Thermo Fisher Scientific (Finance I) B.V. — Moody’s upgrades Thermo Fisher to A3; stable outlook

Rating Action: Moody’s upgrades Thermo Fisher to A3; stable outlookGlobal Credit Research – 25 Jan 2022New York, January 25, 2022 — Moody’s Investors Service (« Moody’s ») upgraded the senior unsecured long-term ratings of Thermo Fisher Scientific Inc. (« Thermo Fisher ») and Thermo Fisher Scientific (Finance I) B.V. to A3 from Baa1. At the same time, Moody’s affirmed the Prime-2 commercial paper ratings of Thermo Fisher, Thermo Fisher Scientific (IVGN) B.V. and Thermo Fisher Scientific (Finance I) B.V. Following these actions, the outlook is stable. »The upgrade to A3 reflects our expectation for strong business performance, excellent global scale and diversity, and financial policies that support a higher rating, » stated Michael Levesque, Moody’s Senior Vice President.Although the company’s aggressive M&A strategy continues to present event risk, Moody’s anticipates that Thermo Fisher’s strong free cash flow will result in rapid deleveraging following debt-financed acquisitions. Thermo Fisher’s recent $21 billion acquisition of PPD, Inc. resulted in pro forma gross debt/EBITDA of approximately 2.8x using Moody’s calculations and estimates, which is within Moody’s expectations for the A3 rating. This financial leverage figure benefits from material earnings contribution from COVID-19 testing revenue, which is unlikely to recur in that magnitude. However, Moody’s anticipates that strong growth in Thermo’s core businesses will help mitigate this decline, keeping gross debt/EBITDA below 3.25x.Upgrades:..Issuer: Thermo Fisher Scientific Inc…..Senior Unsecured Notes, to A3 from Baa1..Issuer: Thermo Fisher Scientific (Finance I) B.V…..Gtd Senior Unsecured Notes, to A3 from Baa1Affirmations:..Issuer: Thermo Fisher Scientific Inc…..Commercial Paper, Prime-2..Issuer: Thermo Fisher Scientific (Finance I) B.V…..Commercial Paper, Prime-2..Issuer: Thermo Fisher Scientific (IVGN) B.V…..Commercial Paper, Prime-2Outlook Actions:..Issuer: Thermo Fisher Scientific Inc…..Outlook, remains Stable..Issuer: Thermo Fisher Scientific (Finance I) B.V…..Outlook, remains StableSocial and governance considerations are material to the rating action. The ongoing global COVID-19 pandemic has created more opportunities for Thermo Fisher than risks, due to its high revenue and earnings from both COVID testing equipment and vaccine products. These have enhanced the credit profile in the form of higher cash flow, which is likely to be used for acquisitions that enhance Thermo Fisher’s business profile, such as PeproTech, Inc. From a governance standpoint, Thermo Fisher’s articulated financial policies through 2025 will involve steadily increasing debt to fund acquisitions and shareholder payouts, but with credit ratios that Moody’s believes support the higher credit rating. Further, the company has demonstrated a consistent track record for deleveraging following large acquisitions.RATINGS RATIONALEThe A3 rating is supported by Thermo Fisher’s significant scale and leading market position in the life science industry. The rating also reflects the strength of the company’s revenue growth and good free cash flow. Further, Thermo Fisher has strong geographic, product and end-user market diversity, as well as a recurring and historically predictable revenue stream as more than half of revenue is generated from the sale of consumables and services. The acquisition of PPD, Inc. bolstered Thermo Fisher’s service offerings and deepened its relationships with key biopharmaceutical customers. COVID response revenues will continue to enhance earnings until the pandemic more substantially ebbs.Tempering these strengths, the rating is constrained by an aggressive stance toward acquisitions, and shareholder payouts. Moody’s expects that Thermo Fisher will continue these activities in light of its capital allocation policies which include $48 billion of anticipated capital deployment from 2023 to 2025, 60%-75% of which is targeted for acquisitions.The stable outlook reflects Thermo Fisher’s good track record of deleveraging and strong free cash flow, and Moody’s expectation that any material debt-financed acquisitions would be followed by rapid deleveraging such that debt/EBITDA declines below 3.25x.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody’s could upgrade the ratings if Thermo Fisher continues solid operating performance, successfully integrates PPD, and demonstrates a reduced appetite for large debt-financed acquisitions, as well as a commitment to more conservative financial policies. Specifically, if Moody’s believes Thermo Fisher will operate with adjusted debt/EBITDA below 2.75x on a sustained basis, the ratings could be upgraded.The ratings could be downgraded if Thermo Fisher adopts more aggressive financial policies, or faces a material slowdown of growth. Specifically, debt/EBITDA sustained above 3.25x could result in a downgrade.Headquartered in Waltham, Massachusetts, Thermo Fisher is a diversified manufacturer and distributor of analytical instruments, equipment, reagents and consumables, and provides software, and services for research, manufacturing, analysis, discovery and diagnostics. Revenues for the 12 months ended October 2, 2021 totaled approximately $39 billion including about $10 billion of COVID response revenue.The principal methodology used in these ratings was Medical Products and Devices published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1278812. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Michael Levesque, CFA Senior Vice President Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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