Fitch Affirms Agilent at 'BBB+'; Outlook Stable.
KEY RATING DRIVERS
Strong Positions in Competitive Markets: Agilent holds leading positions in its largest markets, but several of its primary competitors have greater overall scale and financial flexibility than Agilent, including Thermo Fisher Scientific Corp., Danaher Corp., Abbott Laboratories, and Roche. Competition will remain heightened and consolidation is likely to remain a key theme. A sustained commitment to R&D investment for new product development will be necessary to maintain market leadership.
Commitment to Strong IG: Agilent has consistently maintained gross debt/EBITDA around 2.0x since it spun off Keysight in 2014. The company has deployed capital on targeted M&A, expansionary capex and returns to shareholders. We believe Agilent's access to its substantial overseas cash balances under tax reform will allow for larger M&A going forward. Fitch believes that Agilent is committed to maintaining strong investment grade (IG) ratings and that the company will continue to operate with a moderate leverage profile, with gross debt/EBITDA remaining around 2.0x.
Stable Operations, Cash Flows: Agilent's business has a stable operating and cash flow profile, owing to a significant installed instrument base providing a large proportion of recurring revenues (around 56%) and steady end-market demand. EBITDA margin improvement of roughly 150bps since the Keysight spin has been attributable to restructuring operations, integration of Dako, and rationalization of the portfolio through divestitures. Fitch forecasts improving margins from infrastructure and supply chain cost improvements and FCF generation (cash from operations less capital expenditures and dividends) of between $600 million-$700 million for the next few years.
Good Revenue Diversification: Agilent remains well diversified in terms of product categories, end markets, and geographies. The company is exposed to the applied markets (46% of total revenue), life sciences market (39%) and the diagnostics market (15%). Geographic exposure is roughly split in thirds between the Americas, Europe and Asia. Diversification supports stability, although exposure to academic and government research budgets (approximately 10% of revenues) may lead to dampened or negative sales growth in periods of macroeconomic weakness.
Measured Approach to M&A: Fitch expects that Agilent will focus on smaller, capabilities-based deals, but the pace of deals may pick up given improved access to outside the U.S. (OUS) cash without negative cash tax implications. For Agilent, becoming a leader in diagnostics and genomics may require large-scale aggregate M&A. But larger firms may have the ability to outbid Agilent and other mid-sized corporations as new technologies emerge and as consolidation occurs over time. While larger deals are not out of the question, Fitch expects that any transactions of meaningful size will be executed in a manner consistent with Agilent's history of and commitment to conservative financial management.
Fitch believes Agilent is well positioned operationally compared to other healthcare companies in the life sciences and diagnostics sub-sectors, which are generally rated in the low to mid 'BBB' category. Agilent's operating profile is favorably differentiated by the breadth and depth of its portfolio of product and service offerings, and diversification of end-market customers versus peer companies PerkinElmer, Inc. (BBB/Stable) and Bio-Rad Laboratories, Inc. (BBB-/Stable) but lags Thermo Fisher Scientific Inc. (BBB/Stable). Agilent also exhibits operating margins and coverage metrics that are in line with or better than those of its peers. Agilent maintains total debt/EBITDA at around 2.0x, which is lower than its peers. Improved access to OUS cash could help to fund larger M&A going forward, while maintaining its credit profile.
Fitch's key assumptions within our rating case for the issuer include:
--Organic revenue growth of 4%-5%, reflecting robust growth in emerging markets offset by softer demand in more developed markets.
--Fitch models EBITDA growth resulting from growing revenues, with flat margins due to acquisitions offsetting the benefit of operating leverage.
--EBITDA growth backstops stronger cash flow generation. FCF exceeds $600 million throughout the forecast period, benefitting from manageable capex requirements and shareholder dividends.
--Incremental annual debt increases of $250 million annually from 2018-2021 to help finance share repurchases, resulting in gross debt/EBITDA of around 2.0x throughout the forecast period.
--Fitch expects acquisitions to be targeted in nature and manageable in size.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
--A commitment from management to pursue a financial policy consistent with operating with gross debt to EBITDA durably below 2.0x.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
--Lower-than-expected cash flows, leading Agilent to issue more than expected additional debt to fund dividends or share repurchases;
--Margin deterioration due to market commoditization or the inability to flex costs in response to weak demand (e.g. from government and research budget cuts);
--An acquisition of size such that cash flows would not be sufficient to permit adequate and timely deleveraging to gross debt/EBITDA of 2.5x.
Solid Liquidity, Lower U.S. Cash: Agilent maintains a solid liquidity profile with $2.8 billion in cash on the balance sheet, although historically U.S. cash balances have been low. Repatriation of foreign earnings under the Tax Act will allow OUS cash balances to be more accessible, without adverse cash tax consequences. Revolver availability of $655 million under the firm's $1 billion revolver due Sept. 15, 2019 should be adequate to fund smaller acquisition targets and working capital needs.
Near-Term Maturities Not Material: Agilent's next maturity is the unsecured revolver in 2019, but we anticipate repatriated cash will pay down the $345 million balance. The next maturity will be the $500 million unsecured notes in 2020, which we anticipate may be refinanced. We anticipate share repurchases requiring incremental debt of $250 million in each of the next three years.
FULL LIST OF RATING ACTIONS
Agilent Technologies, Inc.
--LT IDR affirmed at 'BBB+'; Stable Outlook;
--Senior unsecured revolver and notes affirmed at 'BBB+'.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jun 7, 2018|
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