Nov 26 (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
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
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
--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
--Continued long-term secular growth in digitalization and computer adoption
worldwide as well as greater penetration of microprocessors in areas outside of
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
--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
--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.
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.