Motorola Solutions' Ratings Unaffected By Expectations For Lower Cash Balances

Published on: 26th Jul 2012

­Fitch Ratings has stated that the ratings for Motorola Solutions are unaffected by the expectations for lower cash balances from incremental share repurchases and increased cash dividends.

Motorola Solutions' board of directors authorized an incremental $2 billion stock buyback program with no termination date and increased the annual common dividend to $1.04 (approximately $300 million) from $0.88 per share. This follows the company's near completion through the quarter ended June 30, 2012, of the existing $1.5 billion stock buyback program initiated in July 2011 and increased to $3 billion in January 2012.

Given Fitch's expectations for annual pre-dividend free cash flow (FCF) of $500 million to $1 billion, the combination of shareholder friendly uses of cash and acquisitions could exceed FCF beyond 2012. As a result, net cash should decline from nearly 2 times (x) as of June 30, 2012 and could reach a net debt position. Fitch believes the anticipated reduction in cash reduces event risk for the company.

The ratings contemplate the company moderating stock buybacks to maintain sufficient domestic cash balances, which Fitch estimates in the $500 million to $1 billion range. Therefore, FCF and ability to efficiently repatriate foreign earnings and existing overseas cash will be a significant factor in pacing share repurchases. Domestic cash was approximately $1.4 billion at June 30, 2012, representing 36% of total cash. Fitch believes Motorola Solutions' domestic FCF generation approximates the company's sales split, which was roughly 60% domestic and 40% foreign for the latest 12 month (LTM) period.

Fitch does not anticipate meaningful borrowing to support stock buybacks but the ratings reflect the company's guidance that it will maintain total adjusted leverage (total adjusted debt to operating EBITDAR) approximating 2x. The expectation for lower cash increases the risk that acquisitions would be debt funded, although acquisitions are expected to be small in size.

Motorola Solutions is on track to exceed Fitch's expectations for low to mid-single digit revenue growth and double digit operating income growth in 2012, following a solid operating performance in the first half of 2012. Demand within Motorola Solutions' government businesses is solid, despite still pressured public coffers. Enterprise markets remain challenged, given a cautious macroeconomic environment and ongoing weakness in Europe. Year-over-year revenues for the Enterprise segment were down modestly but slightly up after the exclusion of the iDEN business.

The company should continue benefitting from operating leverage. Fitch expects gross margins will remain near 50% on an adjusted basis but that adjusted operating expenses will decline further as a percentage of sales. For 2012, Fitch expects operating expenses will be below 35% of sales, versus a Fitch estimated 37% in 2011 and 41% in 2010. As a result, operating income should exceed 15% of revenues, up from a Fitch estimated 14.2% in 2011 and below 10% in 2010.

Motorola Solutions' credit protection measures will remain solid. Fitch estimates total leverage (total debt to operating EBITDA) will approximate 1x over the intermediate term, while interest coverage will exceed 10x. FCF to total debt should exceed 20% for 2012.

 

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