Fitch Affirms Motorola Solutions Debt Ratings with Stable Outlook

By: Ian Mansfield | 28th Dec 2011

Fitch Ratings has affirmed Motorola Solutions debt ratings with a stable outlook. The rating actions affect approximately $1.5 billion, pro forma for the repayment of $600 million of senior notes that matured Nov. 1, 2011.

?Fitch said that the ratings and Outlook reflect Motorola's strengthened operating profile, following the separation of its Mobile Devices business and sale of the majority of its Networks business assets earlier in 2011. As a result, Fitch expects more consistent revenue growth and higher operating profitability.

For 2011, Fitch expects mid-single-digit revenue growth and low single-digit growth over the intermediate term. Fitch believes near-term revenue growth may be challenged by pressured government budgets and the potential for macroeconomic uncertainty to constrain enterprise investment. Fitch estimates Motorola's exposure to Europe, Middle East and Africa (EMEA) is approximately 20% of total sales with 55%-60% of sales in North America.

Operating earnings should remain in the mid-teens through the business cycle, driven by operating leverage and the company's substantial restructuring undertaken in the recent past. As a result, Fitch expects higher and more consistent free cash flow. Pro forma for the recently reinstated $0.88 per share annual dividend (approximately $290 million), Fitch expects free cash flow for 2011 of approximately $500 million.

For 2012, free cash flow should be more than $250 million, which assumes higher cash payments required for the company's approximately $2 billion underfunded pension plans. Over the longer term, Fitch believes annual free cash flow should range from $500 million to $1 billion.

The ratings and Outlook continue to incorporate Motorola's use of annual free cash flow for acquisitions and stock buybacks. As of the end of the third quarter, the company used approximately $750 million of cash for share repurchases under the $2 billion stock buyback authorization announced in July 2011. Fitch anticipates acquisitions will likely be focused on developing domain expertise within the company's enterprise businesses, which would expand the company's addressable market. Fitch believes Motorola Solutions' use of cash for share repurchases and dividends reduces the probability of incremental pressure from significant activist shareholders.

Motorola's commitment to debt reduction has strengthened credit protection measures. Aside from $540 million of debt for which the company tendered in early 2011, Motorola repaid $600 million of debentures at maturity in November 2011. The company has the capacity to repay $400 million of debentures maturing in November 2012. Fitch estimates leverage (total debt to operating EBITDA) was 1.6 times (x) for the latest 12 months (LTM) ended Oct. 1, 2011 and should remain comfortably below 2x through the business cycle. Coverage (operating EBITDA to gross interest expense) was an estimated 9.4x and should approach 10x.

Fitch's expectations for pre-dividend annual free cash flow of more than $500 million also support liquidity. Over the near term, Fitch believes free cash flow may be constrained by increasing cash contributions to the company's underfunded pension in 2012.

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