[June 18, 2015]

Fitch: Keysight Technologies' 'BBB' IDR Unaffected by Anite Acquisition

Fitch Ratings believes the 'BBB' Issuer Default Rating for Keysight Technologies, Inc. (Keysight) is unaffected by the proposed acquisition of software-centric wireless design and validation testing solutions provider, Anite (News - Alert) Plc (Anite). A full list of current ratings follows at the end of this release.

Fitch views the acquisition as a modest credit positive, given that Anite aligns with Keysight's strategy to grow in wireless communications, expand software solutions and increase revenues from research and development (R&D) customers. Keysight will use available offshore cash to fund the transaction.

The acquisition should add more than $100 million of annual revenue with operating profit margins in the low teens. Beyond the near-term, Fitch expects the resumption of positive revenue growth and $20 million of annual cost savings to drive operating income margin expansion to the mid-to-high teens.

Keysight announced it will acquire Anite for GBP1.26 per share in an all cash transaction or a total consideration of GBP388 million (approximately $606 million). Keysight expects the acquisition to close by the end of October 2015, subject to approvals by regulators and Anite's shareholders.

KEY RATING DRIVERS

The ratings and Outlook reflect Fitch's expectations for improving operating performance driven by the low-single digit positive revenue growth. Meaningful operating leverage and lower fixed costs from restructuring will drive operating profit margin expansion and strengthen annual free cash flow, providing sufficient internal liquidity to maintain conservative financial policies.

The ratings and Outlook are supported by:

--Leading positions and significant share in the majority of key end markets resulting in a significant and diversified global installed base. This enables highly profitable software upgrades, supports research and development (R&D) investment levels through the cycle and key technology platform development;

--Fitch's expectations for solid annual FCF of $250 million to $500 million through the cycle, driven by low capital intensity and countercyclical inventory. Profitability will remain cyclical but Keysight has reduced fixed costs to maintain a double digit operating profit margin at the trough of the cycle; and

--Conservative financial policies underpinned by expectations for a net cash position in the intermediate-term, although a significant portion of cash remains utside the U.S. Financial policies should provide Keysight with headroom for operational shortfalls, tuck-in acquisitions, and cash build outside the U.S. Keysight plans to maintain total leverage (total debt to operating EBITDA) below 2.0x and pay no dividend in the near-term. Fitch estimates total leverage is 1.8x, pro forma for the acquisition.

Rating concerns include:

--Challenges growing the top line within the context of a diversified but volatile set of end markets; revenue growth will remain cyclical with substantial downturns followed by commensurate recoveries, as was the case in the most recent recession. Significant operating leverage will exacerbate profitability swings and could result in below double digit operating profit, lower than expected FCF, and weakened credit protection measures over the short-term;

--Weak personal computer demand and lower testing penetration in low end legacy handsets, which constitutes Keysight's largest end markets; and

--Flattish end market demand anticipated within defense and aerospace markets, given lower military spending. Keysight will be challenged to accelerate low single digit long-term revenue growth, in the absence of steady product refreshes and further market share gains. Nonetheless, long-term growth drivers in most of Keysight's end markets remain healthy.

RATINGS SENSITIVITIES

Positive rating action would require Fitch's expectations for:

--Significantly higher mid-cycle revenues and FCF from sustained market share growth; and

--A long-term commitment to a net cash position and total leverage below 2x.

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 to remain above 2.5x, indicating more aggressive financial policies.

Liquidity was solid as of April 30, 2015 and consisted of:

--$894 million of cash, $131 million of which is located in the U.S.; and

--An undrawn $300 million revolving credit facility expiring Nov. 1, 2019.

Fitch's expectation for $250 million to $500 million of annual FCF also supports liquidity.

Total debt at April 30, 2015 was $1.1 billion and consisted of:

--$499 million of 3.3% senior notes due 2019; and

--$600 million of 4.55% senior notes due 2024.

Fitch currently rates Keysight as follows:

--Long-term Issuer Default Rating 'BBB';

--Senior Unsecured Revolving Credit Facility 'BBB';

--Senior Unsecured Notes 'BBB'.

The Rating Outlook is Stable.

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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