Fitch: Motorola Solutions' Ratings and Outlook Unaffected by Enterprise Sale

CHICAGO--()--Fitch Ratings has stated that the ratings for Motorola Solutions, Inc. (Motorola Solutions; NYSE: MSI) are unaffected by the announced sale of the Enterprise business for $3.45 billion in cash and lower revenue guidance for 2014. The sale of the Enterprise business is expected to close by the end of 2014, with 100% of the proceeds ultimately returned to shareholders.

Fitch's current long-term Issuer Default Rating (IDR) for Motorola Solutions is 'BBB'. The Rating Outlook is Stable. A full list of ratings for Motorola Solutions follows at the end of this release.

KEY RATINGS DRIVERS

The ratings reflect Fitch's expectations for solid and more stable long-term operating performance pro forma for the Enterprise sale, given leading market share, greater visibility and lower cyclicality associated with government and public safety markets. Profitability will remain strong, with operating profit margin in the mid- to upper-teens and annual free cash flow (FCF) of $250 million to $500 million.

However, credit metrics at the low end of the range for the current rating and retention of meaningful underfunded pension obligations could constrain financial flexibility. In combination with smaller scale, reduced revenue diversity and mature government and public safety markets, this reduces headroom at the current rating for operational shortfalls from lower profitability.

Pro forma for the sale, credit protection measures will weaken, adding roughly a half turn to leverage. Fitch estimates pro forma total debt to operating EBITDA of approximately 1.9 times (x) (or 2.8x adjusted for rents and net pension obligations) for 2013 compared to 1.5x (or 2.2x adjusted) prior to the sale. Pro forma operating EBITDA to interest expense exceeds 9x.

Motorola Solutions also reduced first quarter and full year revenue guidance for 2014, reflecting softer than expected demand in North American government markets and lower than anticipated Enterprise sales. As a result, the company now expects low-single digit negative full year revenue growth compared to previously anticipated low single digit positive growth. The 2014 guidance incorporates mid-single digit growth in Enterprise and low to mid-single digit revenue declines in Government.

Despite the weaker near-term demand environment, the ratings and Outlook reflect Fitch's expectations for still solid operating profit and FCF in 2014. Operating profit margin is anticipated to remain in the upper teens in 2014, contributing to FCF in excess of $250 million that will be used to fund acquisitions and stock buybacks. Over the longer term, organic revenue growth will be in the low single digits with growth driven increasingly by markets outside the U.S.

RATINGS SENSITIVITIES

Negative rating actions could result from:

--Total adjusted leverage exceeding 3.0x beyond short-term upticks, from structurally lower than expected profit margins;

--Sustained annual FCF below $250 million due to more significant-than-anticipated government spending cuts.

Positive rating actions are not anticipated, given Fitch's expectations for weaker credit metrics over the intermediate-term.

Motorola Solutions will sell the Enterprise businesses to Zebra Technologies Corporation (Zebra) for $3.45 billion in cash. The sale will exclude certain assets, including the iDEN infrastructure business. Pro forma sales are more than $6 billion with operating profit margin in the upper teens. Restructuring actions will drive operating leverage, offsetting lower gross margin attributable to a growing services business. The sale is expected to close at the end of 2014.

As of Dec. 31, 2013, Fitch believes liquidity was solid and supported by:

--$3.2 billion of cash and cash equivalents ($1.8 billion of which was in the U.S.);

--An undrawn $1.5 billion senior unsecured revolving credit facility (RCF) expiring 2014.

Total debt was approximately $2.5 billion as of Dec. 31, 2013, consisting of various tranches of senior notes. Motorola Solutions has a clear debt maturity schedule until $400 million of senior notes mature on Nov. 15, 2017. Nonetheless, the company's $1.5 billion revolving credit facility expires June 30, 2014.

Fitch currently rates Motorola Solutions' as follows:

--Long-term IDR 'BBB';

--Senior unsecured bank RCF 'BBB';

--Senior unsecured notes 'BBB';

--Short-term IDR and commercial paper program 'F2'.

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

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1 312-368-3210
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Committee Chairperson
Jamie Rizzo, CFA, +1 212-908-0548
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1 312-368-3210
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Committee Chairperson
Jamie Rizzo, CFA, +1 212-908-0548
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com