Fitch Rates Thermo Fisher's Senior Notes 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB' rating to Thermo Fisher Scientific Inc.'s (Thermo Fisher) USD seven-year senior notes offering. Fitch expects that the proceeds of the issue will be used to redeem the outstanding $1 billion principal amount of the company's 2.25% senior notes due Aug. 15, 2016. The Rating Outlook is Stable.

The ratings apply to $12.5 billion of debt at Dec. 31, 2015. A full list of current ratings follows at the end of this press release.

KEY RATING DRIVERS

--Thermo Fisher has demonstrated solid and consistently paced improvement in credit metrics since its Life Tech acquisition, using FCF and proceeds from business divestitures to reduce post-acquisition debt balance by about $4.6 billion. Thermo Fisher's year-end 2015 leverage of 3.0x is consistent with Fitch's target for the 'BBB' rating.

--Fitch views the possibility of aggressive capital management, and not operating risk, as Thermo Fisher's key credit risk. Capital deployment for acquisitions and shareholder payments has occasionally contributed to higher debt levels and deterioration of credit metrics, reducing financial flexibility in the aftermath of leveraging transactions.

--Thermo Fisher's diversification across customer markets and product categories helps to mitigate the impact of cyclical downturns or secular headwinds to sales or profitability in any one of the company's end markets.

--Thermo Fisher's ample FCF, which could exceed $3 billion in 2016, should be sufficient to repay any debt issued to finance bolt-on acquisitions, as well as to fund share repurchases of at least $1 billion in 2016.

--The integration of the Life Tech business is proceeding smoothly, demonstrated by Thermo Fisher raising the target for cost synergies; revenue synergies were a tailwind to growth in 2015 and this should continue in 2016. These benefits have helped Thermo Fisher generate EBITDA growth despite meaningful headwinds from foreign currency translation.

KEY ASSUMPTIONS

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

--Thermo Fisher's gross debt leverage drops to 2.8x by the end of 2016 and 2.5x by year-end 2018, reflecting stable debt levels and EBITDA growth.

--Revenue growth of about 3%-4% over the forecast period. This reflects Fitch's general expectations for growth in the life sciences sector. Persistent headwinds in developed industrial markets will be offset by stronger growth in emerging markets and biopharmaceutical end markets.

--The operating EBITDA margin rises slightly through the end of 2018 due to some continued cost benefits from the integration of Life Tech, as well as a stable pricing environment.

--CFO is more than sufficient to fund a slightly increasing dividend and greater than $4 billion of bolt-on acquisitions and over $4 billion of share repurchases over the next three years.

--Annual FCF exceeds $3 billion throughout the forecast period.

RATING SENSITIVITIES

Thermo Fisher's favorable business profile, with significant scale, good end-market diversification and improved product mix following the Life Tech acquisition, supports the ratings. Therefore, rating actions are more likely to be triggered by capital deployment decisions than by an operational stress scenario.

Maintenance of the 'BBB' Issuer Default Rating contemplates Fitch's continued expectation that Thermo Fisher will be an active acquirer going forward, while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x in most periods. Fitch recognizes that gross leverage may occasionally exceed this range in the immediate aftermath of leveraging transactions. If Thermo Fisher were to complete a leveraging transaction that cast doubt on its ability to return leverage to roughly 3.0x within the following 18-24 months, it could result in a downgrade.

A near-term positive rating action is not anticipated, since it would require a commitment from the company to maintain leverage below 2.5x.

DEBT REDUCTION COMPLETED ON SCHEDULE

Despite funding a high level of business development activities and returns to shareholders, Thermo Fisher has a generally strong track record of maintaining gross leverage within a publicly stated target range of 2.5x-3.0x over most periods.

Upon the announcement of the Life Tech acquisition in second quarter 2013, the company suspended its share repurchase program and management made debt reduction the priority for cash deployment during 2014 and 2015. In 2014 and 2015, Thermo Fisher applied the majority of free cash flow (FCF; CFO less capital expenditures and dividends) plus about $1 billion in proceeds from business divestitures to debt reduction, reducing the post-acquisition debt balance by about $4.6 billion. As a result, Thermo Fisher has demonstrated solid and consistently paced improvement in credit metrics since first-quarter 2014.

At Dec. 31, 2015, Fitch calculates gross leverage of roughly 3.0x, versus a pro forma level of 4.5x at the end of 2013, which included $11.3 billion of additional debt used to help finance the Life Tech acquisition. Thermo Fisher's current leverage is consistent with the 3.0x target that Fitch articulated as consistent with a 'BBB' rating in the wake of the company's acquisition of Life Tech.

AGGRESSIVE CAPITAL DEPLOYMENT PRESSURES CREDIT PROFILE

Several facets of the firm's credit profile could support higher ratings than the current 'BBB'. These factors include the company's significant scale, good end-market diversification and product mix, as well as its constructive growth outlook, solid margins, and robust cash flow profile. Fitch therefore views the possibility of aggressive capital management, and not operating risk, as Thermo Fisher's key credit risk.

Notwithstanding Thermo Fisher's publicly stated leverage target of 2.5x-3.0x (calculated on a gross, unadjusted basis), the company has shown that it is comfortable increasing leverage well above this level to fund a large acquisition. The downgrades of Thermo Fisher's IDR in 2012 and 2013 reflected aggressive capital deployment that contributed to higher debt levels and deterioration of credit metrics. Although funding sources for the Life Tech acquisition included approximately $3 billion of equity proceeds and $2 billion of cash on hand, debt funding drove pro forma leverage to nearly 4.5x versus a pre-acquisition level of 2.6x.

Fitch continues to expect that Thermo Fisher will be an active acquirer going forward, while maintaining run-rate gross debt/EBITDA of between 2.8x-3.2x, which Fitch views as supportive of Thermo Fisher's 'BBB' ratings.

The company funded three fairly sizeable acquisitions in 2011-2012, as well as a high level of share repurchases, although the company did suspend share repurchases in the immediate aftermath of the Life Tech acquisition before resuming stock buy backs of $500 million in 2015. Thermo Fisher also instituted a regular dividend in 2012, which now consumes about $240 million of cash from operations (CFO) annually. Fitch currently models $1 billion of share repurchases and $240 million of dividends for calendar year 2016, in addition to $1.8 billion of acquisitions.

LIFE TECH INTEGRATION AHEAD OF SCHEDULE

Thermo Fisher appears to be making good progress in the integration of Life Tech. The Life Solutions Segment, which is primarily comprised of the Life Tech business, posted organic revenue growth of 7% in 2015. Fitch thinks this business could continue to post above market organic growth given the potential for revenue synergies in end-markets where the companies had significant overlap, including academic, government and biopharmaceutical research settings.

Another benefit of the business combination is improved profitability and greater sales predictability for Thermo Fisher. In 2015, the company's gross operating margin improved by about 150 bps compared to the prior year period, while the operating margin improved by about 140 bps. In part, this reflects Life Tech's high proportion of consumables sales. The addition of the Life Tech portfolio of products increased the proportion of Thermo Fisher's sales that can be classified as 'recurring' consumables or services to 62% from 56% before the acquisition. Sales of consumable products are highly profitable and fairly predictable, since demand is somewhat less susceptible to the headwinds that are influencing sales of larger capital equipment in the life sciences sector.

The realization of cost synergies is also supporting growth in the operating margin. The company reports that it realized $130 million in cost synergies in 2015, ending the year at the company's original targeted three year run rate. This is somewhat above the original synergy target of $115 million for 2015. Thermo Fisher also achieved $90 million of revenue synergies in 2015.

Thermo Fisher expects to deliver an additional $55 million of year-over-year cost synergy benefits in 2016, as well as a further $60 million of revenue synergies that would enable Thermo Fisher to achieve its three-year goal of $350 million of total cost and revenue synergies in 2016.

AMPLE LIQUIDITY

Thermo Fisher's solid financial flexibility and strong liquidity is an important factor supporting the investment grade credit profile. At Dec. 31, 2015, Thermo Fisher's sources of liquidity included $452mm of cash on hand and $1.935 billion of capacity under the $2 billion revolving credit facility. The credit facility is back-up for the CP program and if the revolver is drawn the company intends to leave an available balance at least equal to the amount of CP outstanding. At Dec. 31, 2015, $50 million of CP was outstanding, versus no amounts outstanding at Dec. 31, 2014.

Cash generation has historically been strong and consistent. Fitch forecasts that Thermo Fisher will produce at least $3 billion in FCF annually for the next several years. The debt maturity schedule of the company's senior notes is laddered, following recent refinancing of $1.3 billion of 2016 debt.

FULL LIST OF RATING ACTIONS

Fitch currently rates Thermo Fisher as follows:

Thermo Fisher Scientific, Inc.

--Long-term IDR and senior notes 'BBB';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Life Technologies Corp.

--Long-term IDR and senior notes 'BBB'.

The Rating Outlook is Stable.

Date of relevant rating committee: March 1, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001975

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160404006513/en/

Fitch Ratings
Primary Analyst
Gregory Dickerson
Director
+1-212-908-0220
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
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, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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