Fitch Affirms Motorola's IDR at 'BBB-/F3'; Revises Outlook to Positive

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings on Motorola Inc. (Motorola; NYSE: MOT) and revised the Rating Outlook to Positive from Stable:

--Issuer Default Rating (IDR) at 'BBB-';

--Senior secured revolving credit facility at 'BBB';

--Senior unsecured notes at 'BBB-';

--Short-term IDR and commercial paper program at 'F3'.

The rating actions affect approximately $4.9 billion of total debt, including the company's undrawn $1.5 billion revolving credit facility.

The Outlook revision to Positive follows Motorola's recent disclosure that it will contribute $3.5 billion of cash to Motorola Mobility (MDB - includes Mobile Devices and Home businesses) upon separation from Motorola Solutions, subject to final board approval.

Pro forma for the separation and sale of the Networks business, Fitch expects Motorola Solutions will have approximately $5.9 billion of cash and $2.9 billion of total debt. This includes $1.2 billion of cash proceeds from the Networks sale (expected to close near the end of 2010), Fitch's expectations for approximately $500 million of free cash flow in the second half of 2010, and the repayment at maturity of $527 million of senior debentures due Nov. 15, 2010. Improving profitability should enable Motorola Solutions' credit protection measures to remain solid with total leverage expected to be below 2.5 times (x) and interest coverage near 10x, pro forma for the separation.

The Positive Outlook also contemplates Fitch's expectations for additional deleveraging, given Motorola Solutions' significant cash balances and stated commitment to achieving a solid investment grade rating. Fitch believes the company's pro forma capitalization positions it to achieve a capital structure and credit protection measures indicative of a solid investment grade rating. Beyond the aforementioned upcoming debt maturity on Nov. 15, 2010, the company has meaningful debt maturities of $600 million and $400 million in November of 2011 and 2012, respectively.

With total debt expected to approximate $2.9 billion at separation, net cash should be substantial. However, since more than half of cash is located overseas, Fitch believes the company likely will have a net debt position on a domestic cash basis, potentially limiting the pace at which debt reduction could occur. This, in conjunction with cash pension obligations, partially allays Fitch's concerns regarding potential pressures from large equity holders for significant shareholder friendly actions.

Fitch believes Motorola Solutions' technology leadership, customer diversification, and exposure to mission critical programs will drive more consistent (albeit slower) revenue growth. Operating profit margins likely will exceed 15% during periods of positive revenue growth and 10% in a downturn, driven in part by the ongoing benefits of recent restructuring. Fitch estimates operating profit margin was 14.5% for the first half of 2010, versus 12.1% in the comparable 2009 period. Fitch anticipates annual free cash flow will approximate $500 million in each of next two years, after substantial cash payments required for the company's approximately $2 billion underfunded pension plans. This amount does not incorporate the resumption of paying a common dividend, which was suspended in 2009.

Fitch does not anticipate further positive rating actions until at least the separation is consummated.

However, negative rating actions could result if the company:

--Postpones the separation of MDB, most likely due to an acute reversal of its recent positive operating momentum and weak market acceptance of new product launches in the second half of 2010;

--Generates negative free cash flow before special cash outlays in 2010, likely due to a stalled recovery in enterprise markets or more significant than anticipated municipal and state budget cuts; and

--Does not maintain total leverage below 2.5x, likely from not using available cash for debt reduction.

Fitch believes Motorola's liquidity was solid as of June 30, 2010 and supported by:

--Approximately $2.9 billion of cash and cash equivalents, more than 80% of which Fitch estimates is located outside the U.S. Nonetheless, Motorola continues to review various repatriation strategies to return offshore cash to the U.S. with minimal adverse tax consequences. Of the cash and cash equivalents amount, $216 million was restricted cash;

--Approximately $5.3 billion of Sigma Funds balances and short-term investments, approximately 39% of which was held by affiliates outside the U.S. and the majority of which was invested in highly liquid securities; and

--An undrawn $1.5 billion revolving credit facility expiring Dec. 14, 2011. The size of the facility is limited to an amount determined based on eligible domestic accounts receivable and inventory.

Fitch's expectations for positive free cash flow also support liquidity. Beyond 2010, Fitch believes free cash flow will be constrained by increasing mandatory cash contributions to the company's underfunded pension in 2011 and 2012. The aforementioned sale of the majority of the Networks' assets for $1.2 billion of cash, along with approximately $150 million of retained accounts receivables, will provide additional liquidity.

Total debt as of June 30, 2010 was approximately $3.4 billion, consisting of various tranches of senior unsecured notes and debentures. Motorola's nearest maturity is $527 million of 7.625% senior unsecured debentures due on Nov. 15, 2010, which Fitch believes the company is likely to repay with available cash.

Additional information is available at 'www.fitchratings.com'.

Applicable criteria are available at 'www.fitchratings.com' and specifically include the following reports:

--'Corporate Rating Methodology', dated Aug. 16, 2010;

--'Revisions to Rating Definitions', dated March 2009;

--'Evaluating Corporate Governance', dated Dec. 12, 2007;

--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;

--'Short-term Ratings Criteria for Corporate Finance', dated June 12, 2007.

For additional details, see Fitch's most recent press release on Motorola dated Aug. 10, 2010 and available at 'www.fitchratings.com'.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

Short-Term Ratings Criteria for Corporate Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328670

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.