Hologic (HOLX) Ratings Affirmed by S&P Following Credit Facility Refinancing

Standard & Poor's Ratings Services affirmed its ratings, including the 'BB' corporate credit rating, on Hologic (NASDAQ: HOLX) following the company's refinancing of its credit facility. The outlook is stable.

At the same time, we assigned a 'BBB-' issue-level rating to the $2.5 billion credit facility. The recovery rating on this debt is '1', indicating our expectation of very high (90% to 100%) recovery in the event of default.

The issue-level rating on the company's $1 billion unsecured notes is 'BB'. The recovery rating is capped at a '3' with our expectation of meaningful (50% to 70%; at the high end of range) recovery in the event of default. The issue-level rating on the company's convertible notes is 'B+'. The recovery rating is '6', indicating our expectation of negligible (0% to 10%) recovery in the event of default.

The rating on Hologic reflects the company's moderate product diversity as a leading manufacturer and supplier of medical imaging equipment, molecular diagnostic, and surgical products with a strong focus on women's health care; modest geographic diversity; and solid profitability. "The rating also incorporates our expectation that leverage will fall to about 3.7x in 2015 from about 4x as of Dec. 31, 2014," said Standard & Poor's credit analyst Tahira Wright. As a result, we are revising our financial risk profile assessment to "significant" from "intermediate". We also revised our assessment of liquidity to "strong" from "adequate," reflecting the company's good cash flow generation and our expectation that it will continue to grow its ample cash reserves.

Hologic has a leading market position in the women's health care market. The company provides diagnostic services (47% of 2014 revenues), breast health (37% of 2014 revenues), gynecological surgical (13% of 2014 revenues), and skeletal health (3% of 2014 revenues). The company has made inroads in enhancing its technology in its mammography imaging equipment. The company has introduced 3D imaging equipment that has clinical evidence on its superior ability to detect cancer, has a best in class product profile and has begun to see reimbursement from the Centers for Medicare and Medicaid Services. This device supplements its strong position in 2D imaging. U.S. service providers have begun to gradually shift to the higher price point 3D device from the 2D device. We expect this trend to accelerate over the next few years, as patients and clinicians preference sways to the improved technology and reimbursement coverage is expanded. We also expect the company to continue to grow its 2D line to emerging markets.

Our stable outlook reflects our expectation of mid-single-digit revenue growth contributing to EBITDA, with the company operating with leverage of about 3.7x by the end of 2015.

Given the company's ability to generate solid cash flow from operations and its commitment to repay debt, we believe the company has plenty of cushion at the current rating. A downgrade could occur if operating performance meaningfully fell short of our expectations. We estimate that a 7% revenue decline combined with a negative 400-basis-point gross margin deviation from our base case would reduce EBITDA and raise debt leverage to above 5x at fiscal year-end 2015, which could trigger a downgrade.

We do not anticipate an upgrade in the coming year, unless the company were to commit to significantly reducing debt and operating with leverage under 3x over a sustained period, which would be reflective of an "intermediate" financial risk profile. Over time, improved geographic or product diversification could strengthen the company's business risk profile to "satisfactory," which could be an alternative path to an upgrade. This could be achieved through gradual organic growth and continued expansion in markets outside U.S. or a transformative acquisition that is primarily funded through internally generated cash.

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