Ortho-Clinical Diagnostics Bermuda Co. Ltd. Outlook Revised To Stable From Positive; Ratings Affirmed

  • Ortho-Clinical Diagnostics Bermuda Co. Ltd. underachieved our fiscal 2018 base-case scenario because of demand softness in the U.S. market and inventory rationalization abroad.
  • As a result, adjusted leverage was 8.3x at Dec. 31, 2018, versus our expectation of 7.7x and free operating cash flow generation was negligible versus our expectation of $60 million. We do not anticipate significant improvement during 2019, but the company should continue generating minimal top line growth and marginally positive free cash flows.
  • On April 12, 2019, S&P Global Ratings affirmed its 'B-' issuer credit rating on Ortho-Clinical and revised the outlook to stable from positive. We are also affirming the 'B-' issue-level rating on the senior secured credit facility and the 'CCC' issue-level rating on the senior unsecured notes. The '3' and '6' recovery ratings are unchanged.
  • The stable outlook reflects our expectation for flat revenue growth (slightly below the broader clinical diagnostics industry) and adjusted leverage sustained above 7.5x.
TORONTO (S&P Global Ratings) April 12, 2019--S&P Global Ratings today took the rating actions listed above. The outlook revision follows Ortho's first full year as a separate entity from Johnson & Johnson, during which the company saw moderate improvements to operating performance but did not reach our base-case expectations. Ortho has undergone substantial cost-savings initiatives since the separation in mid-2017, improving free cash flow generation to a $9 million outflow in 2018 (inclusive of debt issuance costs and foreign exchange losses) from a $27 million outflow in 2017. We expect FOCF to improve moderately to around $40 million in 2019 as these one-time costs roll off However, given the company's significant amount of debt, FOCF to debt remains below 2%, consistent with 'B-'-rated peers.
The stable outlook on Ortho-Clinical reflects our expectation for low-single-digit revenue growth and moderate pricing pressure, in line with the broader clinical diagnostics industry. It also reflects our expectation for minimal, but positive, cash flow generation and high adjusted leverage above 7.5x.
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