Fitch Affirms Motorola Solutions Ratings Following Tender Offer Announcement; Outlook Negative

CHICAGO--()--Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR) assigned to Motorola Solutions following the company's announced tender offer of up to $2 billion of share repurchases and $1 billion strategic investment from Silver Lake Partners (SLP). Fitch has revised the Rating Outlook to Negative from Stable. Fitch's actions affect approximately $6.5 billion of debt, including the company's undrawn $2 billion revolving credit facility (RCF) and pro forma for the $1 billion convertible notes issued to SLP.

Motorola Solutions will initiate a tender offer in the current quarter to repurchase up to $2 billion of common shares. The company will fund the tender with available cash and net the proceeds from the $1 billion convertible note issued to SLP.

Fitch views the SLP investment as a credit positive, given SLP's track record of driving efficiencies and organic growth, as well as identifying strategic acquisition opportunities including accelerating growth in smart public safety solutions and services. These investments in turn can potentially strengthen the company's market positions and services offerings. SLP will also add two managing partners to Motorola Solutions' board of directors.

The ratings and Negative Rating Outlook reflect the company's use of debt to support accelerated share repurchases and potential for weakened credit protection measures beyond the near-term, despite positive operating trends. Pro forma for the tender offer and convertible notes issuance, Fitch estimates total leverage (total debt to operating EBITDA) of approximately 3.5x, versus 2.7x for the latest 12 months ended July 4, 2015.

Fitch believes Motorola Solutions' stated commitment to managing financial policies to maintain a solid investment grade rating mitigates concerns regarding the adoption of more aggressive financial policies.

KEY RATING DRIVERS

Fitch contemplated Motorola's opportunistic share repurchases to reduce excess cash through 2016, which provides the company flexibility to address operational shortfalls or organically fund smaller acquisitions while maintaining total leverage below 3x. The Negative Outlook reflects the more aggressive shareholder return posture. Nonetheless, Motorola Solutions' growing backlog, particularly in services, and solid profitability growth from meaningful restructuring should return total leverage below 3x in 2016.

Fitch believes operating trends will remain positive through at least the near-term, despite continued currency headwinds. Solid new order growth in products and services is driving significant backlog growth,. Fitch anticipates constant currency growth will be modestly positive in 2015 and in the low single-digits beyond the near-term, driven by market share gains, higher backlog and services' attach rates.

The company is on track to achieve $175 million of incremental cost reductions, which Fitch believes will drive profit margin expansion within the context of flat top-line growth. Fitch forecasts more than 300 basis points of operating EBIT margin expansion in 2015 with further upside beyond the near-term. For the quarter ended July 4, 2015, Fitch estimates operating EBIT margin was roughly 19%, versus 14.5% for the prior year quarter.

Fitch believes Motorola Solutions' ratings are supported by:

--Lower operating volatility following the sale of the Enterprise business, given more consistent government and public safety demand;

--Leading market positions in Public Safety and Enterprise markets, driven by investment and technology leadership, significant installed base, and brand name; and

--Expectations for structurally higher profitability and annual FCF from lower fixed costs related to restructuring.

Ratings concerns include:

--Potential for debt financed acquisitions as part of the company's strategy to increase services' attach rates, given management's commitment to use excess cash and FCF for share repurchases;

--Low single-digit organic revenue growth profile, given mature growth rates and funding constraints associated with government markets; and

--Smaller scale and reduced diversification following divestitures over the last several years as a pure play provider of public safety solutions.

KEY RATING ASSUMPTIONS

--Positive low single digit constant currency organic revenue growth over the longer-term, driven by market share gains and higher backlog and services' attach rates.

--Higher profit margins from the realization of $175 million of incremental cost reductions in 2015 and operating leverage resulting in operating EBITDA margins in the mid-20s, versus high-teens and low-20s more recently.

--The repurchase $2 billion of shares via the tender, resulting in up to $3.5 billion of stock buybacks in 2015.

--Maintenance of at least $1 billion of cash and utilizing FCF for a combination of acquisitions, particularly in light of the SLP strategic partnership, and share repurchases.

RATING SENSITIVITIES

Negative rating actions could result from:

--Fitch's expectation that total leverage will remain above 2.5x, driven by among other things ongoing share repurchases with FCF requiring debt-financed acquisitions that fail to produce sufficient incremental profitability; or

--Expectations for sustained negative revenue growth from competitor driven pricing pressures or structurally lower aggregate funding due to budget constraints resulting in annual FCF near $250 million.

Positive: The stabilization of the rating at 'BBB' could occur with Motorola Solutions reducing total leverage near 2.5x exiting 2016, driven primarily by cost reduction efforts and related operating EBITDA growth. Beyond this, Fitch does not anticipate positive rating actions, given the company's commitment to using FCF for share repurchases and potential for debt financed acquisitions.

LIQUIDITY AND DEBT STRUCTURE

Fitch believes Motorola Solutions' liquidity was solid as of July 4, 2015 and pro forma for the $2 billion tender, and supported by:

--$2.1 billion of cash and cash equivalents; and

--$2 billion undrawn RCF expiring May 2019.

Fitch's expectation for more than $500 million of annual FCF through the intermediate-term also supports liquidity. Motorola Solutions has no significant maturities until 2021.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:

Motorola Solutions

--Long-term IDR at 'BBB';

--Senior unsecured RCF at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook has been revised to Negative from Stable.

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

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989058

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989058

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Mike Weaver
+1-312-368-3156
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Mike Weaver
+1-312-368-3156
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com