News Column

Fitch Affirms Motorola Solutions' IDR at 'BBB'; Rates $1.4B Sr Notes 'BBB'; Outlook Stable

August 12, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Rating (IDR) for Motorola Solutions, Inc. (Motorola Solutions; NYSE: MSI) at 'BBB'. Fitch also rates the $1.4 billion senior notes issuance at 'BBB'. The Rating Outlook is Stable.

The ratings affect $5.5 billion, including the undrawn revolving credit facility (RCF). A full list of ratings follows at the end of this release.

Motorola Solutions will issue $1.4 billion of senior unsecured notes and use $1 billion of net proceeds for general corporate purposes, including funding pension obligations. The company will use the remaining net proceeds to redeem $400 million of 6% senior notes due 2017 under a make-whole provision.

KEY RATINGS DRIVERS

The ratings and Outlook reflect Fitch's expectations for more stable long-term operating performance pro forma for the Enterprise segment sale. The remaining company will consist mainly of the Public Safety segment and have leading market share, greater visibility and lower end-market cyclicality. Profitability will remain strong, with operating profit margin in the mid- to upper-teens and annual free cash flow (FCF) of $250 million to $500 million.

Fitch expects credit metrics will remain weak for the 'BBB' rating, pro forma for the Enterprise sale and debt issuance, given lower profitability levels and structurally higher debt levels. This, in combination with smaller scale, reduced revenue diversity and mature government and public safety markets, reduces flexibility at the current rating for operational shortfalls from lower profitability.

Pro forma for the Enterprise sale and debt issuance, Fitch expects total leverage (total debt to operating EBITDA) near 3x for 2014. Adjusted for net pension obligations and rent expense, Fitch estimates leverage was nearly 4x but will decline below 3.5x in the near term assuming the use of net proceeds to meaningfully address $1.6 billion of net global pension obligations. Over the longer term, Fitch expects leverage adjusted for net pension obligations and rent expense will remain below 3.5x.

Fitch expects low-single-digit negative revenue growth for 2014, driven by North American government markets and lower than anticipated Enterprise sales. The 2014 guidance incorporates mid-single-digit growth in Enterprise and low- to mid-single-digit revenue declines in Government. Pro forma for the Enterprise sale, revenues will exceed $6 billion and organic revenue growth will be in the low single digits with growth driven increasingly by markets outside the U.S.

Despite a weaker near-term demand environment, the ratings and Outlook reflect Fitch's expectations for still solid operating profit and FCF in 2014. Restructuring actions will drive operating leverage, offsetting lower gross margin attributable to a growing services business and lower hardware revenues. Operating profit margin is anticipated to remain in the upper teens in 2014, contributing to FCF before pension contributions in excess of $250 million.

The company remains on track to close the sale of the Enterprise business, excluding the iDEN business, to Zebra Technologies Corp. for $3.45 billion of cash by the end of 2014. Motorola Solutions will return 100% of the sale proceeds to shareholders.

The ratings are supported by MSI's:

--Leading market positions in Public Safety and Enterprise markets, driven in part by a solid intellectual property (IP) portfolio and brand name;

--Expectations for consistent operating performance and annual FCF of $250 million to $500 million;

--Solid liquidity position.

Ratings concerns center on:

--Mature growth rates for public safety businesses;

--Strained government budgets in developed economies, which could be a drag on more robust international spending;

--Reduced diversification and revenue base following the sale of the Enterprise business.

RATINGS SENSITIVITIES

Negative rating actions could result from:

--Leverage adjusted for net pension obligations and rent expense exceeding 3.5x beyond the short term, from weaker than expected profit margins;

--Sustained annual FCF below $250 million due to more significant-than-anticipated government spending cuts.

Positive rating actions are not anticipated, given Fitch's expectations for structurally weaker credit metrics.

As of June 30, 2014, Fitch believes liquidity was solid and supported by:

--$2.9 billion of cash and cash equivalents ($1.7 billion of which was in the U.S.);

--An undrawn $2 billion senior unsecured RCF expiring 2019.

Pro forma for the senior notes issuance and redemption, total debt was approximately $3.5 billion as of June 30, 2014, consisting of various tranches of senior notes. Aside from the undrawn RCF's expiration in 2019, Motorola's nearest debt maturity is $750 million of 3.75% senior notes due 2022.

Fitch rates Motorola Solutions as follows:

--Long-term IDR at 'BBB';

--Senior unsecured RCF 'BBB';

--Senior unsecured notes 'BBB';

--Short-term IDR and commercial paper program 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology', May 14, 2014.

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849314

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.



Fitch Ratings

Primary Analyst

Jason Pompeii, +1 312-368-3210

Senior Director

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

John M. Witt, CFA, +1 212-908-0673

Senior Director

or

Committee Chairperson

Sean Sexton, +1 312-368-3130

Managing Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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