RPT-Fitch affirms Intel's ratings at 'A+'; outlook stable

Tue Nov 26, 2013 9:26am EST

Nov 26 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Intel Corporation's (Intel) Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. The short-term IDR was also affirmed at 'F1'.

Fitch views Intel as one of the strongest credits in the technology space driven by its position as the leading provider of microprocessors for PCs and servers worldwide. The company's manufacturing technology advantage has resulted in a widening degree of differentiation from its competitors over the years. While new competition has emerged recently in ARM-based processors for tablets and smartphones, Fitch believes that the company's dominance of x86 based processors which are the most prevalent computing platform in the world will result in a relatively stable market opportunity for the foreseeable future.

Recently, Intel announced two modest changes to its longer-term strategy, reflecting the growing challenges in the PC and mobile computing markets. The company plans to move more aggressively in developing and bringing to market processors for the convertible notebook, tablet and smartphone markets. By 2015, Intel expects these processors to effectively be at par with its leading edge solutions for the traditional PC market utilizing its most advanced 14nm manufacturing technology. The company expects to incur a greater loss in this segment of its business in 2014 as it invests in this development. Fitch believes that Intel has begun to demonstrate that it can compete in the mobile market but that 2014 will be a key window for it to develop meaningful market share leading into 2015. Expectations for relative stability in the PC Client segment in 2014 and solid growth in the Data Center segment provide some measure of flexibility for Intel to manage through these market challenges over the next few years at the current rating.

Intel also announced that it intends to open its foundry service offerings more broadly, potentially putting the company in position to manufacture chips for direct competitors in the smartphone and tablet markets. Fitch believes that this potential shift in the business is a net neutral development for the credit. On one hand this could provide meaningful diversification in this part of the market for the company during a time when it is spending aggressively on new manufacturing process technology development and capacity expansion. This should lessen the risk of Intel's ultimate level of success in the smartphone and tablet markets to the credit. Conversely, a broader offering of its foundry services could potentially negate Intel's manufacturing process technology leadership as a key competitive advantage in a segment of the market where it is significantly behind competitors in terms of market share. Fitch expects Intel will choose whether or not to partner with potential competitors based on the relative economics of either strategy as it expands these services over the next few years.

KEY RATINGS DRIVERS

The ratings and outlook recommendation reflect the following considerations:

--Fitch expects the company to maintain a relatively conservative capital structure and balanced approach to shareholder friendly actions. Fitch expects leverage (total debt / EBITDA) to remain comfortably below 1x and for normalized free cash flow to adjusted debt to range near 35% or above 50% before dividends.

--Fitch expects share repurchases and the company's dividend to be financed by free cash flow. Fitch does expect Intel to continue to be acquisitive going forward which could potentially be a source of additional modest debt financing.

--Fitch believes that Intel's new energy efficient processors targeted for tablets and smartphones will begin to establish the company's presence in that market. Intel's technology leadership in the semiconductor space is a significant competitive advantage and its focus on this emerging market opportunity should begin to produce returns over the next few years.

Importantly, Fitch does not believe that Intel's ultimate success in this market is contingent on the success of Windows 8 or future Windows platforms. That said greater consumer adoption of Windows 8 devices should materially aid Intel over the next few years.

The short-term rating reflects the significant liquidity resources Intel has on balance sheet. The company had $4.9 billion of cash plus $14.3 billion in short-term investments including marketable debt securities as of Sept. 30, 2013, to support its $3 billion commercial paper program. Intel has no revolving credit facility.

Intel's ratings and outlook are supported by the following factors:

--Intel is the dominant microprocessor vendor and maintains a clear and significant technology advantage, particularly in manufacturing, over its nearest competitors.

--Broad geographic and business diversification. Although the majority of the company's revenue is derived from PC and server demand, these markets are driven by different secular growth trends which Fitch expects to contribute to longer-term stability.

--Continued long-term secular growth in digitalization and computer adoption worldwide as well as greater penetration of microprocessors in areas outside of traditional computing.

Credit concerns include:

--Intel is exposed to the highly cyclical demand for semiconductors which is typically exacerbated at the beginning of cyclical downturns due to channel inventory contraction.

--The business model has high fixed costs, principally in R&D, in addition to being highly capital intensive. Intel's high profit margins largely compensate for this risk although capital spending has in recent times ranged near 50% of EBITDA.

--Intel has significant customer concentration with its 2 largest customers representing 19% and 15% of revenue in 2011.

--Potential technology shifts that reduce demand for Intel's x86 solutions in its core PC and server markets. This includes the potential for broader adoption of ARM-based processing solutions beyond the smartphone and tablet markets. Liquidity as of Sept. 30, 2013, was solid with cash of $4.9 billion and a $3 billion commercial paper program which had no outstanding balance. Intel also had $6.5 billion of short-term investments, $7.8 billion in trading assets and $6.5 billion of marketable securities. Free cash flow of $6 billion over the latest 12 month period further supports liquidity. The company does not have a revolving credit facility to support its commercial paper program but Fitch views Intel's strong liquidity as providing ample support for the program. Total debt as of Sept. 30, 2013, was $13.5 billion consisting principally of: $1.5 billion in 1.95% senior unsecured notes due October 2016, $3 billion in 1.35% senior unsecured notes due December 2017, $2 billion in 3.3% senior unsecured notes due October 2021, $1.5 billion in 2.7% senior unsecured notes due December 2022, $750 million in 4% senior unsecured notes due December 2032, $1.6 billion principal value in 2.95% junior subordinated debentures due July 2035, $2 billion principal value in 3.25% junior subordinated debentures due July 2039, $1.5 billion in 4.8% senior unsecured notes due October 2041, and $924 million in 4.25% senior unsecured notes due December 2042.

Intel also owes approximately $600 million to NVIDIA as part of a long-term patent cross licensing agreement in 2011, payable over six years. This amount is categorized under accrued liabilities.

RATINGS SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--If Intel is successful in solidifying its market position in the market for smartphone and tablet processors while maintaining its high level of profitability, it is possible the ratings could be positively impacted. Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--If Intel is not successful in expanding its market share in the tablet and smartphone market while consumer PC demand is further cannibalized by tablet adoption, it is possible the ratings could be negatively impacted, potentially resulting in a one or two notch downgrade over the next few years.

--At the current rating level, Fitch would expect total debt / EBITDA to remain comfortably below 1x and for free cash flow before dividends to represent 50% of adjusted debt under normal conditions. If that free cash flow figure were to fall closer to 20%, a rating in the 'BBB' category could be more appropriate. Fitch has affirmed the following ratings for Intel:

--Issuer Default Rating (IDR) at 'A+';

--Short-term IDR at 'F1';

--$3 billion commercial paper program at 'F1';

--Senior unsecured notes at 'A+'; and

--Junior subordinated notes at 'A'.

The Rating Outlook is Stable.