The ratings affect
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
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
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
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
The company remains on track to close the sale of the Enterprise business, excluding the iDEN business, to Zebra Technologies Corp. for
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
--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.
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
Positive rating actions are not anticipated, given Fitch's expectations for structurally weaker credit metrics.
Pro forma for the senior notes issuance and redemption, total debt was approximately
--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'.
--'Corporate Rating Methodology',
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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