Fitch Affirms Agilent's IDR at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the long-term ratings of Agilent Technologies, Inc. (Agilent) at 'BBB+'. The Rating Outlook is Stable.

A full list of rating actions, which apply to approximately $1.6 billion of debt at Oct. 31, 2014, follows at the end of this release.

Agilent completed its spin-off of its electronic measurement (EM) business, now named Keysight Technologies, Inc., through a tax-free pro rata distribution to Agilent shareholders on Nov. 1, 2014. Keysight accounted for roughly 42% of Agilent's total net revenues and a similar proportion of operating income.

KEY RATING DRIVERS

--The process of spinning out Agilent's EM business has gone smoothly and largely as expected, to Fitch's knowledge. Pre-separation costs have not been excessive. Fitch expects continuing Agilent to improve margins and cash flows, albeit with some remaining separation-related costs, in fiscal 2015-2016.

--Fitch believes Agilent is committed to maintaining strong investment grade ratings and is expected to operate with a moderate leverage profile (gross debt-to-EBITDA below 2x). Debt maturities are long-dated, with only $100 million of debt due before July 2020, subsequent to the repayment of $1 billion of its unsecured notes during fiscal 2014.

--Agilent holds leading positions in its largest markets, with a significant installed base of capital equipment supporting a good amount of recurring sales of consumables. Nevertheless, the life sciences industry is highly competitive and consolidation is likely to remain a key theme. A sustained commitment to productive R&D investment for new product development will be necessary to maintain market leadership.

--The continuing business has more stable operations and cash flows post-spin, because of a larger proportion of recurring revenues (around 40%) and less volatile end-market demand. Fitch forecasts normalized free cash flow (FCF; cash from operations less capital expenditures and dividends) to exceed $400 million over the next few years.

--Agilent will remain well-diversified in terms of product categories, end markets, and geographies, even after the EM spin-off. Diversification supports stability, although a fairly large exposure to academic and government research budgets (around 12% of revenues) may constrain sales growth in periods of macroeconomic weakness.

--Acquisitions may be sizeable in the aggregate, given significant growth opportunities in diagnostics and genomics markets. Fitch anticipates smaller, capabilities-based deals, as fewer transformational targets remain. But larger deals are not out of the question, within the parameters of Agilent's history of and commitment to conservative financial management.

RATING SENSITIVITIES

Maintenance of Agilent's 'BBB+' ratings will require gross debt-to-EBITDA generally maintained at or below 2x. Temporary increases to consummate strategic M&A accompanied by a credible de-leveraging plan would be appropriate at the current rating category. Fitch recognizes that a successful long-term strategy in key areas like diagnostics and genomics may require sizeable acquisitions in the aggregate over the medium term.

Annual cash from operations of approximately $300 million will be required to generate adequate cash in the U.S. to fund Agilent's dividend, which Fitch expects the firm to grow over the ratings horizon, and share repurchase activity meant to offset dilution. Modest margin expansion will evidence successful new product introductions and operational efficiencies supportive of the 'BBB+' ratings.

A downgrade could result from the incurrence of debt to fund dividends or share repurchases, or to consummate a large acquisition such that cash flows would not be sufficient to permit adequate and timely de-leveraging. Margin deterioration due to market commoditization or the inability to flex costs in response to weak demand (i.e. from government and research budget cuts) could also precipitate downward ratings pressure.

An upgrade is not anticipated in the near- to medium-term. Fitch's 'BBB+' ratings provide Agilent with flexibility to take part in the consolidation expected to characterize the life sciences and diagnostics sector over the near- to medium-term.

MARKETS ARE HIGHLY COMPETITIVE, CONSOLIDATING

Agilent holds strong market positions in most of the markets in which it participates, but several of the its primary competitors have greater overall scale and financial flexibility. These include Thermo Fisher Scientific Corp. (Thermo Fisher); Danaher Corp.; Abbott Laboratories; and Roche. Thermo Fisher in particular has been aggressively expanding its genomics capabilities, and its recently completed acquisition of Life Technologies Corp. resulted in an organization four times the size of Agilent, by revenues. New product launches will be vital for Agilent to maintain leadership positions and to sustain pricing.

For Agilent, becoming a major player in diagnostics and genomics may require large-scale aggregate M&A. However, larger firms may have the ability to outbid Agilent and other mid-sized corporations as new technologies emerge and as consolidation occurs over time.

EXPECTATIONS FOR DEMAND GROWTH; PROFITABILITY IMPROVEMENTS

Fitch expects demand growth in Agilent's key markets to be sustained in the mid-single digits, with diagnostics/genomics possibly in the low-double digits, over the next several years. Gradually improving macroeconomic conditions and lapsing sequestration/austerity measures should alleviate pressures felt in academia and government end-markets, though demand growth in the U.S. and Europe will likely remain modest. Growth in biologic drug development should support solid demand among pharma and biotech firms. Agilent is also well-positioned to benefit from strong growth prospects in emerging markets in food safety, environmental, and chemical/energy end-markets.

Fitch thinks annual margin improvement of at least 30 basis points (bps) post-spin is achievable for the firm, driven by remaining synergy capture from the 2012 Dako acquisition and cost optimization initiatives following the EM spin. EBITDA margins are expected to run between 21% and 23% over the forecast period. Performance will be notably more stable after spinning out the more cyclical EM business.

SOLID LIQUIDITY; NO DEBT MATURITIES UNTIL FY2018

Liquidity is solid, comprising more than $2 billion (Fitch estimate) of cash on hand and full availability under the firm's $400 million revolver due September 2019. Most cash is held outside the U.S., but Fitch expects U.S. cash balances and cash flows generated in the U.S. (Fitch estimated 30%-40% of total operating CF) to be sufficient to fund Agilent's dividend, with the excess being directed toward U.S.-based M&A and/or share repurchase. Fitch forecasts cash from operations of approximately $680 million-$800 million in fiscal 2015-2017.

Total debt outstanding approximated $1.6 billion at Oct. 31, 2014, consisting primarily of:

--$100 million of 6.5% senior notes due Nov. 1, 2017;

--$500 million of 5.0% senior notes due July 15, 2020;

--$400 million of 3.2% senior notes due Oct. 1, 2022;

--$600 million of 3.875% senior notes due July 15, 2023.

Fitch has affirmed Agilent's ratings as follows:

--Long-term Issuer Default Rating at 'BBB+';

--Senior unsecured bank facility at 'BBB+';

--Senior unsecured notes at 'BBB+'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology' (May 28, 2014).

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=913955

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, CFA
Director
+1-212-908-0501
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, CFA
Director
+1-212-908-0501
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com