December 7, 2016 / 5:46 PM / a year ago

Fitch Affirms PerkinElmer's Ratings at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, December 07 (Fitch) Fitch Ratings has affirmed PerkinElmer Inc.'s (PerkinElmer) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. A full list of PerkinElmer's ratings follows the end of this release. KEY RATING DRIVERS --Gross debt leverage has generally remained between 2.0x and 2.5x, and Fitch expects this metric to continue to approximate these levels in most periods. As has been the case historically, Fitch anticipates that gross leverage could temporarily exceed 2.5x if the company issues incremental debt to finance targeted acquisitions. --Adjusted EBITDA margins have stabilized at levels near 20%, which represents a 400 basis points (bps) improvement over levels reported in 2011, benefitting from successful execution of restructuring and a shift in business mix toward higher margin consumables and services businesses. Fitch projects that the company will be able to sustain and likely improve upon these levels going forward. --Fitch anticipates low or mid-single digit organic growth over the forecast period, driven by growing demand in emerging markets supplemented by new products. These growth drivers should more than offset industry headwinds that include softer demand in government and academic end markets. FX headwinds have eased in 2016 after pressuring reported revenue growth by 6% in 2015. --Free cash flow (FCF) generation has been consistently solid and should remain so for the foreseeable future. Fitch projects annual FCF of $250 million or more for the next few years, benefitting from EBITDA growth, minimal required contributions to pension plans and continued manageable CAPEX requirements. --The present top priority for capital usage remains asset purchasing, specifically small opportunities. In the absence of acquisitions, Fitch believes that shareholder returns, especially opportunistic share repurchases, will take precedence over debt reduction. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for PerkinElmer include: --Revenues increase in 2016 to 2019 by a compound annual growth rate (CAGR) of 2.3%, reflecting slower growth in 2016 due to a shorter fiscal year, modest FX headwinds and a soft near term outlook for instrument sales, followed by stronger growth later in the forecast period. --Fitch models EBITDA growth resulting from growing revenues and moderate margin expansion, derived from cost efficiencies resulting from ongoing Lean operating initiatives. --EBITDA growth backstops stronger cash flow generation. FCF exceeds $250 million in 2016 and builds from there, benefitting from stable capital expenditures, modest pension funding requirements, and long-dated debt maturities. --Incremental debt increases of $50 million from 2017-2019 to help fund acquisitions, resulting in gross leverage approximating 2.3x-2.4x throughout the forecast period. --Potential for increased share repurchasing and/or leveraging transactions; however, Fitch expects that that the actions, if realized, would be undertaken in a financially disciplined manner. RATING SENSITIVITIES Maintenance of PerkinElmer's 'BBB' rating would be supported by average gross debt leverage levels between 2.0x-2.5x, EBITDA margins approximating 20%, and U.S.-generated cash flows well in excess of annual debt servicing requirements. Near term upward ratings momentum is unlikely in the near term. Longer term, an upgrade could be considered if PerkinElmer were to achieve the following: --Maintain gross debt leverage below 2.0x for a period of consecutive years accompanied by EBITDA margins approximating 20%; --Continue to generate U.S.-based cash flows well in excess of annual debt servicing requirements; --Significantly increase its scale and further expand the scope of products and services. Downward rating action could result from heavy pressure on operations or leveraging shareholder-friendly actions or acquisitions such that debt leverage was expected to exceed 2.5x for 18-24 months or longer. PerkinElmer's ratings could also be downgraded if the company's U.S.-generated cash flows decreased to a level where the company's ability to internally fund its annual debt servicing requirements came into question. Operational weakness could stem from lower-than-anticipated results due to poorer-than-expected sales performance as the company's diversified portfolio cannot withstand headwinds of capital expenditure constraint in Europe, and tightened global research spending. EMERGING MARKETS DRIVE GROWTH Continued, strong demand in emerging markets has helped to offset softer conditions in developed markets, particularly in PerkinElmer's more capital-intensive businesses. In particular, government and academic end markets have been more challenging, as well as industrial and, more recently, environmental businesses. Importantly, Fitch believes that substantial runway remains for continued robust growth in PerkinElmer's key emerging markets, particularly China and India. This constructive outlook is supported by global population growth and an expanding middle class in emerging markets that will continue to generate demand for high quality health care outside of the U.S. This is particularly true in the area of reproductive health, where PerkinElmer enjoys a strong competitive position globally. PerkinElmer's Environmental Health business should likewise benefit from growing demand for food supply chain security and a world-wide shortage of clean water. These factors are driving increased regulatory scrutiny and spurring demand for increased monitoring of air, food and water quality. Fitch sees the potential for double digit organic growth in emerging markets over the forecast period that will more than offset single digit organic revenue declines in developed markets, where PerkinElmer has recently seen reductions or delays in instrument purchases. The recent softness in demand for equipment bears watching. It could reflect short term delays or reduction in capital outlays due to the uncertain global economic and political environment, including possible concerns about implications of Britain's pending exit from the EU or the outcome of the recent U.S. presidential election. On the other hand, if lower demand for PerkinElmer's instruments persists over a longer time period, it could suggest a weakening in PerkinElmer's competitive position in these areas that could ultimately have negative rating implications. Fitch projects that PerkinElmer could report compound growth in reported revenues of around 2.3% through 2019. Continued demand for PerkinElmer's diversified portfolio should be further bolstered by new offerings across the Human Health an Environmental Health segments. BOLT-ON ACQUISITIONS REMAIN PRIORITY FOR CAPITAL DEPLOYMENT Although capital used for share repurchases has recently exceeded amounts deployed for acquisitions, Fitch believes that PerkinElmer's highest priority for capital deployment remains asset purchasing. Specifically, Fitch expects that PerkinElmer remains focused on small to moderate-sized opportunities to gain access to technology and broaden the research and product portfolios as well as targets in adjacent markets. For the latest 12 months (LTM) ended Oct. 2, 2016, Fitch calculates that PerkinElmer repurchased $138 million of common equity (net of share issuances), while completing acquisitions of $104 million over the same time period. Fitch attributes this allocation to an absence of attractively priced targets, rather than a shift in financial policy in favour of shareholder returns over business development. While PerkinElmer has occasionally used debt to help fund targeted acquisitions, gross debt leverage has generally remained between 2.0x and 2.5x, and Fitch expects this metric to continue to approximate historical levels in most periods. As has been the case historically, Fitch anticipates that gross leverage could temporarily exceed 2.5x if the company issues incremental debt to finance acquisitions of a slightly larger size. In the absence of attractive acquisition opportunities, Fitch believes that shareholder returns, especially opportunistic share repurchases, will take precedence over debt reduction. Fitch sees potential for increased share repurchasing over the intermediate term given reasonable debt leverage and solid FCF generation. Fitch anticipates that the actions, if realized, would be undertaken in a financially disciplined manner. PerkinElmer has also publicly guided that it is considering pruning its portfolio in Fitch expects any cash proceeds resulting from these dispositions to be reinvested in PerkinElmer's business or returned to shareholders through share repurchases. RECENT MARGIN IMPROVEMENT DURABLE, FURTHER IMPROVEMENT POSSIBLE PerkinElmer has successfully executed its strategic focus on margin expansion as evidenced by EBITDA margins stabilizing at current levels around 20%, which represents meaningful improvement from 15.7% margins generated in 2011. The margin expansion reflects benefits of multiple rounds of restructuring initiatives as well as a shift in product mix toward higher margin businesses, including software services (35% of revenues) and consumables (24%). Additional margin expansion appears achievable, as the company is in the process of implementing various Lean initiatives intended to reduce materials spend and realize manufacturing and logistics efficiencies. Margin expansion could also be aided by selective pruning of businesses that are outside of PerkinElmer's four core areas of focus, which include reproductive health, food analysis, emerging diagnostics, and pharmaceutical services. Each of these four areas is averaging double digit organic growth and generating operating margins greater than the company's current consolidated level of around 18.5%. PerkinElmer targets an additional 400bps of margin expansion by 2020 but Fitch conservatively models more moderate margin improvement over forecast period, leading to EBITDA margins of close to 22% by the end of 2019. GROSS DEBT LEVERAGE SUPPORTIVE OF 'BBB' RATING Gross debt leverage has generally been maintained between 2.2x-2.4x for the past several years as occasional, modest increase incremental debt increases to help fund acquisitions have been offset by EBITDA growth. Fitch views gross debt leverage of between 2.0x-2.5x as commensurate with the company's current 'BBB' ratings. Given Fitch's outlook for low to mid-single-digit revenue growth and moderate margin expansion, the company should be able to maintain leverage within this range fairly comfortably if it so chooses. Fitch nevertheless expects that PerkinElmer will occasionally use debt to help fund acquisitions, which could cause PerkinElmer's gross debt leverage to occasionally exceed 2.5x. Fitch believes that PerkinElmer's 'BBB' rating provides flexibility for the company to temporarily exceed 2.5x gross debt leverage if the company were to demonstrate a pathway to reducing leverage closer to 2.5x within 18-24 months. LIQUIDITY PerkinElmer's debt maturity schedule is laddered and fairly simple. The company's capital structure is comprised of two unsecured debt issuances ($500 million of 5% notes due in 2021 and EUR500 million of 1.875% notes due in 2026) and $45 million of bank borrowings under a $1.0 billion revolving credit facility. PerkinElmer has intermittently drawn under its unsecured credit facility to help fund modest sized acquisitions. All debt, including bank facilities, is held and will be issued at PerkinElmer Inc. as there is no finance subsidiary. Fitch's estimates that incrementally improving EBITDA margins, manageable capital spending, a consistent dividend and modest pension contributions will yield annual FCF of $250 million or more annually. Steps taken in recent years to fund the U.S. defined pension benefit plan and improve operational efficiency have materially boosted cash flows versus levels reported in 2012 and 2013. FCF totalled $259.0 million for the LTM as of Oct. 2, 2016, representing a FCF margin of 11.4%. This result continues a trend of steady improvement that PerkinElmer is poised to build upon over the forecast period, assuming stable debt levels. Fitch anticipates that PerkinElmer will continue to generate cash in the U.S. in amounts that are more than sufficient to fund the company's annual interest expense of roughly $37 million, annual dividends of $32 million, and CAPEX requirements that have ranged between $25 million-$40 million. FULL LIST OF RATING ACTIONS Fitch has affirmed PerkinElmer Inc.'s ratings as follows: --Long-Term Issuer Default Rating at 'BBB'; --Senior unsecured credit facility at 'BBB'; --Senior unsecured notes at 'BBB'. The ratings apply to approximately $1.1 billion of consolidated debt outstanding as of Oct. 2, 2016. The Rating Outlook is Stable. Contact: Primary Analyst Greg Dickerson Director +1-212-908-0220 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Jacob Bostwick, CPA Director +1-312-368-3169 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=1016039 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT 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. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below