-- 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
-- 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.
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
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.
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
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.
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
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.
For the complete recovery analysis, see the recovery report on Intersil,
published April 10, 2012, on RatingsDirect.
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.
-- 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 Affirmed; Outlook Action
Corporate Credit Rating BB-/Stable/-- BB-/Positive/--
Ratings Affirmed; Recovery Ratings Unchanged
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