S&P Lowers Outlook on St. Jude (STJ) to Negative; Cites Growing Debt, Lower Revs
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Standard & Poor's Ratings Services said today it revised its rating outlook on St. Jude Medical Inc. (NYSE: STJ) to negative from stable. We affirmed our 'A' corporate credit and unsecured debt ratings and 'A-1' commercial paper rating.
The outlook revision reflects increasing debt/EBITDA and declining FFO/debt as a result of growing debt and weakening revenues. Disappointing sales performance may also be indicative of unfavorable operating issues that could persist. Maintenance of current ratings depends of the company deleveraging and maintaining financial metrics commensurate with a "modest" financial risk profile. We believe that this incorporates a management commitment to actively pay down debt.
"The ratings on St. Jude reflect its "strong" business risk profile and "modest" financial risk profile, according to Standard & Poor's Ratings Services' criteria. St. Jude develops, manufactures, and distributes high technology medical devices. Despite weaker-than-expected 2013 first quarter results, including loss of market share in some segments, St. Jude holds leading positions in implantable cardioverter defibrillators (ICD) and pacemakers, heart valves, electrophysiology catheters, vascular sealing devices, and other high-technology-content cardiac and neuromodulation devices," said credit analyst Cheryl Richer. "Despite the need for constant innovation, barriers to entry are high in the high-technology medical device industry, supporting the company's strong business risk profile. St. Jude spends 12%-13% of revenues (slightly higher than peers, but it is smaller in scale) on research and development (R&D) to maintain a competitive product pipeline. St. Jude largely competes against the other two leading market participants, Medtronic Inc. and Boston Scientific Corp."
Our negative outlook reflects the potential for a downgrade within two years if financial metrics do not improve to parameters squarely within the range for a modest financial risk profile. We believe this will likely require proactive debt repayment given prospects for relative flat EBITDA over the coming years. Our base case anticipates a $500 million debt reduction which would result in debt/EBITDA and FFO/debt of approximately 1.5x and 45%, respectively, by year-end 2014. If we gain confidence that St Jude is on track to meet these expectations, we would revise the outlook to stable. However, we could lower our rating if St. Jude continues to make acquisitions and/or repurchase shares such that financial improvement appears unlikely. Furthermore, weak operating performance, such as a 5% revenue decline combined with a 200-basis-point EBITDA margin decline could also reduce cash flow and thwart best efforts to reduce leverage, which could result in a downgrade.
The outlook revision reflects increasing debt/EBITDA and declining FFO/debt as a result of growing debt and weakening revenues. Disappointing sales performance may also be indicative of unfavorable operating issues that could persist. Maintenance of current ratings depends of the company deleveraging and maintaining financial metrics commensurate with a "modest" financial risk profile. We believe that this incorporates a management commitment to actively pay down debt.
"The ratings on St. Jude reflect its "strong" business risk profile and "modest" financial risk profile, according to Standard & Poor's Ratings Services' criteria. St. Jude develops, manufactures, and distributes high technology medical devices. Despite weaker-than-expected 2013 first quarter results, including loss of market share in some segments, St. Jude holds leading positions in implantable cardioverter defibrillators (ICD) and pacemakers, heart valves, electrophysiology catheters, vascular sealing devices, and other high-technology-content cardiac and neuromodulation devices," said credit analyst Cheryl Richer. "Despite the need for constant innovation, barriers to entry are high in the high-technology medical device industry, supporting the company's strong business risk profile. St. Jude spends 12%-13% of revenues (slightly higher than peers, but it is smaller in scale) on research and development (R&D) to maintain a competitive product pipeline. St. Jude largely competes against the other two leading market participants, Medtronic Inc. and Boston Scientific Corp."
Our negative outlook reflects the potential for a downgrade within two years if financial metrics do not improve to parameters squarely within the range for a modest financial risk profile. We believe this will likely require proactive debt repayment given prospects for relative flat EBITDA over the coming years. Our base case anticipates a $500 million debt reduction which would result in debt/EBITDA and FFO/debt of approximately 1.5x and 45%, respectively, by year-end 2014. If we gain confidence that St Jude is on track to meet these expectations, we would revise the outlook to stable. However, we could lower our rating if St. Jude continues to make acquisitions and/or repurchase shares such that financial improvement appears unlikely. Furthermore, weak operating performance, such as a 5% revenue decline combined with a 200-basis-point EBITDA margin decline could also reduce cash flow and thwart best efforts to reduce leverage, which could result in a downgrade.
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