Fitch Ratings has affirmed Agilent Technologies, Inc.'s (Agilent) (NYSE:A) ratings following the company's announcement that it will be required to repay $1.5 billion of debt obligations within the next 120 days. Fitch affirms the following:
--Issuer default rating (IDR) at 'BBB-';
--Senior unsecured revolving credit facility (RCF) at 'BBB-'; and
--Senior unsecured notes ($600 million, 6.5%, due 2017) at 'BBB-'.
The Rating Outlook remains Stable. Approximately $900 million of debt is affected by Fitch's action, including the currently undrawn $300 million RCF expiring 2012.
Merrill Lynch has notified Agilent that it will be required to repay $1.5 billion of debt obligations related to a wholly-owned subsidiary, Agilent World Trade, within 120 days. Fitch believes the company will review various funding options, none of which are anticipated to have any ratings impact given Fitch's expectations that Agilent's long-term capital strategy will include higher debt levels. Moreover, the company can satisfy the put with available cash, including the approximately $1.6 billion of restricted cash and cash equivalents related to the World Trade and approximately $1.4 billion of unrestricted cash and cash equivalents as of Jan. 31, 2008.
Fitch believes a substantial amount of the company's total gross cash position is located overseas and could incur a tax penalty if used to satisfy the aforementioned debt obligation. Aside from the aforementioned undrawn RCF, which includes a $200 million accordion feature, Fitch believes Agilent's liquidity is supported by expectations that the company will generate $500 million of free cash flow in fiscal year 2008. The affirmation of the ratings continues to incorporate Fitch's expectations that Agilent will curtail share repurchases should cash flow and/or liquidity become pressured.
Pro forma for the repayment of the $1.5 billion of debt obligations, total leverage is a Fitch estimated 0.7 times (x) and interest coverage 9x for the LTM ended Jan 31, 2008. If the company were to fully refinance this obligation, gross leverage would be 2.5x, which is within Fitch long-term expectations. Given Agilent's substantial amount of overseas cash and free cash flow, borrowings are likely to increase over the longer-term to support ongoing share repurchases and, to a lesser extent, acquisitions. The company currently has approximately $1.6 billion outstanding under its current share repurchase program.
The ratings and Outlook continue to reflect Agilent's:
--Solid annual free cash flow, which Fitch believes will exceed $500 million in each of the next few years, driven by higher profitability and improved working capital efficiency;
--Relatively conservative financial policies and solid liquidity position, including a net cash position;
--Diversified customer and end market portfolio, relatively positive industry fundamentals, and lower fixed cost structure following the completion of the company's restructuring activities in fiscal year 2006, all of which Fitch believes will reduce the volatility of Agilent's future operating results; and
--Leading share and broad portfolio in a variety of relatively fragmented measurement markets.
Rating concerns center on:
--Fitch's expectations for ongoing share repurchases, which could include increased borrowings since the majority of Agilent's free cash flow is generated overseas. However, the ratings incorporate Fitch's expectations that the company will maintain manageable leverage metrics and curtail share repurchase activity should cash flow become pressured;
--Sustained pricing pressures and lower-than-anticipated demand within certain of Agilent's end markets, including wireless manufacturing (approximately 8% of total revenues for fiscal 2007), which Fitch believes will moderate revenue growth and constrain further meaningful operating margin expansion over the nearer term;
--maturing unit growth rates in the company's core electronics measurement (EM) end markets, albeit still in the mid single digits, which Fitch expects will prompt Agilent to accelerate expansion into adjacent end markets and acquisition activity; and
--More focused competitors (albeit smaller in many cases) in each of the company's discrete end markets, which Fitch believes results in more defensible market positions and could slow share gains for Agilent.
Despite lower revenue growth for Agilent's EM segment (almost two-thirds of fiscal 2007 revenues), due in part to the aforementioned pricing pressures for wireless handset manufacturing testing, Fitch expects the company's bio-analytical measurement (BAM) segment (just over one-third of fiscal 2007 revenues) to continue growing at a double digit rate over the next few years. While acquisitions and currency fluctuations meaningfully contributed to recent results, revenue growth for BAM is being driven by solid demand across all end markets, including its proprietary supplies business, and across each of its geographies. Given the faster growth rate and BAM's higher operating profitability (a Fitch estimated 19% for fiscal 2007 versus 14% for EM), Fitch believes an increasingly balanced corporate revenue and profit mix will further reduce Agilent's operating volatility, despite the company's small but growing exposure to the comparatively volatile food and petrochemical end markets.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Jason Pompeii, +1-212-908-0668
Nick P.
Nilarp, CFA, +1-212-908-0649
Jason Paraschac, +1-212-908-0746
Brian
Bertsch, +1-212-908-0549 (Media Relations)