Updated 5:15 p.m.
Moody’s Investors Service changed its outlook on Medtronic Inc. (NYSE:MDT) from stable to negative on concerns that two of the company’s core businesses were in a prolonged market slump.
"Medtronic’s core cardiac rhythm disease management (CRDM) and spinal businesses continue to be negatively affected by a variety of market conditions," Diana Lee, a senior credit officer for the ratings service , wrote in a prepared release. "As a result, we believe Medtronic’s credit metrics may not recover to levels targeted for its A1 rating."
Lee said that Moody’s expects the Fridley, Minn.-based medical device goliath is “likely to continue to experience weak performance in its CRDM and spinal markets, which will negatively affect cash flow generation,” she wrote.
"In combination with higher debt levels, Moody’s believes that it will be more difficult for Medtronic to attain mid-"A" credit metrics (including cash flow from operations to debt of 45% and free cash flow to debt of 30%). If growth rates do not improve or debt financed shareholder initiatives and acquisitions result in Moody’s belief that Medtronic will not be able to attain and sustain mid-"A" credit metrics, the ratings could be downgraded."
She added that Moody’s did not see any ratings upgrade for the company in the near future because of sluggish growth rates, lack of cushion in credit metrics and limited U.S. cash flows, which would make it difficult for Medtronic to fund future acquisitions.
"However, over time, drivers for an upgrade include improvement in core CRDM and spinal segments, continued expansion of non-core business lines, and a more moderate posture toward shareholder initiatives. The ability to sustain stronger credit metrics, including cash flow from operations to debt and free cash flow to debt above 55% and 40%, respectively, could support an upgrade," she wrote.
The ratings service reaffirmed the company’s long term credit rating at A-1, which is still the fifth-highest possible rung of investment-grade territory.
Medtronic spokesman Steven Cragle played down the outlook change in a conversation with MassDevice. He noted that the agency maintained the company’s credit rating and the change wouldn’t result in any increased interest costs for MDT. Cragle pointed out that the concerns Moody’s expressed were related to a widespread slowdown in the cardiac rhythm management business that has affected at least two of the big three players in the market.
He added that the MDT recognized the softness in the CRM market and spine market and has been actively pursuing higher growth market.
“We’re continuing to shift from flat to high growth markets such as diabetes and neuromodulation,” he told us.
As for time expectations related to the slow CRM market, Medtronic CFO Gary Ellis recently told MassDevice that the company expects the slump to be short term in nature.
"Our perspective is that it will come back but it’s going to have an impact on the marketplace right now," he told us.
In May, Medtronic said sales in its CDRM group dropped 5 percent during the 12-months ended April 29, to $5.01 billion, compared to $5.26 billion during fiscal 2010. The drop was primarily attributable to a 6 percent dive in sales of MDT’s defibrillation systems, which went from $3.16 billion in 2010 to $2.96 billion in 2011.
