Fitch Affirms Motorola Solutions' 'BBB' IDR; Outlook Stable
CHICAGO -- December 20, 2012
Fitch Ratings has affirmed Motorola Solutions, Inc.'s (Motorola Solutions;
NYSE: MSI) 'BBB' long-term Issuer Default Rating (IDR) and 'F2' short-term
IDR. Fitch's actions affect $3.4 billion of total debt, including the undrawn
$1.5 billion revolving credit facility (RCF). The Rating Outlook is Stable. A
full list of ratings for Motorola Solutions is below.
The ratings and Outlook reflect Fitch's expectations for solid operating
performance overall 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 meaningfully exceeding 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 $1.8 billion
remaining under the prevailing $5 billion share repurchase authorization as of
Sept. 29, 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
Credit protection measures should remain solid for the rating, despite
expectations for higher debt levels to support acquisitions and share
repurchases. Fitch estimates total leverage (total debt to operating EBITDA)
was just over 1 time (x) for the LTM ended Sept. 29, 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 Sept. 29, 2012 and the company will maintain
interest coverage above 10x. FCF to debt also should be more than 10% through
the intermediate term.
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.
WHAT COULD TRIGGER A RATING ACTION
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 Sept. 29, 2012, Fitch believes liquidity was solid and supported by:
--$1.8 billion of cash and cash equivalents ($385 million of which was in the
--$1.8 billion of short-term investments and Sigma Funds (approximately half
of which was in the U.S.); and
--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.
As of Sept. 29, 2012, total debt was approximately $1.9 billion, 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 revolving credit facility (RCF) at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR and commercial paper program at 'F2'.
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 Relevant Research:
--'Corporate Rating Methodology', Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
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Jason Pompeii, +1-312-368-3210
70 W. Madison Street
Chicago, IL 60602
John M. Witt, CFA, +1-212-908-0673
Jamie Rizzo, CFA, +1-212-908-0548
Brian Bertsch, New York, +1 212-908-0549
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