TEXT-S&P revises Intersil rating outlook to stable from positive

Mon Oct 1, 2012 12:17pm EDT

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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