March 1, 2012 / 3:36 PM / 5 years ago

TEXT-Fitch on Thermo Fisher

(The following statement was released by the rating agency)

March 1 - Thermo Fisher Scientific's (Thermo Fisher) ratings, including the 'A-' Issuer Default Rating (IDR), are unaffected by the company's announcement that it will begin funding a quarterly dividend. The ratings apply to about $7 billion of debt outstanding at Dec. 31, 2011. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release. Thermo Fisher has announced the initiation of a quarterly dividend of $0.13 per share starting April 16, 2012. The cash dividend payments will total about $200 million annually. Fitch had previously articulated that maintenance of Thermo Fisher's 'A-' IDR would depend upon total debt-to-EBITDA generally maintained at or below 2.0 times (x). Periodic increases in debt leverage to fund acquisitions are tolerable at the rating category as long as Fitch feels that the company is willing and able to reduce debt to below the 2.0x target within 12-18 months post the transaction. Thermo Fisher completed two large acquisitions in 2011, Phadia AB and Dionex Corp., the debt funding of which resulted in deterioration in credit protection metrics. Funding for these two transactions resulted in a cumulative $4.8 billion in debt added to the company's capital structure at the end of 2011. Total debt-to-EBITDA has increased to about 3.0x at Dec. 31, 2011 versus about 1.0x before the transactions. Fitch anticipates positive EBITDA growth for Thermo Fisher in 2012-2013, both organically and as a result of its recent acquisitions. However, Fitch projects that reducing leverage to the 2.0x level will require the application of about $2 billion of cash to debt reduction over the next 18 month period. Fitch is not presently concerned that Thermo Fisher's decision to implement a dividend represents a departure from the company's commitment to apply cash to debt reduction. Thermo Fisher produces an adequate level of discretionary free cash flow (FCF; cash from operations less capital expenditures) to fund the necessary level of debt pay-down to reduce leverage to below 2.0x EBITDA while still returning a solid amount of cash to shareholders through dividends and share repurchase. In the latest 12 months (LTM) period ended Dec. 31, 2011, the company produced cash from operations of nearly $1.7 billion and discretionary FCF of about $1.4 billion. Fitch forecasts the company will produce about the same level of discretionary FCF in 2012. Funding of the dividend will therefore reduce annual FCF available for debt reduction to about $1.2 billion annually. Thermo Fisher did fund an increased level of share repurchases in 2011, when it bought back a total of $1.3 billion of shares. As of Dec. 31, 2011, the company had $650 million in outstanding share repurchase authorization. Thermo Fisher has not indicated that the company intends to reduce the share repurchase authorization in light of implementation of the dividend. If the company elects to prioritize use of cash for share repurchase or additional acquisitions, to an extent that it that becomes apparent leverage will be sustained above 2.0x EBITDA, it will likely result in a ratings downgrade during 2012. Thermo Fisher's liquidity profile is otherwise strong. The debt maturity schedule is well laddered. The next maturities occur in 2012 when the bank credit facility matures on Aug. 29, 2012 (including only an undrawn $1 billion bank revolver) and $350 million of senior unsecured notes mature in December. Fitch doesn't expect Thermo Fisher to have difficultly extending the term of its bank credit facility based on its strong operational and FCF profile. Other debt maturities through 2016 include $700 million of senior unsecured notes in each of 2014 and 2015 and $900 million of senior unsecured notes in 2016. Thermo Fisher's bank credit facility includes a financial maintenance covenant requiring leverage to be maintained below 3.5x. At Dec. 31, 2011, the company's cash balance was $1 billion. Fitch currently rates Thermo Fisher as follows: --IDR 'A-'; --Short-term IDR 'F2'; --Senior unsecured notes 'A-'; --$1 billion commercial paper program 'F2'. A $1 billion 364 day unsecured revolving credit facility executed on June 23, 2011 provides adequate liquidity back up for the commercial paper program. The commercial paper backup revolver includes standard negative covenants, including a financial maintenance covenant requiring debt-to-EBITDA maintained below 3.5x. (Caryn Trokie, New York Ratings Unit)

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