Fitch Affirms Motorola Solutions' Debt with a Stable Outlook
Published on: 21st Dec 2013
By: Ian Mansfield
Fitch Ratings has affirmed Motorola Solutions debt rating at BBB and said that the outlook is stable. The rating actions affect approximately $2.5 billion of total debt.
The ratings and Outlook reflect Fitch's expectations for improved operating performance over the intermediate term, including a resumption of pre-dividend annual free cash flow (FCF) of more than $500 million. Fitch expects low single digit organic revenue growth, supported by a strong backlog of business in government and the anticipation of gradually improving enterprise spending.
Ongoing restructuring actions should support operating profit margins at near current record levels in excess of 15% over the intermediate term. Fitch expects Motorola Solutions' operating profit margin will reach 17% in 2014 but believes the company achieving its 19% target will require continued restructuring and a favorable sales mix, given lower gross margins of and expectations for a growing services business.
Credit protection measures to remain solid for the rating, driven by Fitch's expectations for consistent debt and profitability levels. Fitch forecasts total debt to operating EBITDA will end 2013 at 1.5 times (x) and remain below 2.0x over the intermediate term. Operating EBITDA to gross interest expense should remain comfortably above 10.0x.
Fitch expects a resumption of more robust annual FCF over the intermediate term after likely falling short of Fitch's expectations in 2013. Modestly lower operating profit levels are being exacerbated by working capital usage, which Fitch expects to normalize in the near term. Discrete uses of cash include cash tax payments and lower compensation accruals, while Fitch expects the pace of cash collections for certain longer-term contracts will remain modestly volatile, particularly as the mix of managed services contracts increases.
The ratings and Outlook continue to incorporate Motorola Solutions' use of annual free cash flow for acquisitions and stock buybacks. The company has not been particularly acquisitive in recent years, and Fitch anticipates deals would be smaller in nature and geared toward obtaining domain expertise, customer access or geographical reach within the Enterprise segment.
Fitch expects share repurchase activity will continue but at less aggressive levels over the intermediate term. The company exited the quarter ended Sept. 28, 2013 with $2.1 billion available for buybacks under the current share repurchase authorization.
Nonetheless, Fitch anticipates cash location structurally constrains more aggressive buyback activity. Furthermore, the company is expected to manage repurchases to achieve a $2 billion target minimum global cash level over the next two years. Share repurchases beyond 2015 will be more closely tied to excess FCF.
The tepid macroeconomic recovery of demand continues to constrain revenue growth and visibility remains limited. Still, spending by states and local government customers in the U.S. is solid and offsets expectations for continued cautious Federal spending. Growth increasingly will be driven by markets outside the U.S., particularly the Middle East, Africa and Asia.
Within the Enterprise segment, the outlook continues to be cautious, with customers hesitant to move forward with programs in the absence of more robust demand. Nonetheless, Enterprise appears to have troughed, as Motorola Solutions reported year-over-year (YoY) positive segment revenue growth in the recent quarter follow six consecutive negative YoY growth quarters. The backlog is growing, and Fitch anticipates a still gradual but less fragile recovery in 2014.