Keysight rating lifted to Baa1 by Moody’s, stable outlook

Investing.com -- On Thursday, Moody’s Ratings announced an upgrade to Keysight Technologies (NYSE:KEYS), Inc.’s senior unsecured rating, lifting it to Baa1 from Baa2. The firm also revised Keysight’s outlook to stable, indicating a positive shift from its previous positive stance.

The upgrade by Moody’s is attributed to the anticipated growth in profitability and free cash flow for Keysight over the next few years. The firm’s Vice President - Senior Analyst, Justin Remsen, cited Keysight’s dominant position in the Electronic Design & Test industry and its history of conservative financial practices as key factors in the decision.

Keysight’s strategic plans to acquire Spirent (LON:SPT), Synopsys (NASDAQ:SNPS)’ Optical Solutions Group, and Ansys (NASDAQ:ANSS)’ PowerArtist are expected to fortify the company’s competitive edge and broaden its market reach. Despite an increase in leverage to fund these acquisitions, Moody’s anticipates it will remain within the limits of the Baa1 rating category, emphasizing the importance of governance in their ratings process.

The Baa1 rating reflects Keysight’s strong market presence, with significant positions in various industry subsegments and a broad global customer base that contributes to revenue stability. The company’s investment in 5G testing tools and potential revenue from 6G R&D activity are seen as positive drivers for future growth.

Keysight’s financial position is bolstered by a diverse customer base and a portfolio that includes data center products benefiting from investments in generative artificial intelligence (GenAI). Despite facing challenges in certain volatile end markets, the company’s focus on R&D sales offers some consistency in performance.

The firm’s robust liquidity is supported by over $1.5 billion in cash and an expected $1 billion in free cash flow over the next year. Additionally, an undrawn $750 million senior unsecured revolving credit facility due in July 2026 further strengthens Keysight’s financial flexibility.

Moody’s stable outlook for Keysight is based on projections of mid-single digit organic revenue growth and sustained annual free cash flow of about $1 billion. The outlook incorporates potential acquisitions that could temporarily raise leverage levels but expects management to maintain a long-term leverage target of 2.0x debt to EBITDA. The ratings could see further upgrades if Keysight continues to demonstrate strong profitability and revenue diversification while adhering to conservative financial policies. Conversely, a downgrade could occur if the company faces significant deceleration in revenue growth, market share erosion, or a shift in financial policies leading to reduced liquidity or sustained debt levels above the mid-2x threshold.

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