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TEXT-Fitch comments on Motorola Solutions
July 25, 2012 / 4:37 PM / 5 years ago

TEXT-Fitch comments on Motorola Solutions

 (The following statement was released by the rating agency)
 July 25 - Fitch Ratings stated today that the ratings for Motorola
Solutions, Inc. (Motorola Solutions; NYSE: MSI) are unaffected by 
Fitch's expectations for lower cash balances from incremental share repurchases 
and increased cash dividends. 

Motorola Solutions' board of directors authorized an incremental $2 billion 
stock buyback program with no termination date and increased the annual common 
dividend to $1.04 (approximately $300 million) from $0.88 per share. This 
follows the company's near completion through the quarter ended June 30, 2012, 
of the existing $1.5 billion stock buyback program initiated in July 2011 and 
increased to $3 billion in January 2012. 

Given Fitch's expectations for annual pre-dividend free cash flow (FCF) of $500 
million to $1 billion, the combination of shareholder friendly uses of cash and 
acquisitions could exceed FCF beyond 2012. As a result, net cash should decline 
from nearly 2 times (x) as of June 30, 2012 and could reach a net debt position.
Fitch believes the anticipated reduction in cash reduces event risk for the 
company.

The ratings contemplate the company moderating stock buybacks to maintain 
sufficient domestic cash balances, which Fitch estimates in the $500 million to 
$1 billion range. Therefore, FCF and ability to efficiently repatriate foreign 
earnings and existing overseas cash will be a significant factor in pacing share
repurchases. Domestic cash was approximately $1.4 billion at June 30, 2012, 
representing 36% of total cash. Fitch believes Motorola Solutions' domestic FCF 
generation approximates the company's sales split, which was roughly 60% 
domestic and 40% foreign for the latest 12 month (LTM) period. 

Fitch does not anticipate meaningful borrowing to support stock buybacks but the
ratings reflect the company's guidance that it will maintain total adjusted 
leverage (total adjusted debt to operating EBITDAR) approximating 2x. The 
expectation for lower cash increases the risk that acquisitions would be debt 
funded, although acquisitions are expected to be small in size.

Motorola Solutions is on track to exceed Fitch's expectations for low to 
mid-single digit revenue growth and double digit operating income growth in 
2012, following a solid operating performance in the first half of 2012. Demand 
within Motorola Solutions' government businesses is solid, despite still 
pressured public coffers. Enterprise markets remain challenged, given a cautious
macroeconomic environment and ongoing weakness in Europe. Year-over-year 
revenues for the Enterprise segment were down modestly but slightly up after the
exclusion of the iDEN business.

The company should continue benefitting from operating leverage. Fitch expects 
gross margins will remain near 50% on an adjusted basis but that adjusted 
operating expenses will decline further as a percentage of sales. For 2012, 
Fitch expects operating expenses will be below 35% of sales, versus a Fitch 
estimated 37% in 2011 and 41% in 2010. As a result, operating income should 
exceed 15% of revenues, up from a Fitch estimated 14.2% in 2011 and below 10% in
2010. 

Motorola Solutions' credit protection measures will remain solid. Fitch 
estimates total leverage (total debt to operating EBITDA) will approximate 1x 
over the intermediate term, while interest coverage will exceed 10x. FCF to 
total debt should exceed 20% for 2012.

The ratings are supported by Motorola Solutions':

--Leading market positions in public safety and enterprise markets, driven in 
part by a solid intellectual property (IP) portfolio and brand name;

--Expectations for more consistent operating performance and pre-dividend annual
FCF of $500 million?$1 billion; 

--Conservative capital structure and solid liquidity position.

Ratings concerns center on:

--Maturing public safety markets that may limit significant longer-term organic 
growth opportunities; 

--Strained government budgets and a tepid macroeconomic growth environment, 
which could mute intermediate-term revenue growth; 

--Reduced diversification and revenue base following separation of mobile 
devices and sale of networks businesses.

Positive rating actions could result from meaningfully greater than expected 
FCF, likely driven by robust new product adoption leading to stronger than 
anticipated revenue growth and gross profit margin expansion.

Negative rating actions could result from:

--Pre-dividend annual FCF meaningfully below $500 million, likely due to 
meaningful deterioration in the macroeconomic environment or more significant 
than anticipated municipal and state budget spending cuts; 

--The company does not maintain total adjusted leverage below 2.5x, likely from 
intensified profit margin contraction. 

As of June 30, 2012, Fitch believes liquidity was solid and supported by: 

--Approximately $3.7 billion of cash and cash equivalents and the Sigma Fund. 

--An undrawn $1.5 billion revolving credit facility expiring June 30, 2014.

Fitch's expectation for pre-dividend annual FCF of $500 million to $1 billion 
also supports liquidity. Over the near term, Fitch believes FCF may be 
constrained by increasing cash contributions to the company's $2.5 billion 
underfunded pension in 2012. 

Total debt was approximately $1.9 billion, consisting of various tranches of 
senior notes. Motorola Solutions has a clear debt maturity schedule until the 
company's $1.5 billion revolving credit facility expiring June 30, 2014 and $400
million of senior notes mature on Nov. 15, 2017. 

Fitch currently rates Motorola Solutions as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB'; 
--Senior unsecured bank revolving credit facility (RCF) at 'BBB';
--Senior unsecured notes at 'BBB'; 
--Short-term IDR and commercial paper program at 'F2'.

 (Caryn Trokie, New York Ratings Unit)
 

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