Fitch Affirms Agilent Technologies' IDR at 'BBB'; Outlook Revised to Positive

Fitch's actions affect approximately $3.2 billion of total debt, including a $330 million RCF expiring 2012 and $1.5 billion of repurchase obligations of the company's wholly-owned subsidiary, Agilent World Trade Inc. (World Trade). The Rating Outlook is revised to Positive from Stable.

The ratings and Outlook reflect Fitch's greater confidence in Agilent's operating and financial profile. The company's increasing percentage of organic sales from the faster growing and more profitable Life Sciences (LSG) and Chemical Analysis (CAG) segments should drive higher and less uneven operating performance over time. The company's recently completed acquisition of Varian Inc. (Varian) will result in sales for LSG and CAG together representing more than half total sales, versus less than 45% historically.

The company's operating performance through the recent downturn also supports the revision in rating outlook. Annual free cash flow was $280 million even as sales declined more than 22% for fiscal year 2009, driven primarily by reduced inventory and the company's ongoing working capital efficiency improvements. Fitch believes Agilent will return profitability to historically high levels in the near-term, driven by meaningful fixed cost reductions and solid revenue growth in each of the company's businesses. As a result, Fitch anticipates annual free cash flow will exceed $500 million in fiscal 2010, as well as through a normalized business cycle.

Fitch believes the anticipated higher profitability will drive significantly improved credit protection measures from current levels. Fitch estimates total leverage (total debt to operating EBITDA) exceeded 5 times (x) in fiscal 2009, due in part to $750 million of debt issued in 2009 to pre-fund the Varian acquisition. However, leverage should decrease to below 2.5x exiting fiscal 2010. After adjusting for $1.5 billion of World Trade repurchase obligations, which Fitch believes are mostly defeased, Agilent should exit fiscal 2010 with total leverage below 1.5x. The outlook incorporates Fitch's expectations that Agilent will maintain total leverage of 2.0x to 2.5x and a net cash position. Fitch believes Agilent will return interest coverage (operating EBITDA to gross interest expense) to more than 10x in fiscal 2010 and beyond, versus a Fitch-estimated 6x in fiscal 2009. Finally, the rating outlook contemplates Agilent limiting share repurchases to offset dilution over the near-term and to no greater than annual free cash flow over the longer-term.

Fitch believes positive rating actions could result from:

--Annual free cash flow at the upper end of Fitch's forecasts, which likely would be driven by continued discretionary spending and inventory management discipline within the context of solid revenue growth;

--Modest debt reduction, potentially in connection with the expiration of the World Trade repurchase obligations;

--The company limiting share repurchases over at least the near term, which would augment available cash balances.

The ratings could be stabilized if:

--Annual free cash flow is meaningfully less than $500 million, likely from the Agilent's inability to return operating profits to historically high levels or higher structural inventory levels;

--The company rolls over the World Trade structure, reducing the potential for debt reduction through the intermediate term;

--Annual share repurchases and acquisitions together exceed annual free cash flow.

While near-term integration risk associated with the $1.5 billion Varian acquisition is considerable, Fitch anticipates the recently closed transaction will add to stability over the longer term. Agilent anticipates the addition of Varian could add $700 million and $100 million of incremental revenues and operating EBITDA, respectively, and results in Agilent becoming the leading player within certain life sciences markets. Fitch believes integration risks associated with the Varian acquisition are elevated because of Varian's size and decentralized organizational culture, which could moderate the pace of Agilent's operating margin expansion. Nonetheless, the company recently completed cost restructuring actions taken in each of the last two fiscal years that should reduce fixed costs by $525 million annually and offset any short-term gross margin pressure from integrating Varian.

For fiscal 2010, Fitch expects Agilent will benefit from a meaningfully improving operating environment, as the company exited its recently ended second fiscal quarter with a book-to-bill ratio of 1.06x. Despite seasonally weak order patterns in LGS (26% of second fiscal quarter revenues) and CSG (19% of second fiscal quarter revenues) segments, both of these businesses ended the quarter with book-to-bill ratios just under 1x. Fitch anticipates both segments have solid growth prospects through their exposure to the food safety, petrochemical, environmental, and biotech markets, particularly in Asia-Pacific, which constituted more than 40% of total sales for the quarter. Furthermore, book-to-bill for Electronics Measurement (EMG, 55% of second fiscal quarter revenues) was 1.12x exiting the quarter, driven by strong recovery in its general purpose end-markets.

The ratings are supported by i) the company's end-market, product, and customer diversification, which Fitch believes should yield less volatile operating results, ii) Agilent's relatively conservative financial policies and solid liquidity position, including a net cash position, and iii) the company's balanced geographic footprint, particularly given that solid growth in Asia-Pacific has offset broad-based demand weakness in more developed economies for the company's EMG segment. Fitch expects Agilent will benefit from solid organic revenue growth over the intermediate term, potentially augmented by acquisitions of modest size, driven by increased testing demand within LSG and CAG.

Ratings concerns center on: i) Agilent's meaningful albeit lower exposure to increasingly commoditized manufacturing testing within EMG, ii) sustained pricing pressures and the potential for lower-than-anticipated demand, particularly in European markets, which could constrain further meaningful operating margin expansion over the near term, and iii) longer-term financial policies related to funding future share repurchases and acquisitions, as the company will continue generating a disproportionate amount of free cash flow overseas. Finally, more focused competitors (albeit smaller in many cases) in certain of the company's end-markets, which Fitch believes results in more defensible market positions, could slow share gains for Agilent.

Pro forma for the $1.5 billion cash payment associated with the May 14, 2010 closing of the Varian acquisition, Fitch believes Agilent's liquidity as of April 30, 2010 was sufficient and supported by:

--Approximately $1.2 billion of unrestricted cash and cash equivalents (excludes approximately $1.6 billion of restricted cash related to the aforementioned Agilent World Trade repurchase obligations), although a substantial amount of Agilent's cash is located overseas;

--An undrawn $330 million RCF expiring May 11, 2012.

Agilent's liquidity also is supported by expectations that the company will generate annual free cash flow of more than $500 million.

Total debt was approximately $2.9 billion as of April 30, 2010 and consisted of:

--$1.5 billion of World Trade repurchase obligations due in January 2011. The company has approximately $1.6 billion of restricted cash held by Agilent Technologies (Cayco) Limited associated with this obligation that would need to be repatriated to the United States before satisfying any portion of the obligation;

--$250 million of 4.45% senior notes due Sept. 12, 2012;

--$500 million of 5.5% senior notes due Sept. 14, 2015;

--$600 million of 6.5% senior notes due Nov. 1, 2017.

The rating is based on applicable criteria available on the Fitch website at '[ www.fitchratings.com ]' including:

--Corporate Rating Methodology, Nov. 24, 2009

--Evaluating Corporate Governance, Dec. 12, 2007

--Liquidity Considerations for Corporate Issuers, June 12, 2007

--Cash Flow Measures in Corporate Analysis , Amended Oct. 12, 2005

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

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Fitch Affirms Agilent Technologies' IDR at 'BBB'; Outlook Revised to Positive