Fitch Affirms Agilent's IDR at 'BBB+'; Outlook Revised to Positive
CHICAGO -- April 12, 2013
Fitch Ratings has affirmed the following ratings for Agilent Technologies,
Inc. (Agilent) (NYSE: A):
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured revolving credit facility (RCF) at 'BBB+';
--Senior unsecured notes at 'BBB+'.
Fitch's proposed actions affect approximately $2.8 billion of debt, including
an undrawn $400 million revolving credit facility (RCF) expiring 2016.
KEY RATING DRIVERS
The ratings and Positive Outlook reflect Agilent's strengthening operating
profile due to ongoing revenue diversification. As a result, Fitch expects
mid-cycle annual free cash flow (FCF) approaching $1 billion. The ratings and
Outlook also reflect Agilent's conservative financial policies with share
repurchases limited to excess domestic cash.
Fitch expects flat revenue growth in fiscal 2013 with solid emerging market
demand and revenues from the 2012 Dako acquisition offsetting lower U.S.
government spending, European recession, and more volatile communications
order patterns. Fitch expects emerging markets and increasing recurring
revenues to fuel mid-single-digit revenue growth beyond the near term.
Solid profitability from productivity initiatives should drive nearly $1
billion of FCF for fiscal 2013. Agilent's reduction in flexible workforce,
consolidation of manufacturing facilities and streamlining order fulfillment
will enable the company to maintain operating margins near current levels.
Fitch expects Agilent will maintain global cash levels at more than $1
billion, manage total leverage (total debt to operating EBITDA) below 2x, and
limit share repurchases to excess domestic cash levels. Nonetheless, share
repurchase activity will increase, given Agilent's $421 million remaining
under its current up to $500 million in fiscal 2013 authorization.
Fitch believes Agilent will use cash repatriated to the U.S. from overseas to
fund stock buybacks. The vast majority of Agilent's FCF is generated overseas,
potentially constraining share repurchases beyond fiscal 2013. The Outlook
incorporates some headroom for debt-financed domestic acquisitions with
subsequent FCF used to bring total leverage back below 2x.
The Dako acquisition further diversified Agilent's revenue portfolio and
strengthens the company's capabilities and customer reach in cancer
diagnostics markets. Dako also expands Agilent's recurring revenues to 30%
from 25% of total. Future acquisitions are likely to be smaller in size,
outside the U.S., and focused on bio-analytical markets.
Agilent's ongoing focus on higher growth bio-analytical markets will further
reduce the company's still significant exposure to the more volatile
Electronics Measurement (EM) segment. Fitch expects EM to represent less than
45% of total revenues in fiscal 2013, down from nearly 55% five years ago.
Fitch believes Agilent's commitment to high levels of research and development
(R&D) investment support the company's technology leadership and high
retention rates of its significant installed base. R&D spending should remain
near 10% of revenues, down slightly from historical levels but higher than
that of competitors.
Fitch believes positive rating actions could result from consistent annual FCF
of $1 billion, from share gains resulting in higher than expected revenue
growth, or solid execution of cost reduction initiatives driving operating
Negative rating actions could occur if there is:
--Negative organic revenue growth or sustained operating profit margin
compression in EM, likely due to reduced competitiveness or lower testing
penetration in communications markets;
--Reduced gross profit margin in the company's bio-analytical markets,
signaling product commoditization or less robust growth within developing
--Incremental borrowing to support share buybacks.
Fitch expects credit protection measures will remain near current levels,
driven by Fitch's expectations that profitability will remain near current
levels over the intermediate term and that Agilent will refinance upcoming
Fitch estimates total leverage was approximately 1.6x for the latest 12 months
(LTM) ended Jan. 31, 2013 and should remain below 2x over the intermediate
term. Interest coverage (operating EBITDA to gross interest expense) was
nearly 15x for the LTM ended Jan. 31, 2013 and should remain well in excess of
The ratings are supported by:
--Leading market positions in faster growing and more stable life sciences,
chemical analysis, and diagnostics and genomics markets;
--Global footprint and increasing end-market, customer, and technology
--Conservative financial policies with sufficient overall liquidity, as well
as expectations for lower but still solid annual FCF in a downturn.
Ratings concerns include:
--Mature growth rates and trends toward reduced testing within certain
electronic measurement markets;
--Substantial R&D requirements to maintain technology leadership;
--Potential for higher debt levels over the longer-term to support domestic
spending, due to anticipated overseas cash build.
As of Jan. 31, 2013, Fitch believes Agilent's liquidity was solid and
--Approximately $2.5 billion of cash and cash equivalents, approximately $1.9
billion of which was located overseas;
--An undrawn $400 million senior unsecured RCF expiring October 20, 2016.
Agilent's liquidity is also supported by expectations for mid-cycle annual FCF
approaching $1 billion.
Total debt was approximately $2.4 billion as of Jan. 31, 2013 and consisted
--$250 million of 2.5% senior notes due Jul. 15, 2013;
--$500 million of 5.5% senior notes due Sep. 14, 2015;
--$600 million of 6.5% senior notes due Nov. 1, 2017;
--$500 million of 5% senior notes due Jul. 15, 2020; and
--$400 million of 3.2% senior notes due Oct. 1, 2022.
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 Related Research:
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Evaluating Corporate Governance' (Dec. 12, 2007);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007);
--'Cash Flow Measures in Corporate Analysis - Amended' (Oct. 12, 2005).
Applicable Criteria and Related Research
Cash Flow Measures in Corporate Analysis
Liquidity Considerations for Corporate Issuers
Evaluating Corporate Governance
Corporate Rating Methodology
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Jason Pompeii, +1 312-368-3210
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
Jason Paraschac, CFA, +1 212-908-0746
James Rizzo, +1 212-908-0548
Brian Bertsch, +1 212-908-0549
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