Agilent Debt Rating Lowered

In downgrading the company's debt to below investment grade, S&P cites its subpar operating performance and weakening credit measures

On Feb. 7, 2003, Standard & Poor's Ratings Services lowered its corporate credit and senior note ratings on Agilent Technologies (A ) to 'BB' from 'BBB-'. At the same time, the existing senior unsecured bank loan rating was withdrawn.

The ratings downgrade is based on subpar operating performance and weakening credit measures. The rating outlook is negative. Total rated debt is $1.15 billion.

Agilent, based in Palo Alto, Calif., serves the communications, electronics, and life science markets with test, measurement, and monitoring instruments, as well as semiconductor components.

Agilent will report a substantial operating loss for the fiscal first quarter ended January 2003, as sales were almost 20% lower than in the fiscal fourth quarter of 2002. This will be the company's seventh consecutive quarterly loss. The downturn in key end-markets, particularly communications, manufacturing, and semiconductor markets, has been deeper and more protracted than management envisioned. More than 70% of sales are associated with weak communications, semiconductor, and computing end-markets.

Standard & Poor's believes end-market conditions are likely to remain difficult over the near term, challenging management efforts to improve operating performance. Therefore, despite considerable restructuring actions over the past year, the timing of the company's return to sustained profitability is uncertain.

Agilent's profile benefits from its entrenched market leadership position, in the test-and-measurement segment of the electronics industry, where it has more than twice the sales of its nearest competitor. The test-and-measurement business comprises about 55% of sales. The semiconductor and life sciences business units account for the rest of sales and provide a modest level of business diversity. Good geographic and customer diversification are positive factors, as about 60% of sales are from outside the U.S.

Management expects to reach profitability at sales levels of $1.6 billion per quarter. It expects to report that sales for the 2003 first fiscal quarter were $1.35 billion-$1.45 billion.

Agilent's operations consumed nearly $800 million of cash in fiscal 2002, ended October 2002, to fund operating losses, capital expenditures, and cash costs associated with restructuring actions. Despite sharp curtailment in capital spending, improving operating efficiency, and anticipated improved working capital management in 2003, cash flow from operations is likely to be limited by operating losses and further restructuring activities in the near term.

Sufficient liquidity is provided by a cash balance of $1.84 billion, as of October 2002. The company does not have a credit facility. There are no near-term maturities and the convertible bond's put provision cannot be exercised until November 2006.

The outlook is negative. Ratings could be lowered unless operating performance stabilizes, and there is meaningful sequential progress towards returning to profitability.

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