) to 'BBB+' from 'BBB' and affirmed the company's 'A-2' short-term corporate credit and commercial paper ratings.
The ratings were also removed from CreditWatch, where they were placed on Aug. 1, 2002. The outlook is stable.
These actions recognize that St. Jude has strengthened its financial profile considerably through years of product innovation, increasingly strong operating cash flow, debt reduction, and disciplined reinvestment. These efforts have resulted in a credit profile that is sufficiently conservative to offset near-term technology risks and support a ratings upgrade.
In tandem with these rating actions, Standard & Poor's also withdrew the company's 'BBB' senior unsecured bank loan rating. The facility had matured and was not renewed. As of Dec. 31, 2002, St. Jude had no debt outstanding.
St. Paul (Minn.)-based St. Jude is a leading manufacturer of mechanical heart valves, pacemakers, defibrillators, and other premium, high-technology-content cardiac devices. The company's success in innovating and introducing next-generation products has created a focused but very competitive device portfolio. Supplemented by a strong financial profile, these strengths largely outweigh the ongoing uncertainties of technological change and a lack of disease-state diversification. Sales growth is expected from further market penetration of the Atlas and Epic dual-chamber implantable cardioverter defibrillators, from the AFx Atrial Fibrillation Suppression technology in pacemakers, from new sophisticated pacemakers, as well as from cardiac surgery and vascular sealing products, and later from a new device for congestive heart failure.
These factors, together with a continued strong commitment to R&D of 12% of sales and modest-sized acquisitions and technology licensing investments, should continue to support robust financial measures that provide considerable insulation against near-term competitive risks. Operating margins and return on permanent capital have remained strong at 29% and 25%, respectively. Still, earnings quality is tempered somewhat by unrecognized stock-based employee compensation expenses. Clients' reimbursement pressures remain an operating challenge. And global economic conditions will also affect the 34% of sales generated outside of the U.S. Still, financial hedges reduce foreign exchange exposure. Although the company's capital structure at year-end 2002 was virtually unleveraged, St. Jude subsequently financed the majority of its $230 million purchase of Japanese distributor Getz Brs. Co. with low-interest yen-denominated debt. St. Jude is not expected to pursue large-sized acquisitions. Instead, additional moderate-sized investments are possible over time, consistent with a conservative financial policy.
Liquidity: In addition to increasing levels of operating cash flow, at Dec. 31, 2002, St. Jude had more than $400 million of cash and short-term investments, about half of which was held overseas. The company elected not to renew its $350 million senior unsecured revolving credit facility when it expired in March, 2003.
These resources and a very conservative balance sheet should provide considerable financial flexibility to meet medium-term needs. Capital expenditures are expected to remain well within operating cash flow. St. Jude does not pay a common stock dividend, and the company presently has no program to repurchase shares. St. Jude is a defendant in various patent infringement and product liability lawsuits which, while not uncommon in the medical technology industry, could, if successful, have a material financial impact on certain core products. However, associated liabilities, if any, cannot currently be estimated. The company maintains product liability insurance to address the financial obligations, if any, of litigation related to Silzone-coated mechanical heart valves, which were voluntarily recalled in 2000. Other liabilities, including post-retirement benefit obligations, appear manageable at this time. With a strong common share price, St. Jude currently is well-positioned to access equity capital, if needed.
Outlook: The stable outlook reflects expectations that St. Jude will sustain a cardiac device portfolio that generates very strong cash flow, while practicing disciplined reinvestment policies. Moderate-sized external investments are possible within this profile. St. Jude's somewhat narrow product slate makes it more vulnerable to technological change than its main competitors. As such, the resilience of each product line and the company's liquidity position are keenly relevant to ratings. From Standard & Poor's CreditWire