Fitch Affirms Agilent's IDR at 'BBB+'; Outlook Revised to Positive

Fri Apr 12, 2013 10:54am EDT

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(The following statement was released by the rating agency) CHICAGO, April 12 (Fitch) Fitch Ratings has affirmed the following ratings for Agilent Technologies, Inc. (Agilent) (NYSE: A): --Issuer Default Rating (IDR) at 'BBB+'; --Senior unsecured revolving credit facility (RCF) at 'BBB+'; --Senior unsecured notes at 'BBB+'. Fitch's proposed actions affect approximately $2.8 billion of debt, including an undrawn $400 million revolving credit facility (RCF) expiring 2016. KEY RATING DRIVERS The ratings and Positive Outlook reflect Agilent's strengthening operating profile due to ongoing revenue diversification. As a result, Fitch expects mid-cycle annual free cash flow (FCF) approaching $1 billion. The ratings and Outlook also reflect Agilent's conservative financial policies with share repurchases limited to excess domestic cash. Fitch expects flat revenue growth in fiscal 2013 with solid emerging market demand and revenues from the 2012 Dako acquisition offsetting lower U.S. government spending, European recession, and more volatile communications order patterns. Fitch expects emerging markets and increasing recurring revenues to fuel mid-single-digit revenue growth beyond the near term. Solid profitability from productivity initiatives should drive nearly $1 billion of FCF for fiscal 2013. Agilent's reduction in flexible workforce, consolidation of manufacturing facilities and streamlining order fulfillment will enable the company to maintain operating margins near current levels. Fitch expects Agilent will maintain global cash levels at more than $1 billion, manage total leverage (total debt to operating EBITDA) below 2x, and limit share repurchases to excess domestic cash levels. Nonetheless, share repurchase activity will increase, given Agilent's $421 million remaining under its current up to $500 million in fiscal 2013 authorization. Fitch believes Agilent will use cash repatriated to the U.S. from overseas to fund stock buybacks. The vast majority of Agilent's FCF is generated overseas, potentially constraining share repurchases beyond fiscal 2013. The Outlook incorporates some headroom for debt-financed domestic acquisitions with subsequent FCF used to bring total leverage back below 2x. The Dako acquisition further diversified Agilent's revenue portfolio and strengthens the company's capabilities and customer reach in cancer diagnostics markets. Dako also expands Agilent's recurring revenues to 30% from 25% of total. Future acquisitions are likely to be smaller in size, outside the U.S., and focused on bio-analytical markets. Agilent's ongoing focus on higher growth bio-analytical markets will further reduce the company's still significant exposure to the more volatile Electronics Measurement (EM) segment. Fitch expects EM to represent less than 45% of total revenues in fiscal 2013, down from nearly 55% five years ago. Fitch believes Agilent's commitment to high levels of research and development (R&D) investment support the company's technology leadership and high retention rates of its significant installed base. R&D spending should remain near 10% of revenues, down slightly from historical levels but higher than that of competitors. RATINGS SENSITIVITIES Fitch believes positive rating actions could result from consistent annual FCF of $1 billion, from share gains resulting in higher than expected revenue growth, or solid execution of cost reduction initiatives driving operating profitability expansion. Negative rating actions could occur if there is: --Negative organic revenue growth or sustained operating profit margin compression in EM, likely due to reduced competitiveness or lower testing penetration in communications markets; --Reduced gross profit margin in the company's bio-analytical markets, signaling product commoditization or less robust growth within developing economies; --Incremental borrowing to support share buybacks. Fitch expects credit protection measures will remain near current levels, driven by Fitch's expectations that profitability will remain near current levels over the intermediate term and that Agilent will refinance upcoming debt maturities. Fitch estimates total leverage was approximately 1.6x for the latest 12 months (LTM) ended Jan. 31, 2013 and should remain below 2x over the intermediate term. Interest coverage (operating EBITDA to gross interest expense) was nearly 15x for the LTM ended Jan. 31, 2013 and should remain well in excess of 10x. The ratings are supported by: --Leading market positions in faster growing and more stable life sciences, chemical analysis, and diagnostics and genomics markets; --Global footprint and increasing end-market, customer, and technology platform diversification; --Conservative financial policies with sufficient overall liquidity, as well as expectations for lower but still solid annual FCF in a downturn. Ratings concerns include: --Mature growth rates and trends toward reduced testing within certain electronic measurement markets; --Substantial R&D requirements to maintain technology leadership; --Potential for higher debt levels over the longer-term to support domestic spending, due to anticipated overseas cash build. As of Jan. 31, 2013, Fitch believes Agilent's liquidity was solid and supported by: --Approximately $2.5 billion of cash and cash equivalents, approximately $1.9 billion of which was located overseas; --An undrawn $400 million senior unsecured RCF expiring October 20, 2016. Agilent's liquidity is also supported by expectations for mid-cycle annual FCF approaching $1 billion. Total debt was approximately $2.4 billion as of Jan. 31, 2013 and consisted of: --$250 million of 2.5% senior notes due Jul. 15, 2013; --$500 million of 5.5% senior notes due Sep. 14, 2015; --$600 million of 6.5% senior notes due Nov. 1, 2017; --$500 million of 5% senior notes due Jul. 15, 2020; and --$400 million of 3.2% senior notes due Oct. 1, 2022. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Jason Paraschac, CFA Senior Director +1-212-908-0746 Committed Chair James Rizzo Managing Director +1-212-908-0548 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Nov. 24, 2009); --'Evaluating Corporate Governance' (Dec. 12, 2007); --'Liquidity Considerations for Corporate Issuers' (June 12, 2007); --'Cash Flow Measures in Corporate Analysis - Amended' (Oct. 12, 2005). Applicable Criteria and Related Research Cash Flow Measures in Corporate Analysis here Liquidity Considerations for Corporate Issuers here Evaluating Corporate Governance here Corporate Rating Methodology here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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