Fitch Rates Keysight Technologies' $1.1 Billion of Senior Notes at 'BBB'

CHICAGO--()--Fitch Ratings has assigned a 'BBB' rating to Keysight Technologies Inc.'s (Keysight) $1.1 billion senior notes offering. The ratings affect $1.4 billion of total debt including the company's $300 million undrawn revolving credit facility. The Rating Outlook is Stable. A full list of current ratings follows at the end of this release.

Keysight's debt issuance consisted of $500 million of five-year senior notes and $600 million of 10-year senior notes. Net proceeds from the senior notes will be used to make a one-time cash distribution to Agilent Technologies, Inc. (Agilent), of which Keysight is currently a wholly owned subsidiary, and to fund working capital.

The senior notes will be guaranteed on an unsecured, unsubordinated basis by Agilent. However, the guarantee will terminate upon the earliest of Keysight's separation from Agilent, Agilent ceasing to own the majority of Keysight's common stock or the consummation of a legal or covenant defeasance or discharge of the indenture related to the senior notes.

Agilent plans to separate Keysight, its Electronics Measurement (EM) segment, from the Life Sciences, Diagnostics and Applied Markets (LDA) segments, creating two stand-alone companies. The separation will take the form of a tax-free spinoff to Agilent shareholders. The separation is expected to close November 2014.

KEY RATINGS DRIVERS

The ratings and Outlook reflect Fitch's expectations for improving operating performance driven by the resumption of revenue growth after bottoming in fiscal 2013. Meaningful operating leverage and lower fixed costs from restructuring will drive operating profit margin expansion and strengthen annual free cash flow, providing sufficient internal liquidity to maintain conservative financial policies.

The ratings and Outlook are supported by: i) leading positions and significant share in the majority of key end markets; ii) Fitch's expectations for solid annual FCF of $250 million to $500 million through the cycle; and iii) conservative financial policies underpinned by a net cash position in the intermediate-term, although a significant portion of cash will be located outside the U.S.

Rating concerns include: i) challenges growing the top line within the context of a diversified but volatile set of end markets; ii) weak personal computer demand and lower testing penetration in low end legacy handsets, which constitutes Keysight's largest end markets; and iii) flattish end market demand anticipated within defense and aerospace markets, given lower military spending.

Keysight's leading positions and strong share in key end markets has resulted in a significant and diversified global installed base. This enables highly profitable software upgrades, supports research and development (R&D) investment levels through the cycle and key technology platform development.

Fitch expects $250 million to $500 million of annual FCF through the cycle, driven by low capital intensity and countercyclical inventory. Profitability will remain cyclical but Keysight has reduced fixed costs to maintain a double digit operating profit margin at the trough of the cycle.

Financial policies should provide Keysight with headroom for operational shortfalls, tuck-in acquisitions, and cash build outside the U.S. Keysight plans to achieve a net cash position by the anniversary of the spin-off, maintain total leverage (total debt to operating EBITDA) below 2.0x, and pay no dividend in the near-term. Fitch estimates total leverage is 1.5x, pro forma for the separation and senior notes issuance.

Revenue growth will remain cyclical with substantial downturns followed by commensurate recoveries, as was the case in the most recent recession. Significant operating leverage will exacerbate profitability swings and could result in below double digit operating profit, lower than expected FCF, and weakened credit protection measures over the short-term.

Keysight will be challenged to accelerate low single digit long-term revenue growth, in the absence of steady product refreshes and further market share gains. Nonetheless, long-term growth drivers in most of Keysight's end markets remain healthy. Significant acquisitions opportunities appear limited, given the strong share and consolidation in most markets.

For communications markets, mobile data traffic growth, increasing components and chipset complexity, and increasing penetration in developing economies should drive long-term growth. Aerospace and defense growth will depend upon non-U.S. demand for new satellites and radar technologies and growing intelligence and surveillance needs. Increasing electronics penetration in industrial applications, mobile computing, high-performance requirements for cloud computing and the continuation of Moore's Law should drive growth for the industrial, computers, and semiconductor markets.

In the absence of increased working capital from stronger top line growth, cash balances will build and could result in shareholder pressure to return excess cash. As a result, conservative financial policies could give way to initiating a more than anti-dilutive share repurchase program and sizeable dividend, potentially pressuring conservative financial policies.

RATINGS SENSITIVITIES

Positive rating action is unlikely in the absence of significantly higher mid-cycle revenues and FCF from sustained market share growth in conjunction with a long-term commitment to a net cash position and total leverage below 2x.

Negative rating action could result from: i) structurally lower mid-cycle revenues or operating profit margin below 10%, likely from diminished technology leadership, or ii) net debt beyond the separation's anniversary or expectations for total leverage to remain above 2.5x, indicating more aggressive financial policies.

Liquidity will be solid and consist of: i) $700 million of cash at separation, $200 million of which will be located in the U.S., and ii) $300 million revolving credit facility. Annual FCF of $250 million to $500 million also will support liquidity.

Fitch rates Keysight as follows:

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

--Senior Unsecured Revolving Credit Facility at 'BBB';

--Senior Unsecured Notes at 'BBB'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 18, 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=892214

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1 312-368-3210
Senior Director
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Committee Chairperson
Rolando Larrondo, +1 212-908-9189
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii, +1 312-368-3210
Senior Director
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA, +1 212-908-0673
Senior Director
or
Committee Chairperson
Rolando Larrondo, +1 212-908-9189
Senior Director
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com