Fitch Ratings has assigned a 'BBB' rating to
Fitch expects the net proceeds from the offering to fund the repayment of all of the aggregate principal amount outstanding of CAH's 3.08% senior notes due
Fitch currently rates Cardinal's Long and Short-term Issuer Default Ratings 'BBB' and 'F2', respectively. The Rating Outlook is Positive, which reflects Fitch's expectation that CAH will operate with lower financial leverage through FY 2026 compared with the recent past. Fitch also expects CAH to report stronger earnings in the medical segment resulting from remedial actions to address inflation, demand trends and cost optimization.
Key Rating Drivers
Stable Pharmaceutical Segment: CAH's 'BBB' Long-Term IDR benefits from a stable pharmaceutical segment operating profile and good cash flow from operations. Cash generation is supported by steady pharmaceutical demand, increasing revenue and cash flow opportunities tied to specialty drugs and an oligopolistic drug-distribution industry in the
Fitch expects annual cash flow from operations (CFO) between
Improved Leverage Profile: Fitch expects CAH's leverage profile to continue improving because of debt repayment and anticipated EBITDA growth. However, Fitch expects debt outstanding as of
Fitch calculated CAH's EBITDA leverage at 2.7x-3.0x during fiscals 2019-2023 and projects it will be approximately 2.0x over fiscals 2024-2026. Overall, EBITDA will fluctuate at about
Improving Outlook for Medical Segment: CAH's medical segment continues to experience weak financial results, primarily due to inflation and global supply chain constraints. However, performance could improve due to a credible improvement plan designed to address challenges, along with the design of accelerating
Customer Concentration: A significant portion of revenue for CAH and its peers in recent years came from a concentrated group of customers. In fiscal 2023, revenues related to
Fitch Litigation Assumptions: Fitch believes CAH has significant financial flexibility to settle the estimated liability of
New
Derivation Summary
The credit profiles of CAH and its peers,
Those strengths are somewhat offset by weak performance, albeit improving within the medical segment; persistent, restructuring, litigation and regulatory costs; and ongoing changes in the
CAH's leading competitors, Cencora and MCK exhibited lower financial leverage and higher profitability in recent years and Fitch expects them to do so over the medium term. Both Cencora and MCK developed or acquired significant capabilities to service pharmaceutical manufacturers of specialty drugs, which is one of the fastest growing and profitable areas of pharmaceutical distribution. CAH plans to expand its capabilities in this area, which has the potential for improved profitability relative to peers.
Fitch believes the guarantee from CAH of
The 'F2' Short-Term IDR is supported by the company's good financial flexibility, financial structure and operating environment. CAH's financial structure subfactor of 'a-', financial flexibility subfactor of 'bbb+' with very comfortable liquidity of 'a', and a well-spread maturity schedule of long-term debt all support the 'F2' Short-Term IDR. The 'F2' rating also benefits from committed revolving credit facilities that back-stop CP issuance.
Key Assumptions
Pharmaceutical segment revenue CAGR of approximately 8%-9% through 2026, and medical segment revenue CAGR of approximately 3% through 2026;
EBITDA margins remain near 1.00% over the forecast;
Litigation settlements and legal expenses of approximately
Working capital is assumed to be net positive over the forecast at approximately
Capex of approximately
Share repurchases assumed by Fitch at approximately
Acquisitions are not assumed;
All debt is assumed to be refinanced over the forecast at rates between 5.0% and 5.5%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA leverage (after opioid payments) expected to remain below 2.5x;
FCF (after opioid payments)/debt expected to remain above 20%.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A deepening of recent shifts in the industry's competitive and pricing dynamics, such as lower than expected brand name product inflation, higher than expected margin compression or generic price erosion; and reduced profitability related to key contract revisions;
Debt-funded acquisitions, share buybacks, material operational issues, declining revenues or evidence of material margin pressure leading to an expectation of EBITDA leverage (after opioid payments) remaining above 3.0x;
FCF (after opioid payments)/debt expected to remain below 15%.
Liquidity and Debt Structure
Ample Liquidity: Fitch believes CAH has ample sources of liquidity based on cash on hand and committed credit facilities; and projected FCF is expected to comfortably cover working capital needs, capex, contractual obligations, dividends and potential litigation settlement payments.
CAH has near full availability under its
The CP program and receivables sales facility program balances were zero as of
Laddered Maturities: Fitch projects FCFs and cash balances will be more than adequate to fund near-term maturities and opioid settlement payments. Debt maturities are manageable and well-laddered with a total of
Issuer Profile
Summary of Financial Adjustments
Fitch has adjusted EBITDA to reflect reported merger and integration expenses, litigation expenses, impairments, state opioid assessments and other charges and credits that are deemed non-recurring.
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
CAH has an ESG Relevance Score of '4' for Customer Welfare - Fair Messaging, Privacy & Data Security due to its exposure to loss contingencies related to opioid litigation that affects
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
(C) 2024 Electronic News Publishing, source