Fitch Upgrades Agilent Technologies' IDR to 'BBB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the following ratings for Agilent Technologies, Inc. (Agilent)(NYSE: A):

--Issuer default rating (IDR) to 'BBB' from 'BBB-';

--Senior unsecured revolving credit facility (RCF) to 'BBB' from 'BBB-';

--Senior unsecured notes to 'BBB' from 'BBB-'.

Approximately $900 million of debt is affected by Fitch's action, assuming a fully drawn $300 million RCF expiring 2012. The Outlook is Stable.

The upgrade mainly centers on Fitch's increased confidence in the stability of Agilent's operating model. Fitch believes Agilent's operating profile has become less volatile due to the diversification of the company's end-markets, customers, and product portfolios. In addition, it is expected Agilent's operating performance will be enhanced over the next few years by solid (mid- to high-single digit) organic revenue growth, driven by strong demand within the company's Bio-Analytical Measurement (BAM) segment, particularly the Life Sciences businesses.

The company's geographically balanced footprint also has contributed to lower volatility, as solid revenue growth in Asia-Pacific has offset broad-based demand weakness and more mature organic revenue growth rates within developed economies for Agilent's Electronics Measurement (EM) segment in recent quarters, a trend that Fitch expects will continue over the near term. Finally, despite a less robust operating environment, the company's lower fixed cost structure following the completion of restructuring programs and ongoing efficiency initiatives has resulted in Agilent achieving record profit margins, which Fitch expects will remain in the low double-digits through a normalized business cycle. As a result, Agilent's annual free cash flow in each of the next few years should be at the higher end of Fitch's previously expected range of $500 million to $1 billion.

The upgrade also considers Agilent's relatively conservative financial policies, which Fitch believes are underpinned by a solid net cash position. As of July 31, 2008, cash was approximately 2 times (x) total debt, excluding the $1.5 billion of preferred shares repurchase obligation of Agilent Technologies World Trade, Inc. ('World Trade debt') and the associated approximately $1.6 billion of restricted cash held by Agilent Technologies (Cayco) Limited. The company's liquidity remains solid, although a substantial amount of Agilent's unrestricted cash is located overseas, a trend Fitch believes will continue given expectations that the majority of ongoing free cash flow will be generated outside the United States.

As a result, gross debt levels could increase over time to fund ongoing share repurchase activity. However, the ratings and Outlook incorporate Fitch's expectations that Agilent will maintain total leverage (as measured by total debt-to-operating EBITDA) below 2.5x. For the latest 12 months (LTM) ended July 31, 2008, Fitch estimates interest coverage (operating EBITDA-to-gross interest expense) was more than 9.0x and total leverage was 2.2x, while free cash flow-to-total debt was more than 30%.

Given Fitch's expectations for relatively consistent profitability, credit protection measures (including $1.5 billion of World Trade debt) should remain near current levels over the intermediate term. The ratings and Outlook incorporate Fitch's expectations that Agilent will refinance the World Trade debt, which the company is required to repurchase on Nov. 17, 2008. Nonetheless, Fitch believes Agilent could satisfy the repurchase obligation with available cash, including using the aforementioned approximately $1.6 billion of restricted cash. However, a substantial amount of Agilent's remaining cash is located overseas, which would trigger meaningful tax liabilities if utilized to repay this obligation.

The ratings and Outlook also reflect Agilent's:

--Consistent ongoing annual free cash flow of $500 million to $1 billion, although Fitch expects annual free cash flow is likely to exceed $750 million in the current, and each of the next two, fiscal years. Agilent's revenue growth, restructuring, and efficiency initiatives have resulted in record profitability levels, even within the context of a less favorable operating environment, and expectations for cash conversion cycle days to remain at or below a Fitch-estimated 95 days versus more than 100 two years ago;

--Conservative capitalization and solid liquidity position, including the aforementioned 2x net cash position; and

--Leading share and broad portfolio in a variety of relatively fragmented measurement markets. Agilent is a market leader in each of the end markets in which it competes and should continue to benefit from the meaningful scale and scope of its research and development investments, as well as a balanced geographic footprint.

Rating concerns center on:

--Fitch's expectations for ongoing share repurchases, which could include increased borrowings since the majority of Agilent's cash flow is generated overseas. However, the ratings incorporate Fitch's expectations that the company will maintain manageable leverage metrics and curtail share repurchase activity should cash flow become pressured;

--Sustained pricing pressures and lower-than-anticipated demand within certain of Agilent's end markets, which Fitch believes will moderate revenue growth and constrain further meaningful operating margin expansion over the nearer term;

--Maturing unit growth rates in the company's EM end-markets, albeit still in the mid-single digits, which Fitch expects could prompt Agilent to expand into adjacent end markets, potentially via acquisitions; and

--More focused competitors (albeit smaller in many cases) in each of the company's discrete end markets, which Fitch believes results in more defensible market positions and could slow share gains for Agilent.

Fitch believes Agilent's liquidity as of July 31, 2008 was solid and supported by: approximately $1.7 billion of unrestricted cash and cash equivalents (excludes the aforementioned approximately $1.6 billion of restricted cash) and a $300 million RCF expiring May 11, 2012. Strong and consistent free cash flow also support liquidity and Fitch expects Agilent's annual free cash flow will be more than $750 million for fiscal 2008 (ending Oct. 31, 2008). Total debt was approximately $2.3 billion as of July 31, 2008 and consisted of: the World Trade debt, which the company is required to repurchase by Nov. 17, 2008; approximately $600 million of 6.5% senior unsecured notes due 2017; and other debt of approximately $200 million.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.