Fitch Downgrades Abbotts's L-T IDR to 'A'; Outlook Revised to Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded Abbott Laboratories' (Abbott) long-term Issuer Default Rating (IDR) by one notch to 'A' and revised the Rating Outlook to Stable from Negative. In addition, the company's short-term IDR has been affirmed at 'F1'.

Abbott had $8.9 billion in outstanding debt at March 31, 2015. A full list of Fitch's ratings actions follows at the end of this release.

KEY RATING DRIVERS

-- Fitch expects Abbott will operate with debt leverage (total debt/EBITDA) of 1.7x to 1.9x, consistent with an 'A' credit rating for this issuer.

-- Abbott's diversified product portfolio is positioned to deliver mid-single-digit organic growth with incrementally improving margins in the intermediate term.

-- The company's Nutrition, Diagnostics, Medical Devices and Established Pharmaceuticals segments are expected to benefit from the growth in emerging markets.

-- Abbott's ongoing focus on new product introductions across virtually all of its business segments bodes well for growth and margins.

-- The company faces challenges regarding reimbursement for some of its products, as well as near-term adverse foreign exchange movements.

-- Fitch anticipates that Abbott's efforts to improve gross and operating margins will continue to yield results, more than offsetting the aforementioned headwinds.

-- Fitch forecasts Abbott generating relatively strong free cash flow (FCF) of $1.4 billion - $1.6 billion during 2015.

-- Fitch believes that Abbott will focus primarily on shareholders when deploying cash, balancing the return opportunities of share repurchases with acquisitions, while steadily increasing its dividend.

--Fitch expects that Abbott will maintain adequate liquidity through cash generation, bank credit and access to the capital markets.

Leverage Consistent with 'A' Rating: Abbott's current leverage (total debt/EBITDA) of 1.9x and above 1.5x for the most recent five quarters is more consistent with an 'A' credit rating for its operating profile. Fitch now expects that Abbott will balance its investment needs with shareholder-focused activities, so that it operates with leverage of 1.7x-1.9x. Adequate growth, margin support and solid FCF (cash flow from operations minus capital expenditures and dividends) should mitigate the need for significant increases in the company's total debt.

Stable Operations: Fitch forecasts that Abbott's diversified product portfolio will continue to produce mid-single-digit organic growth in the intermediate term, given the strength of its product offerings and its geographic mix. However, adverse foreign exchange movements will likely hamper reported growth in the near term, although margins should remain fairly insulated from the trend. Revenue growth and margin support should provide for solid FCF generation.

Emerging Markets Supporting Growth: Fitch expects the majority of Abbott's growth will continue to come from emerging markets. Abbott expects to generate roughly 50% of its revenues from emerging markets in 2015, fueled by the strong growth in those markets, as well as the divestiture of its developed-market Established Pharmaceuticals business. Nutrition, Diagnostics and Established Pharmaceuticals, in particular, should benefit from the rapidly growing middle class.

Nearly all purchases in these markets are paid for by consumers. This is in contrast to developed markets, where the vast majority of purchases involve third-party payers. As such, rising disposable income is an important driver of demand in these markets. As evidence of the company's commitment to emerging markets, it opened two nutritional manufacturing plants last year in China and India, plus a pilot plant in Singapore.

New Product Flow: Abbott continues to refresh its product portfolio across all of its business segments, helping to drive growth through market expansion and/or market penetration. Newer products with improved efficacy and safety profiles often garner value-added prices, offering support for margins. Many of the company's launches are tailored to specific geographies. For example Abbott recently launched new infant nutritional formulas (Similac QINTI and Eleva) in China.

In the self-testing diabetic market, the company launched FreeStyle Libre, an improved blood glucose monitor. Abbott is developing and launching its next-generation diagnostic platforms, including the IRIDICA (molecular diagnostic platform to quickly detect and identify the causative organisms causing infections in patients) launch in Europe.

MitraClip, a medical device for mitral regurgitation, is relatively new and is gaining traction in the market. XIENCE Alpine, a drug-eluting stent for treating de novo chronic total coronary occlusions, was recently launched in the U.S. TECNIS Multifocal Low Add is an intraocular lens with an improved ability to reduce color distortion at near focus and at a distance.

Select Market Headwinds: Abbott faces a few challenges in select geographic markets, including restrictive reimbursement rates for diabetic supplies in the U.S. Restrained budgets in Europe pose headwinds, although they appear to be moderating. Unfavorable foreign exchange rate movements are expected to hamper reported top-line growth. However, the negative effect on margins is muted, given that the company has significant operations (costs) in the same geographies that are experiencing currency devaluation.

Durable Margin Improvement

Fitch anticipates that Abbott will continue to focus on driving efficiencies across its business segments, in an effort to support/improve margins. During 2014, the company made progress in improving the cost structure in its Nutrition, Established Pharmaceutical and Diagnostic segments, while also taking out some general and administrative corporate costs. Fitch believes the margin improvements are largely sustainable over the intermediate term and bode well for cash generation and debt leverage.

Solid FCF: Fitch estimates that Abbott will generate solid cash flow of roughly $1.6 billion - $1.7 billion in 2015, driven by incremental revenue growth and moderately improving margins. Capital expenditures and dividends are expected to steadily increase during the forecast period, as the company invests for growth and aims to satisfy shareholders' return requirements. FCF should be sufficient to fund moderate share repurchases and targeted acquisitions.

Growth/Shareholder-Focused Cash Deployment: Fitch believes Abbott will be opportunistic with cash deployment as it weighs potential returns for shareholders. As such the company will likely remain acquisitive, focusing on companies or device platforms that offer innovation and growth, as technological advancement in the device sector remains relatively fragmented. Abbott may also consider targets that offer further expansion opportunities into favorable geographies. Share repurchases will likely continue, especially in the absence of viable acquisition targets, and the company will likely pursue a policy of consistently increasing its dividend.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Abbott include:

-- Low-single-digit reported revenue growth with organic growth in nutrional products and pharmaceuticals being offset by negative foreign exchange rate effects.

-- Gradually improving margins, particularly in Nutritional Products and Diagnostics, given Abbott's efforts to improve efficiencies in these two segments.

--Annual FCF (cash flow from operations minus capital expenditures minus dividends) of $1.6 billion to $1.7 billion during 2015.

--Targeted acquisitions with no strategic, transformative transactions.

--Continued share repurchases, especially in the absence of viable acquisition targets.

--Leverage to range between 1.7x-1.9x during the next few years driven by a growth/shareholder-return capital deployment posture offsetting a steadily improving operating profile.

LIQUIDITY

Fitch expects Abbott to maintain adequate liquidity, as the company had approximately $9.9 billion in cash and short-term investments at March 31, 2015 and its unused $5 billion revolving credit facility that expires in July 2019. However, the company had roughly $2.9 billion in short-term borrowings backed by the credit facility. Abbott generated approximately $920 million in FCF during the latest 12-month (LTM) period ended March 31, 2015. In addition, the company should continue to have ample access to public debt markets.

At March 31, 2015, Abbott had approximately $8.9 billion in debt outstanding (including the $2.9 billion in short-term borrowings). Fitch believes the company's debt maturities are manageable, with no significant maturities until 2019. Fitch's forecasts assume that Abbott will refinance most of these maturities with the proceeds from new debt issuances.

RATING SENSITIVITIES

Positive: While Fitch does not anticipate an upgrade in the near to intermediate term, future developments that may, individually or collectively, lead to positive rating action include the following:

-- Abbott committing to and operating with leverage stronger than 1.5x;

--Maintaining relatively stable operations and solid FCF that would support a lower-leveraged capital structure.

Negative: Future developments that may, individually or collectively, lead to negative rating action include the following:

-- Debt above 2.0x EBITDA without the prospect for timely deleveraging, which could result from a scenario in which revenue and margins are significantly stressed (more than Fitch anticipates);

-- Resulting FCF weakens and capital deployment is not adjusted to reduce the company's need for debt financing;

-- Significant debt-financed share repurchases or acquisitions in the near term could prompt a negative rating action, as Abbott has limited flexibility associated with the company's current leverage.

RATING ACTIONS

Fitch has downgraded Abbott's ratings as follows:

--Long-term IDR to 'A' from 'A+';

--Senior unsecured debt rating to 'A' from 'A+';

--Bank loan rating to 'A' from 'A+'.

Fitch has affirmed Abbott's short-term ratings as follows:

--Short-term IDR at 'F1';

--Commercial paper rating at 'F1'.

The Rating Outlook on the long-term ratings is Stable.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984836

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Fitch Ratings
Primary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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