CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Texas Instruments Incorporated (TI), including the long-term Issuer Default Rating (IDR), at 'A+'. Fitch's actions affect $6.1 billion of debt, including the undrawn $2 billion revolving credit facility (RCF) and pro forma for the repayment in August 2015 of $750 million of senior notes. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
The ratings and Outlook reflect Fitch's expectations that operating performance will remain solid, despite headwinds in wireless carrier spending (10% of 2014 sales) and personal computing (PC) markets, as well as foreign currency headwinds. Strength in automotive (13% of 2014 sales) from increasing shipments and semiconductor content should drive flat to slightly positive near-term revenue growth. Cost take-outs at TI's Japan subsidiary and embedded business in 2014 will drive further profit margin expansion and strong free cash flow (FCF) of more than $2 billion.
TI's industrials business (31% of 2014 sales) may weaken further over the near term, in line with the broader economy. Fitch expects the non-PC portion of personal electronics will be slightly positive, while enterprise systems (6% of 2014 sales) should be flat to slightly down from more cautious enterprise spending. Nonetheless, increasing content and digitalization within key analog and embedded processor markets should support low single digit top line growth in constant currency over the longer term.
Profitability will remain strong with operating EBIT margin in the mid-20s to mid-30s through the cycle, versus a Fitch estimated 36.6% for the latest 12 months (LTM) ended June 30, 2015. Fitch expects embedded operating profit margin to expand further to the mid-20s over the intermediate term from the high teens in the first half of 2015. Given still low utilization rates at TI's 300mm manufacturing facilities, TI benefits from significant operating leverage upon realization of higher revenues.
Fitch expects more than $2 billion of annual FCF over the intermediate term and more than $1.5 billion through the cycle, driven by solid profitability, efficient inventory model and low capital intensity. Normalized inventory lead times for TI are 4 to 4.5 weeks, versus an industry average in the high single digits, driven by TI's increasing mix of consignment inventory sales. Fitch expects TI's investments in advanced equipment ahead of demand enable the company to maintain capital spending near 4% of revenues over the intermediate term even as TI adds 300mm capacity.
Fitch expects TI will use 100% of pre-dividend FCF plus cash received from the exercise of employee stock options less debt repayments for shareholder returns through at least the intermediate term. On Sept. 17, 2015, TI increased the quarterly dividend by $0.04 per share and added a $7.5 billion new share repurchase authorization to the $1.8 billion authorized and available for repurchase as of the quarter ended June 30, 2015.
Fitch believes TI remains focused on organic growth, given its substantial share leadership, breadth across analog verticals and larger sales force compared to its competitors. Nonetheless, Fitch believes TI could use FCF and incremental debt for acquisitions over the longer term, given semiconductor industry wide consolidation and that analog and embedded markets remain highly fragmented.
Fitch expects total debt-to-operating EBITDA (total leverage) will remain below 1.5x through the cycle and estimates total leverage was 0.8x for the latest 12 months (LTM) ended June 30, 2015. Interest coverage (Operating EBITDA to gross interest expense) should remain very strong and in excess of 50x and was a Fitch estimated 66x for the LTM ended June 30, 2015.
The ratings are supported by TI's:
--Strong financial flexibility supported by solid liquidity and Fitch's expectations that the company's annual FCF will exceed $1.5 billion through the intermediate term;
--Share leadership in analog and embedded processing. Fitch believes TI's product breadth, sales channel scale, and manufacturing cost leadership, position the company to gain share in analog over time;
--More sustainable operating results from an intensified focus on the more fragmented analog and embedded processing markets and diversified customer base.
Ratings concerns center on TI's:
--Substantial R&D investments and capital expenditures required to maintain technology and cost leadership within the semiconductor industry will constitute approximately 15%-18% of revenues on a combined basis over the longer term;
--Diminished technology leadership following exit from wireless communications markets;
--Commitment to more aggressive shareholder returns.
KEY ASSUMPTIONS
--Flat to slightly up revenues in 2015 and 2016 with strength in automotive offset by weak demand in communications infrastructure and PCs;
--Low single-digit revenue growth in 2017, supported by the resumption of growth and increasing semiconductor content;
--Operating EBIT margin near current run rate levels, driven by the company's operating expense reduction in 2014;
--Inventory lead times remain near 4.5 weeks;
--Capital spending near 4% of revenues in 2015 over the longer-term;
--TI uses 100% of pre-dividend FCF, proceeds from equity compensation less net debt reduction for shareholder returns, with a bias toward half dividends and half share repurchases;
--No meaningful acquisitions, despite significant consolidation activity in semiconductor industry.
RATING SENSITIVITIES
Negative rating actions could result from sustained share losses in focus segments leading to:
--Structurally lower revenue resulting in sustained FCF near or below $1 billion;
--Lower base line operating profitability resulting in sustained debt/EBITDA above 1.5x.
Positive rating action is unlikely, given the company's smaller scale for the rating category and cyclicality associated with the semiconductor industry.
LIQUIDITY
TI's liquidity was solid as of June 30, 2015, and supported by:
--Approximately $3.3 billion of cash and short-term investments, 82% of which is located within the U.S.;
--An undrawn $2 billion credit facility due March 2020 that fully backstops a $2 billion CP program.
Liquidity is further supported by Fitch's expectations for annual FCF of more than $1.5 billion through the semiconductor cycle.
Pro forma for the repayment of $750 million of senior notes in August 2015, total debt was $4.1 billion as of June 30, 2015 and consisted of:
--$1 billion of 2.375% senior notes due May 2016;
--$250 million of 0.875% senior notes due March 2017
--$375 million of 6.6% NSC issued senior notes June 2017;
--$500 million of 1% senior notes due May 2018;
--$750 million of 1.65% senior notes due August 2019;
--$500 million of 1.75% senior notes due 2020;
--$250 million of 2.75% senior notes due March 2021;
--$500 million of 2.25% senior notes due May 2023.
FULL LIST OF RATING ACTIONS
Fitch affirms TI and its subsidiary, National Semiconductor Corporation, as follows:
TI
--Long-term IDR at 'A+';
--Short-term IDR at 'F1';
--Commercial paper program at 'F1';
--Senior unsecured revolving credit facility at 'A+';
--Senior unsecured notes at 'A+'.
National Semiconductor
--Long-term IDR at 'A+';
--Senior unsecured notes at 'A+'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991589
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=991589
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.