|[July 09, 2014]
Fitch Affirms Boston Scientific's IDR at 'BBB-'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed Boston Scientific Corp.'s (NYSE: BSX)
long-term IDR at 'BBB-' with a Stable Outlook. A full list of BSX's
ratings follows at the end of this release. The rating action applies to
approximately $4.25 billion of debt.
KEY RATING DRIVERS:
--Fitch expects BSX will operate with relatively stable leverage (total
debt/EBITDA) of 2.3x-2.5x during the next 12 months, despite a
challenging operating environment. However, current leverage of 2.44x at
March 31, 2014 leaves only modest flexibility within BSX's 'BBB-' rating
--Fitch forecasts that BSX's improving operational performance will
generate consistently solid FCF, given relatively manageable CAPEX
requirements. BSX is expected to maintain adequate liquidity through
revolver availability and access to the capital markets.
--BSX's Implantable Cardioverter Defibrillator (ICD) and drug-eluting
stent (DES) segments are expected to gradually improve, as (i) procedure
volumes stabilize, (ii) the company introduces new products into the
space that offer opportunities for incremental share gains and margin
support and (iii) growth in emerging markets begins to contribute more
significantly to revenues.
-- BSX's other business segments, which generate roughly 63% of BSX's
total firm sales are expected to deliver, in the aggregate, solid
--BSX has made progress in mitigating its litigation risk through
settlements and some legal victories. Nevertheless, BSX is still facing
a few legal actions that pose material financial risks.
--Fitch forecasts that BSX will generate $800 million to $900 million in
free cash flow (FCF) during 2014 and prioritize cash deployment for
targeted acquisitions and share repurchases.
STABLE OPERATIONS AND LEVERAGE IN NEAR TERM
Fitch expects that operational headwinds will moderate for BSX during
the next 12 months as new product introductions help to support margins
and revenue growth. This should also offset the negative effect of
pricing pressures on existing products and moderate shifts in treatment
Nevertheless, with leverage at 2.44x, BSX will need to keep debt levels
basically flat, in order to maintain leverage within the 2.3x-2.5x
range, leaving only modest flexibility within BSX's 'BBB-'' credit
rating. Fitch does expect that improved growth and profitability will
enable BSX to reduce leverage without significant reliance on debt
SOLID CASH FLOW FORECASTED
Fitch forecasts that BSX will generate $800 million to $900 million of
FCF during 2014. Moderately improving sales and margins through new
product introductions and continued cost control efforts are expected to
drive solid cash flow from operations. Capital expenditure requirements
for 2014 are forecasted to be manageable in the range of $240 million -
$250 million. In addition, Fitch believes BSX will continue to generate
consistently strong FCF during the intermediate term.
IMPROVING ICD AND DES SEGMENTS
BSX's ICD and DES businesses are expected to gradually improve during
the next 12-24 months. The stabilizing of surgical procedures should
continue to stabilize for both segments, driven by favorable comparisons
of a multi-year period of soft procedure volumes resulting from the
publication of negative clinical data identified in two large
retrospective studies. BSX will continue to introduce new products into
these two markets, offering the company a number of opportunities to
incrase share and revenue. Longer-term, BSX's investment in emerging
markets is expected support revenue growth.
STEADY PERFORMANCE IN REMAINING SEGMENTS
Endosurgery, Neuromodulation, Peripheral Interventions and
Electrophysiology are expected, in the aggregate, to deliver solid
single-digit growth. These segments generate roughly 63% of BSX's total
firm sales. The medical devices in these segments are experiencing
decent growth and are not as highly priced as pacemakers and ICDs. Given
the relatively smaller dollars at stake, payers do not appear as focused
on price. In addition, Fitch expects BSX will continue to launch new
higher-margin products in these respective markets. As such, Fitch
believes that segment margins will remain somewhat stable.
IMPROVING BUT MEANINGFUL LITIGATION RISK
BSX continues to make progress in resolving litigation issues, resulting
in an improved litigation risk profile during the past five years.
However, some financial risk related to other litigation remains and BSX
will need to prioritize cash accordingly for potential settlements.
Fitch's rating action assumes there will be some cash settlements will
be made by BSX. However, a significant judgment against the company
regarding the JNJ contract lawsuit regarding the Guidant acquisition
that would require meaningful debt could prove problematic for the
company's credit rating.
CASH DEPLOYMENT FOCUSED ON (News - Alert) GROWTH AND SHAREHOLDERS
Fitch believes BSX's acquisition strategy will remain targeted, focusing
on areas that offer innovation and growth. BSX will likely balance share
repurchases and acquisitions depending on the availability of attractive
targets and in lieu of debt reduction. Fitch forecasts that BSX will
generate $800 million to $900 million in FCF during 2014, which should
be sufficient to fund targeted acquisitions and share repurchases. As
such, Fitch does not expect significant increases in debt, absent large
BSX has adequate liquidity provided by positive FCF and access to the
credit markets. FCF for the latest 12-month period (LTM) ending March
31, 2014 was $837 million. At the end of the period, BSX had
approximately $217 million in cash/short-term investments; nearly full
availability on its $2 billion revolver which matures on April 18, 2017;
and full availability on its $300 million 364-day accounts receivable
facility which matures in June 2015. BSX had approximately $4.2 billion
in debt, with roughly $400 million maturing in 2015, $600 million in
2016, and $250 million in 2017. Fitch anticipates that BSX will
refinance its maturities with debt issuances rather than pay them down.
Positive: Future developments that may, individually or collectively,
lead to positive rating action include the following:
--Continued operational improvements that support long-term positive
revenue growth and margin stability/improvement;
--An operational profile that could lead to significant and durable
increases in FCF;
--Cash deployment policy and resulting capital structure that would
durably sustain leverage below 2.2x-2.3x.
Negative: Future developments that may, individually or collectively,
lead to negative rating action include the following:
--Material and lasting deterioration in operations and FCF;
--Persistent increase in leverage approaching 3.0x;
--Leveraging acquisitions without the prospect of timely debt/leverage
--Large legal settlement(s) that would need to be funded with
significant debt issuance(s).
Fitch has affirmed the following ratings for BSX with a Stable Outlook:
--Long-term IDR at 'BBB-';
--Unsecured bank credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
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
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