7 Min Read
Feb 25 - Fitch Ratings has rated Motorola Solutions, Inc.'s (Motorola Solutions; NYSE: MSI) $500 million of 10-year senior notes offering at 'BBB'. Fitch's actions affect $3.9 billion of total debt, including the undrawn $1.5 billion revolving credit facility (RCF). The Rating Outlook is Stable. See the full list of ratings for Motorola Solutions below. The ratings and Outlook reflect Fitch's expectations for overall solid operating performance over the near term, despite macroeconomic headwinds. Motorola Solutions is on track to achieve mid-single-digit annual revenue growth through the intermediate-term, driven by broad-based strength within the Government segment. Spending on public safety networks remains a priority, despite still constrained state and local government budgets, resulting in a healthy demand environment. Solid backlogs and services for existing contracts add revenues and greater visibility. International markets increasingly will drive growth, although North America still represents two-thirds of segment sales. Macroeconomic uncertainty has weakened demand among enterprise customers. Negative Enterprise revenue growth expectations are being exacerbated by iDEN's anticipated revenue roll-off and unfavorable currency movements. Revenues from recently acquired Psion will offset some of this weakness and should enable expansion into adjacent enterprise markets. Revenue growth should drive further operating profit margin expansion, given the company's substantial operating leverage. Fitch expects operating profit margin will approach record levels of 17% over the intermediate term, despite the anticipation for a growing mix of lower gross margin Services sales. Higher profit levels should drive $500 million to $1 billion of annual pre-dividend free cash flow (FCF) through the intermediate term, including approximately $300 million of estimated annual pension contributions. Nonetheless, the company's use of cash for acquisitions and share repurchases will continue to meaningfully exceed annual FCF through 2014. Fitch anticipates Motorola will reach a net debt position over the near term, given the company's appetite for tuck-in acquisitions and $1.5 billion remaining under the prevailing $5 billion share repurchase authorization as of Dec. 31, 2012, which has no expiration date. Nonetheless, Fitch believes the anticipated reduction in cash reduces event risk for the company. The ratings and Outlook contemplate Motorola Solutions moderating stock buybacks to maintain $500 million to $1 billion of domestic cash balances. FCF in the U.S. and the company's ability to efficiently repatriate foreign earnings and existing overseas cash will drive the pacing of share repurchases. Credit protection measures should remain solid for the rating, despite expectations for higher debt levels to support acquisitions and share repurchases. Pro forma for the notes, Fitch estimates total leverage (total debt to operating EBITDA) was approximately 1.4x for the LTM ended Dec. 31, 2012, and believes Motorola Solutions will maintain adjusted total leverage below 2.5x, which accounts for pension obligations. Fitch estimates interest coverage (operating EBITDA to gross interest expense) exceeded 15x for the LTM ended Dec. 31, 2012 and the company will maintain interest coverage above 10x. FCF to debt also should be more than 10% through the intermediate term. KEY RATINGS DRIVERS The ratings and Outlook are supported by Motorola Solutions': i) leading market positions in public safety and enterprise markets, driven in part by a solid intellectual property portfolio and brand name; ii) consistent pre-dividend annual FCF of $500 million to $1 billion; and iii) revenue visibility from mission critical nature of served end markets. Ratings concerns center on: i) next generation public safety markets that may limit longer-term organic growth opportunities; ii) strained government budgets and a tepid macroeconomic growth environment, which could mute intermediate-term revenue growth; and iii) lower domestic cash balances from the resumption of aggressive cash deployment to shareholders via stock buybacks and dividends. RATINGS SENSITIVITIES Positive rating actions could result from meaningfully greater-than-expected FCF, likely driven by robust new product adoption leading to stronger than anticipated revenue growth and gross profit margin expansion. Negative rating actions could result from: --Pre-dividend annual FCF meaningfully below $500 million, likely due to meaningful deterioration in the macroeconomic environment or more significant-than-anticipated municipal and state budget spending cuts; --The company does not maintain total adjusted leverage below 2.5x, likely from intensified profit margin contraction. As of Dec. 31, 2012, Fitch believes liquidity was solid and supported by: --$1.5 billion of cash and cash equivalents ($400 million of which was in the U.S.); --$2.1 billion of short-term investments and Sigma Funds (approximately half of which was in the U.S.); --An undrawn $1.5 billion senior unsecured revolving credit facility (RCF) expiring 2014. Fitch's expectation for pre-dividend annual FCF of $500 million to $1 billion also supports liquidity. Fitch estimates a little over half of FCF is generated within the U.S., consistent with the company's geographic sales mix. The company also resumed paying a dividend during 2012, which should reduce quarterly free cash flow by $70 million - $75 million in 2013. Pro forma for the notes issuance, total debt was approximately $2.4 billion as of Dec. 31, 2012, consisting of various tranches of senior notes. Motorola Solutions has a clear debt maturity schedule until the company's $1.5 billion revolving credit facility expiring June 30, 2014 and $400 million of senior notes mature on Nov. 15, 2017. Fitch affirms Motorola Solutions' ratings as follows: --Long-term Issuer Default Rating (IDR) at 'BBB'; --Senior unsecured bank RCF at 'BBB'; --Senior unsecured notes at 'BBB'; --Short-term IDR and commercial paper program at 'F2'.