3%-4% organic growth in nearly all of its business segments through the intermediate term, although near-term reported growth will likely face some foreign exchange headwinds. Demand for the company's products is relatively reliable, although revenues are modestly sensitive to the macroeconomic environment through reimbursement rates (pricing) and, to a lesser extent, utilization. Fitch expects that the commercializing of pipeline products will also provide support for longer-term top-line growth and incrementally increasing margins. Business Model Still Diversified: The company's business model remains fairly diversified from both a product and geographic perspective, despite the bioscience spinoff. Baxter has four major product-focused franchises: Renal (accounting for 38% of total firm sales), Fluid Systems (23%), Integrated Pharmacy Solutions (23%) and Surgical Care (13%). The company has global reach, manufacturing products in approximately 25 countries and selling them in approximately 120 countries. U.S. sales account for roughly 42% of total firm sales. Strong Cash Flow Expected: Fitch expects that Baxter will generate roughly $1.5 billion to $1.6 billion in annual pro forma cash flow from operations during 2016 driven by expected operational strength and sound working capital management. Operational cash flow should be sufficient to fund approximately $900 million of capital expenditures and approximately $270 million to $290 million in dividends. Acquisitive Posture to Persist: Fitch expects targeted acquisitions will remain a core element of Baxter's long-term growth strategy, using cash balances and incremental debt to fund future transactions. Fitch believes the company will focus on platforms that provide enhancements or adjacencies to its existing portfolio. Fitch expects that typical leverage of 1.7x-2.1x for Baxter. However, it could increase to around 2.5x from acquisitions or significant manufacturing capacity expansions, with FCF providing a source of timely deleveraging. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Baxter include: --Low-single-digit reported revenue growth with organic growth in all business segments. --Gradually improving operating EBITDA margin, particularly as Baxter drives a mix shift to higher margin products and improves operational efficiency. --Cash dividends gradually and consistently increasing over time. --FCF (cash flow from operations minus capital expenditures minus dividends) of $200 million to $300 million through 2016 and meaningfully increasing thereafter. --Targeted acquisitions with no strategic, transformative transactions. --Leverage to range between 1.8x-2.1x. RATING SENSITIVITIES Positive: While Fitch does not anticipate an upgrade in the near to intermediate term, a positive rating action could result from Baxter committing to and operating with leverage consistently in the mid-1x range, while maintaining stable operations sustained with positive organic growth and solid FCF. Negative: Future developments that may, individually or collectively, lead to a Negative Outlook or one notch downgrade to 'BBB' include: --Debt / EBITDA sustainably in the mid-2x range without the prospect for timely deleveraging. --Potential increased leverage resulting from operational stress or share repurchases would need to be reduced more quickly than leverage from an acquisition. LIQUIDITY Adequate Liquidity: Fitch expects Baxter to maintain adequate liquidity, supported by its credit facilities, positive FCF and balance sheet cash. FCF was a negative $14 million during the latest 12 months (LTM) period ended June 30, 2016, due to significant non-recurring cash charges. At June 30, 2016, cash on hand was roughly $2.6 billion, and Baxter had full availability on its credit facilities, amounting to USD1.5 billion and EUR200 million, both of which mature in July 2020. Manageable Debt Maturities: Baxter has roughly $2.7 billion of long-term debt outstanding following the August 2016 refinancing transaction, and resulting/estimated leverage was 1.9x. Fitch believes Baxter's debt maturities are manageable as the refinancing transaction extended maturities out to 2021 and beyond, avoiding the need to refinance small maturities annually. FULL LIST OF RATINGS Fitch affirms Baxter's ratings as follows: Baxter International Inc. --Long-Term IDR at 'BBB+'; --Unsecured bank facility at 'BBB+'; --Unsecured notes at 'BBB+'; --Short-Term IDR at 'F2'; --Commercial paper at 'F2'. The Rating Outlook is Stable. Contact: Primary Analyst Bob Kirby, CFA Director +1-312-368-3147 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Gregory Dickerson Director +1-212-908-0220 Committee Chairperson Megan Neuburger, CFA Managing Director +1-212-908-0501 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock based compensation. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012545 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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