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TEXT-S&P raises EMC Corp to 'A' from 'A-'
Overview -- EMC, a global provider of information infrastructure products and services, has enjoyed strong demand for its storage, security, virtualization, and information management products and services and integrated acquired operations successfully, while maintaining a modest financial risk profile. -- We are raising our corporate credit rating on EMC to 'A' from 'A-'. -- The outlook is stable, reflecting an expanding market position, solid operating performance, and a highly liquid balance sheet. Rating Action On June 25, 2012, Standard & Poor's Ratings Services raised its long-term ratings on EMC Corp. to 'A' from 'A-'. The outlook is stable. The upgrade reflects our view that EMC will maintain a financial policy and growth strategy consistent with an 'A' rating. An expanding market position, improving operating performance, and a highly liquid balance sheet support the rating. Ratings incorporate the expectation that debt to EBITDA will remain below 1.5x. Rationale EMC's ratings reflect the company's "strong" business profile, demonstrated by consistent profitability in the face of very competitive industry conditions, along with a more diversified product and services portfolio following recent acquisitions, and a "modest" financial profile. Standard & Poor's believes EMC's business profile benefits from a leading market position in the enterprise storage market, as well as favorable trends that we expect to support continued strong demand for data storage and data protection. In addition, software acquisitions--including RSA Security, Network Intelligence, Legato Systems, Documentum, VMware, and Greenplum--have improved EMC's business profile in areas such as content management, security, virtualization, and data analytics. The 2009 acquisition of Santa Clara, Calif.-based Data Domain Technologies expanded EMC's base in the growing data deduplication segment of the data storage and disaster recovery industry, as well as accelerating its adoption of next-generation data deduplication technologies. The expansion of EMC's software business has broadened its market reach and strengthened its technology approach to the storage market. Furthermore, the increase in software within EMC's business mix has helped preserve strong profitability, despite ongoing price declines, particularly in EMC's traditional product mainstays of hardware systems. The combination of acquired businesses, strategic partnerships, and strong new product offerings generated above-market revenue growth in recent years. EMC is well positioned for the virtualized data center and evolution toward cloud computing. Revenues in fiscal 2011 exceeded $20 billion partly as a result of early-stage, rapid customer adoption of virtualization software and security solutions. Virtualization, information storage, security, and data analytic remain key growth areas in enterprise IT spending. EBITDA margins have remained relatively stable, in the low-20% range, reflecting restructuring actions taken over the past three years. Operating cash flow comfortably covers about $1 billion of capital spending, and total operating lease-adjusted debt to EBITDA--at 0.8x--is solid, particularly given EMC's "exceptional" liquidity profile. Furthermore, we expect EMC to manage its debt leverage at less than 1.5x in the intermediate term, which should enable it to achieve its growth and shareholder return objectives. Liquidity EMC has exceptional liquidity, with sources of cash likely to substantially exceed uses for the next 12 to 24 months. Cash sources include cash and short-term investment balances of $10.9 billion as of March 31, 2012 (this balance includes about $5.2 billion held by VMware and $1.6 billion held by EMC in overseas entities) and solid free operating cash flow generation, which was about $4.7 billion in 2011. Relevant aspects of EMC's liquidity, in our view, are as follows: -- The company's unrealized value in its 79% economic ownership of VMware provides considerable asset protection. -- Free cash flow exceeding $4.5 billion per year, coupled with its ample cash balances, provides the capacity for policies oriented toward increasing shareholder value, such as share repurchase programs and cash-based acquisitions. -- Standard & Poor's believes that EMC has the capacity to pay off its $1.7 billion of debt due December 2013 with existing cash if it chooses. Outlook The outlook is stable. An expanding market position, solid operating performance, and a highly liquid balance sheet support the rating. Financial metrics are currently strong for the rating, which affords EMC financial capacity to pursue moderate-sized acquisitions and shareholder-friendly initiatives without affecting the rating. We expect EMC to manage debt to EBITDA below 1.5x. Highly competitive industry conditions, a moderately acquisitive growth strategy, and significant share repurchases currently limit the potential for a higher rating. In contrast, we would consider lowering the rating if EMC makes any large, cash-based acquisitions or share repurchases that significantly alter its business or financial profile, with debt to EBITDA sustained at the high-1x level or if market fundamentals deteriorate. Related Criteria And Research -- Performance For U.S. Semiconductor Equipment Makers Has Been Volatile, But Ratings Remain Stable, June 11, 2012 -- Top 10 Investor Questions: How Will The Global Technology Industry Fare Amid An Economy In Flux?, April 26, 2012 -- Global Technology Ratings Trend Shifts To Negative In The First Quarter, April 11, 2012 -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 29, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Global High Technology Industry, Oct. 15, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Upgraded To From EMC Corp. Corporate Credit Rating A/Stable/-- A-/Stable/-- Senior Unsecured A A- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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