TEXT-S&P revises Intersil rating outlook to stable from positive
Overview -- We expect U.S. analog semiconductor manufacturer Intersil's revenues to be flat to modestly lower, on a sequential basis, over the next two quarters, as a result of continued difficult global macroeconomic environment in the second half of 2012. -- We are revising our 'BB-' rating outlook on the company to stable from positive. -- The stable rating outlook reflects the good credit metrics at its current rating and the expectation for EBITDA margins to improve, on a sequential basis, due to cost savings from recent restructuring actions. Rating Action On Oct. 1, 2012, Standard & Poor's Ratings Services revised its rating outlook on Milpitas, Calif.-based Intersil Corp. to stable from positive. At the same time, we affirmed our existing 'BB-' corporate credit rating on the company. The outlook revision to stable reflects our view that Intersil's revenue will continue to face headwinds from the ongoing difficult global macroeconomic environment in the second half of 2012. Rationale The ratings on Intersil reflect the company's mid-tier position in a highly competitive and cyclical industry and its weak revenue growth relative to peers, partially offset by its prudent financial risk profile through an industry cycle. Standard & Poor's expects Intersil's revenues to be flat to modestly lower, on a sequential basis, by a low to mid-single-digit percentage in the September and December 2012 quarters, mainly as a result of continued uncertainty about the worldwide economy affecting all business segments. Despite the expected revenue declines, we believe the company would be able to continue to generate positive free operating cash flows (FOCF) through the cycle, and that liquidity will not be compromised by shareholder returns. Intersil competes in the analog semiconductor industry, focusing on high-performance analog and mixed-signal integrated circuits for the high-end consumer, industrial and infrastructure, and computing markets. The company also competes against much larger firms with greater financial resources and product breadth, such as Texas Instruments Inc., Analog Devices Inc., and Maxim Integrated Products Inc. We believe the company's size renders it less able to withstand pricing pressure from competitors or a prolonged industry downturn and contribute to what we consider a "weak" business risk profile. Intersil generated revenues of $672 million for the 12 months ended June 30, 2012, down from $821 million in the year-ago period, due to overall weakness in its end markets and excess inventory. Profitability also declined, with adjusted EBITDA margins in the mid-teen percentage area for the 12 months ended June 30, 2012, down from mid-20% a year ago, primarily because of changes in its product mix and lower factory utilization rates. Standard & Poor's currently views Intersil's financial risk profile as "significant." Adjusted debt to EBITDA was 1.7x as of June 30, 2012, which is low for the rating. EBITDA, on a last-12-month basis, is likely to decline over next two quarters as industry conditions remain difficult. Even under this scenario, leverage is not expected to exceed 3x. The current rating also incorporates some capacity and expectation for debt leverage of up to 3x average EBITDA for future acquisitions. Finally, we believe that the company's shareholder return policy will remain a significant call on cash flow, with dividends representing about more than half of FOCF for the next 12 months and also the recently authorized stock repurchase program of up to $50 million announced in August 2012, which expires in 12 months. However, we do not expect it to impair the overall credit profile. Liquidity We view Intersil's liquidity as "adequate." Liquidity sources include cash and short-term investment balances of $316 million as of June 30, 2012, positive funds from operations, and about $175 million availability under its $325 million senior secured credit facility. Major uses of cash include dividends of about $60 million per year, up to $50 million of stock repurchases, and modest capital spending. We expect Intersil to continue to meet its covenant requirements over the near term, especially with the recently amended credit agreement to its $325 million senior secured credit facility in September 2012, which removed dividend payments from the calculation of its fixed-charge covenant ratio. Our assessment of Intersil's liquidity profile incorporates the following expectations, assumptions, and factors: -- We expect sources of liquidity to exceed uses by 1.2x or more over the next 12 to 24 months. -- We also expect that net sources would be positive in the near term, even with a 15% decline in estimated EBITDA in the next 12 months. -- Intersil is likely to be able to absorb revenue and margin pressures arising from industry cyclicality without the need for refinancing. -- There are no near-term maturities. Recovery analysis For the complete recovery analysis, see the recovery report on Intersil, published April 10, 2012, on RatingsDirect. Outlook The stable rating outlook reflects the good credit metrics at its current rating level and the expectation for these metrics to remain prudent through an industry cycle. We anticipate that revenues will remain pressured over the next two quarters due to macro headwinds facing the semiconductor industry. If the company could stabilize its revenue decline and return to growth mode, while maintaining its debt-to-EBITDA ratio of less than 3x and generating consistently positive discretionary cash flow through the cycle, we would consider raising the rating. Although unlikely over the near term, we would lower the rating if operating performance deteriorated significantly through the cycle, such that discretionary cash flow turns negative and leverage reaches and sustains at the mid-4x level. We would also lower the rating if the company pursues a more aggressive financial policy via a sizable debt-financed acquisition or more aggressive shareholder returns, resulting in leverage reaching the same level. Related Criteria And Research -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, Sept. 27, 2012 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Industry Economic Outlook: Despite Economic Headwinds, Global Technology Shows Balanced Ratings Trend, July 9, 2012 -- 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 -- 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 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From Intersil Corp. Corporate Credit Rating BB-/Stable/-- BB-/Positive/-- Ratings Affirmed; Recovery Ratings Unchanged Intersil Corp. Senior Secured BB+ Recovery Rating 1 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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