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Fitch Affirms CareFusion Corporation's Ratings at 'BBB'; Outlook Stable

^{Published on 2010-09-10 12:00:32 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings for CareFusion Corporation (NYSE: CFN):

--Issuer Default Rating (IDR) at 'BBB';

--Senior unsecured bank facility at 'BBB';

--Senior unsecured notes at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The ratings apply to approximately $1.4 billion in debt, and the Rating Outlook is Stable.

The rating action reflects CFN's business model that is generating growth, despite relatively weak capital spending trends at hospitals, which accounts for roughly 40% of CFN's revenues. Stable margins and debt levels resulted in leverage (total debt/EBITDA) of 1.9 times (x) at June 30, 2010. In addition, the company generated significant free cash flow (operational cash flow minus capital expenditures) of approximately $700 million. Fitch expects demand will improve during the next 12-24 months as hospitals update their equipment and prepare for some of the quality requirements for health care reform.

The key rating drivers for this credit are leverage measured as total debt-to-EBITDA, relative margin stability and free cash flow. The 'BBB' leverage range for this credit is approximately 1.5x-2.0x. As such, CFN currently has little to no flexibility within the 'BBB' rating category with regard to leverage. Margin variance of less than 100 basis points and material free cash flow generation are expected for this rating.

During the first year following the spin-off, CFN has managed to generate profitable growth during a challenging economic/employment environment and a period of weak capital spending by hospitals. The positive trend was supported by CFN's products, which help to reduce labor costs, medication errors, hospital acquired infections and other adverse medical events at hospitals. Emergency preparedness for the H1N1 virus and the resumption in shipping of Alaris infusion pumps also provided a one-time, positive impact on growth.

Improving margins owing to a favorable shift in sales mix and good cost control supports Fitch's expectation that CFN will generate free cash flow of $300 million to $400 million in 2011, enabling the firm to fund a targeted acquisition while maintaining stable levels of cash and debt. The positive trends in margins and cost control are expected to continue in the near term, as the company focuses on a restructuring plan aimed to reduce costs by more than $100 million within the next two years.

The IRS currently has ongoing audits of fiscal years 2001 through 2007 and claims that CAH owes additional taxes related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among its subsidiaries. CFN agreed to assume the responsibility for this issue at the spin-off. The timing and ultimate outcome of this issue remain uncertain. As such, it poses some financial risk to CFN.

Fitch expects CFN will further expand its operations outside of the U.S., particularly in Europe, where it currently has limited market presence. Given the fragmented nature of the market with respect to medical protocols, delivery and reimbursement, CFN will likely proceed with international expansion at a judicious pace. Fitch also expects CFN will remain acquisitive, focusing on targeted acquisitions that complement its core businesses, while maintaining a financial profile that is supportive of its 'BBB' credit rating, including leverage of 1.8x-1.9x.

At June 30, 2010, CFN had strong liquidity of approximately $1.02 billion in cash and short-term investments and full availability under its three-year $480 million bank facility, which expires in 2012. Total debt outstanding was roughly $1.41 billion, with approximately $250 million maturing in 2012, $450 million in 2014 and $700 million in 2019. Leverage was 1.96x for the latest 12-month period ended June 30, 2010.

Additional information is available at [ www.fitchratings.com ].

These rating actions reflect the application of Fitch's current criteria which are available at [ www.fitchratings.com ] and specifically include the following reports:

--'Corporate Rating Methodology' (Aug. 16, 2010);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).

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