Feb 25 - Fitch Ratings has rated Motorola Solutions, Inc.'s
(Motorola Solutions; NYSE: MSI) $500 million of 10-year senior notes offering at
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
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.
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
--$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)
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'.