OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Keysight Technologies, Inc., including the Long-term Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. Fitch's actions affect $2 billion of debt, including the $450 million revolving credit facility (RCF). A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The rating and outlook reflect Fitch's expectations for consistent operating performance over the intermediate term within the context of low single-digit organic revenue growth. Increased penetration in wireless research and development (R&D) and services should offset negative secular trends in back-end manufacturing test. Lower defense spending from political ongoing elongated budget negotiations could constrain growth in aerospace and defense beyond the near term, despite the company's strong market positions and growth in aerospace.

Fitch expects Keysight will complement top line growth with acquisitions aimed at establishing technology leadership in 5G and bolstering service capabilities, as the company did with the acquisitions of Anite Plc and Electroservices Enterprises Limited in fiscal 2015. Anite added wireless software and design test capabilities while Electroservices strengthens Keysight's multi-vendor calibration and asset management strategy. These deals, which Keysight funded with offshore cash, will add $175 million of annual run rate revenues and increase the company's addressable market .

Fitch expects operating EBITDA margin expansion from a shifting mix away from back-end manufacturing test to wireless R&D and services, in addition to cost savings related to the Anite acquisition. Fitch expects operating EBITDA margin approaching the mid-20s through the intermediate term from a Fitch-estimated 23.4% for fiscal 2015 and 18.9% for fiscal 2014. Top line cyclicality will drive profit volatility, given fixed costs in the business, although an increasing mix of R&D, software and services will mitigate some variability.

Fitch expects credit protection measures to remain near current levels with total leverage (total debt to operating EBITDA) below 2.0x, versus a Fitch-estimated 1.6x for fiscal 2015. Fitch expects gross interest coverage (operating EBITDA to gross interest expense) - a Fitch estimated 14.5x for fiscal 2015 - to remain in the mid-teens. Fitch anticipates that partially debt funded acquisitions could pressure credit metrics temporarily but that the company would use free cash flow for subsequent debt reduction.

The ratings are supported by Fitch's expectations for:
-- Keysight's leading market positions will result in: sufficient scale for ongoing R&D investments, substantial installed base that drives engineering collaboration, software upgrades and services; and leadership within standards bodies.
-- More than $250 million of annual FCF through the cycle, driven by solid profitability, low capital intensity and a counter-cyclical working capital model.
-- Conservative financial policies with no dividend or meaningful share repurchases and total leverage (total debt to operating EBITDA) below 2x, providing Keysight with headroom for operation shortfalls or tuck-in acquisitions. Fitch expects cash balances to remain high to support acquisitions, although a significant portion of cash remains outside the U.S.

Ratings concerns center on Fitch's expectations for:
-- Weak personal computer demand to persist over the foreseeable future and lower testing penetration in low end legacy handsets. These markets constitute a meaningful proportion of Keysight's sales (Fitch-estimated 10%-20% of total sales) and are likely to continue negative revenue growth, given Fitch's expectations for mid- to high-single digit negative PC unit growth and mid-single digit negative top line growth from reduced post-manufacturing cell phone testing.
--Revenue and operating profits to remain cyclical with significant revenues declines in a downturn offset by commensurate recovery over the following 18 months, as was the case after the last recession. Individual customer handset manufacturing programs and PC weakness have added volatility, although non-manufacturing communications (roughly 50%) should mitigate some variability.
-- R&D investments will remain in the low to mid-teens as a percentage of revenues through the cycle, given electronics measurement market fragmentation and Keysight's focus on technology leadership in 5G and internet of things (IoT) markets.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
-- Low single-digit organic constant currency revenue growth, driven by increased wireless R&D penetration and data growth, offsetting continued erosion in back-end manufacturing test.
-- A shift away from back-end/manufacturing test to wireless R&D and software, in conjunction with footprint optimization over the past year, will drive modest operating EBITDA margin expansion toward the mid-20s.
-- R&D will remain in the low- to mid-teens as a percentage of revenues, as the company invests for technology leadership in 5G and service capabilities.
-- The company will focus on acquisitions with FCF and modest debt incurrence.
-- In the absence of acquisitions or a solid deal pipeline, Keysight will initiate shareholder returns beyond the near-term.

RATING SENSITIVITIES

Negative rating action could result from Fitch's expectations for:
-- Structurally lower mid-cycle revenues or operating profit margin below 10%, likely from diminished technology leadership; or
-- Total leverage sustained above 2.5x, from acquisitions or the adoption of more aggressive financial policies.

Positive rating action is unlikely but could occur if Fitch expects:
-- Significantly higher mid-cycle revenues and FCF of $500 million to $1 billion from sustained market share growth; and
-- A long-term commitment maintain total leverage in the 1.5x to 2x range.

LIQUIDITY

As of Oct. 31, 2015 Fitch believes Keysight's liquidity is solid and supported by:

-- $483 million of cash and cash equivalents, the majority of which Fitch believes is located outside the U.S.
-- An undrawn $425 million RCF expiring Nov. 2019.

Fitch's expectations for more than $250 million annual FCF also support liquidity.
Total debt at Oct. 31, 2015 was $1.6 billion and consisted of:

-- $450 million senior unsecured revolving credit facility due November 2019;
-- $500 million senior unsecured notes due 2019; and
-- $600 million senior unsecured notes due 2024.

FULL LIST OF RATING ACTIONS

Keysight Technologies, Inc.

-- Long-term Issuer Default Rating (IDR) at 'BBB'
-- Senior unsecured Revolving Credit Facility (RCF) at 'BBB'
-- Senior unsecured notes at 'BBB'