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Fitch Affirms Motorola Solutions at 'BBB'; Outlook Remains Negative
April 20, 2017 / 9:18 PM / 8 months ago

Fitch Affirms Motorola Solutions at 'BBB'; Outlook Remains Negative

(The following statement was released by the rating agency) CHICAGO, April 20 (Fitch) Fitch Ratings has affirmed the ratings for Motorola Solutions Incorporated (Motorola Solutions), including the Long-Term Issuer Default Rating (IDR) at 'BBB'. The Outlook remains Negative. Fitch's actions affect $6.5 billion of total debt, including the $2.1 billion undrawn revolving credit facility (RCF). A full list of rating actions follows at the end of this release. The Negative Outlook reflects the slower than anticipated pace of deleveraging despite having reduced debt as planned at the end of 2016, due largely to profitability being lower than Fitch's expectation. Leverage was high for the rating following the acquisition of Airwave Solutions Limited (Airwave) and a period of aggressive shareholder returns. Fitch expects Motorola will continue to modestly improve its leverage during 2017 by capitalizing on previous cost restructuring efforts. Fitch estimates total leverage was 2.8x for 2016 and will only edge closer to 2.5x in 2017, providing only modest flexibility for acquisitions (an increasing strategic focus for the company) and shareholder returns. Fitch's Negative Outlook resulted from Motorola Solutions' announcement it would acquire Airwave on Dec. 3, 2015, which led to elevated total leverage at closing that would be below 2.5x in 2017. KEY RATING DRIVERS More Normalized Shareholder Returns. Fitch expects more normalized shareholder returns over the intermediate term, after several years of meaningfully elevated share repurchases as the company completed its transformation into a focused public safety solutions provider and return of deemed excess cash to shareholders. Going forward, Fitch expects the company will use pre-dividend FCF for dividends and acquisitions first, using any remaining domestic cash flow for share repurchases. Mature Organic Market Growth. Fitch expects low single-digit organic revenue growth, given overall mature public safety market growth rates and funding constraints associated with strained state and municipal government finances. Nonetheless, Motorola Solutions will focus on growth opportunities including managed services and integrated command and control solutions. Reduced Operating Volatility. Fitch expects an increasing mix of services sales, including managed services engagements, will result in reduced operating volatility, given the more uneven demand for hardware. Motorola Solutions' Services segment represented 40% of consolidated sales in 2016, up from 35% in the prior year, resulting in more contractual revenue. At the same time, Services is less profitable than hardware on a gross margin basis, which may be offset with lower operating expense to sustain operating EBITDA margins going forward. Leading Market Positions. Fitch expects the company will continue to benefit from leading market positions for public safety markets, driven in part by cumulative investments and technology leadership, significant installed base, and brand equity. As the company continues ramping its managed services capabilities and next generation public safety solutions, Fitch believes software providers increasingly will be among its competitors, although very few competitors will have similar installed base, technology capabilities, and services breadth. Lower Fixed Cost Structure. Fitch expects the company will maintain operating EBITDA margins in the high-20s through the forecast period, despite lower gross margins for the faster growing Services segment. Profitability and FCF profile will benefit from significant restructuring over recent years and high operating expense leverage, although Fitch believes incremental restructuring will be limited. Expectations for Acquisitions. Fitch expects Motorola Solutions will be acquisition-minded with a focus on technologies that expand service capabilities and customer access, although deals should be smaller in size and largely funded organically. FCF seasonality could result in debt financing for serial deals but Fitch expects Motorola Solutions would return to total leverage below 2.5x in the subsequent near term with profitability growth or, if necessary, use FCF for debt reduction. KEY ASSUMPTIONS Fitch's key assumptions within the rating case include: --Low single-digit organic growth through the forecast period, with contributions from tuck-in acquisitions. --Modest gross profit margin contraction, driven by higher services sales mix offset by lower operating expenses from fixed-cost absorption. --More modest capital spending requirements beyond the near term, given elevated investments in recent years and expected for 2017. --Minimal debt reduction; the company refinances debt maturities through the forecast period. --10% annual dividend growth. --Motorola Solutions uses FCF for a combination of acquisitions and share repurchases. RATING SENSITIVITIES Negative rating actions could result from expectations for total leverage sustained above 2.5x due to: --Serial acquisitions that are substantially debt- funded; --Operating EBITDA margin contraction from gross margin contraction related to a higher services mix more than offsetting operating expense-driven leverage. Positive rating actions could result from: --Management's commitment to maintain total leverage at 2x or below, implying organically funded serial acquisitions within the context of curtailing share repurchases; --Expectations for more than $1 billion of annual FCF. LIQUIDITY Fitch believes the company's liquidity profile is sufficient and supported by: --$1 billion of cash and cash equivalents, $455 million of which is located outside the U.S.; --$2.1 billion undrawn RCF expiring 2019. Fitch's expectations for annual FCF of $650 million to $750 million also supports liquidity, 60% of which Fitch estimates is generated in the U.S. FULL LIST OF RATING ACTIONS Fitch has affirmed the following: --Long-Term IDR at 'BBB'; --RCF at 'BBB'; --Senior unsecured notes at 'BBB'. Contact: Primary Analyst Jason Pompeii Senior Director +1 312-368-3210 Fitch Ratings, Inc. 60 W Madison St. Chicago, IL 60602 Secondary Analyst Kevin McNeil Director +1 646-582-4768 Committee Chairperson David Peterson Senior Director +1 312-368-3177 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Date of Relevant Rating Committee: April 20, 2017 Summary of Financial Statement Adjustments - Fitch made no adjustments that depart materially from those contained in the published financial statements of Motorola Solutions Incorporated. 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