March 23, 2017 / 9:14 PM / 6 months ago

Fitch Affirms Keysight Technologies at 'BBB'; Outlook Negative

(The following statement was released by the rating agency) CHICAGO, March 23 (Fitch) Fitch Ratings has affirmed the ratings for Keysight Technologies Incorporated (Keysight), including the company's Long-Term Issuer Default Rating (IDR) at 'BBB'. Fitch has also assigned a 'BBB' rating to the $700 million of senior notes Fitch expects Keysight to issue to fund the Ixia acquisition. The Rating Outlook is Negative. Pro forma for the senior notes issuance, Fitch's actions affect $1.9 billion of total debt, including the $450 million five-year revolving credit facility (RCF). A full list of rating actions follows at the end of this release. Keysight announced on March 21, 2017 it plans to issue: i) an estimated $700 million of 5-10 year senior unsecured notes, ii) enter into a $400 million three-year senior unsecured term loan facility and iii) issue $460 million of new equity (including a $60 million green shoe) to fund the majority of the $1.8 billion acquisition of network test and visibility solutions provider, Ixia ($1.7 billion net of $72 million of acquired cash and cash equivalents). Keysight will fund the remainder of the purchase price with $170 million of borrowings under the company's recently renewed five-year RCF and use $87 million of available cash and cash equivalents. The company also has lender commitments for up to $1.28 billion senior unsecured 364-day bridge facility to fund the Ixia deal, should Keysight fall short of its target bond and equity issuance amounts. The expected senior notes, which will be pari pasu with all other senior unsecured debt (including the term loan when it is drawn at close), should be issued under the indenture dated Oct. 15, 2014. On Feb. 15, 2017, the company amended and restated its RCF to: i) extend the agreement through 2022 and ii) adjust the financial covenants to require adjusted consolidated debt to operating EBITDA under 4x for one year after the close of the Ixia acquisition. In connection with the amend and restatement, Keysight entered into a senior unsecured term loan under which Keysight may borrow up to $400 million to fund a portion of the Ixia acquisition consideration. Keysight also issued $460 of equity (includes $60 million green shoe) and expects $386 million of net proceeds (approximately $444 million if underwriters exercise their overallotment to purchase additional common shares in full), after related fees and commissions. Commitments under the bridge facility will be reduced by $400 million upon the close of the acquisition and will be reduced by the senior notes and equity issuance on a dollar for dollar basis. As part of the March 20, 2017 financing announcement, Keysight also updated the company's outlook for the second fiscal quarter ending April 30, 2017, in which it narrowed revenue and non-GAAP earnings per share (EPS) guidance. Keysight cited the continuation of strength across most end markets with the exception of aerospace and defence on spending delays related to the continuing Congressional budget resolution. Fitch continues to expect improving top line performance from broad based demand strength and the continuation of solid profitability through at least the near term. Fitch believes the acquisition of Ixia complements Keysight's leadership positions in wireless devices and operators markets within the company's Commercial Communications segment. As a result of the combination, Keysight will add data center and cloud testing solutions (Layers 4-7) to existing mobile device (Layers 1-3) offerings, accelerating the company's current mature growth profile. In the process, the deal adds considerable engineering and software capabilities, which Fitch anticipates will result in a richer sales mix. Ixia will add roughly $500 million of annual revenue with a rapidly growing Network Visibility Solutions segment, driven by 5G testing. Network testing from exponential data growth, increasing complexity and enhanced security demand will drive revenue growth through at least the intermediate term. Fitch estimates the deal adds roughly $100 million of operating EBITDA at slightly lower profit margins (high teens versus standalone Keysight's low-20% vicinity operating EBITDA margins). However, cost synergies should drive margin expansion to mid-20% in the intermediate term. On Jan. 30, 2017, Keysight announced it reached a definitive agreement to acquire Ixia for a total consideration of $1.6 billion net of cash. The company expects the deal will close no later than Oct. 31, 2017, subject to customary conditions and regulatory approvals. Pro forma for the debt issuance and Ixia's profitability, Fitch expects total leverage (total debt-to-operating EBITDA) will be approximately 3.4x. The ratings and Negative Outlook reflect Fitch's expectation that Keysight will use FCF and profitability growth, in part by achieving projected cost synergies, to return total leverage to 2.5x in 12-18 months post-close. KEY RATING DRIVERS --Expanded Addressable Market: Fitch believes the acquisition of Ixia expands Keysight's addressable market by an estimated $2.5 billion, comprised of $1 billion of Network Test and $1.5 billion of Network Visibility. Both markets are growing faster than Keysight's $13.5 billion core markets (wireless devices and operators), given a network-level focus and the high software solution content. Strong demand for security and robust adoption of software-defined networking as networks become virtualized should drive Ixia's Network Visibility segment (roughly 25% of total Ixia revenue) and Network Test (approximately 75% of total Ixia revenue). --Top Line Acceleration: Fitch believes the acquisition of Ixia's solid share positions in adjacent markets with attractive demand prospects should accelerate top line growth. Fitch forecasts Ixia will add mid-single-digit growth from solid growth in network visibility and network test markets, bolstering Keysight's mature organic growth profile associated with mobile devices, electrical, radio frequency (RF) and optical test. --Profitability Expansion Roadmap: Fitch expects Keysight will drive $50 million of cost synergies within 24 months post-close and an additional $10 million thereafter, ultimately expanding operating EBITDA margins to mid-20% from the low-20% currently. Fitch estimates standalone Keysight operating EBITDA margin of 20.9% for fiscal 2016 and standalone Ixia operating EBITDA of $96.8 million with a margin at 19.6% for the latest 12 months (LTM) ended Sept. 30, 2016. --Strengthening FCF Profile. Fitch expects $300 million to $500 million of annual FCF through the intermediate term, pro forma for the Ixia acquisition. In addition, a richer sales mix with higher software content should strengthen annual FCF, although a Fitch-estimated roughly two-thirds is generated outside the U.S. --Leading Core Market Positions. Fitch believes Keysight's leading share positions in core testing markets result in sufficient scale for ongoing R&D investments, a substantial installed base that drives engineering collaboration, software upgrades and services; and leadership within standards bodies. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: --Fitch expects low-single-digit-organic revenue growth for standalone Keysight, given a cautious demand environment offset by the acceleration of 5G testing. --Combined operating EBITDA margins will expand to the low-20% vicinity from completed restructuring and resumption of organic revenue growth. --Ixia will add mid-single-digit top-line growth from robust demand for Network Visibility Solutions (around 5G), partially offset by cautious service provider and enterprise capital spending. --Fitch expects Keysight will achieve $50 million of cost synergies within 24 months, ultimately bringing Ixia's operating EBITDA margins in line with those of standalone Keysight. --Capital spending remains in-line with recent years at $100 million to $125 million annually. --At most, minimal share repurchases, given total likely leverage, will remain above 2.5x over at least the next 12 months. RATING SENSITIVITIES Fitch could stabilize the ratings for Keysight at 'BBB' if it expects total leverage below 2.5x in the near term from a combination of debt reduction with FCF and cost synergies- or revenue growth- driven profitability growth. Fitch could downgrade the ratings to 'BBB-' if it expects total leverage will remain above 2.5x beyond the 12- to 24-month post-close timeframe, most likely from incremental acquisitions meaningfully slowing the pace of debt reduction. LIQUIDITY Fitch believes liquidity was adequate as of Jan. 31, 2017 and consisted of: --$896 million of cash and cash equivalents, $667 million of which was located outside the U.S.; --$450 million undrawn senior unsecured revolving credit facility expiring Feb. 15, 2022. Fitch's expectations for $300 million to $500 million of normalized (excluding non-recurring cash restructuring and integration costs) annual FCF over the intermediate term also supports liquidity, although roughly two-thirds is generated outside the U.S. As a result, domestic annual FCF should range from $100 million to $200 million. Including the senior notes issuance, total debt at Jan. 31, 2017 was $1.8 billion and consisted of: --$500 million of senior unsecured notes due 2019; --$600 million senior unsecured notes due 2024; --An estimated $700 million of new year senior notes. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings for Keysight Technologies: --Long-Term IDR at 'BBB'; --Senior unsecured RCF at 'BBB'; --Senior unsecured notes at 'BBB'. Fitch also has assigned a 'BBB' rating to Keysight's senior unsecured notes offering and $400 million senior unsecured term loan. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Stephen Brown Senior Director +1-312-368-3139 Date of Relevant Rating Committee: March 21, 2017 Summary of Financial Statement Adjustments - Fitch made no adjustments that depart materially from those contained in the published financial statements of Keysight Technologies Incorporated. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021037 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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