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Fitch Rates Texas Instruments Senior Notes 'A+'; Outlook Stable
May 1, 2017 / 9:59 PM / 5 months ago

Fitch Rates Texas Instruments Senior Notes 'A+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 01 (Fitch) Fitch Ratings has assigned an 'A+' rating to Texas Instruments Incorporated's (TI) $600 million senior notes offering, comprised of $300 million of 2.75% senior notes due March 12, 2021 and $300 million of 2.625% senior notes due May 15, 2024. Fitch expects the company will use a portion of net proceeds to repay $375 million of senior notes maturing June 15, 2017 (assumed in connection with the 2011 acquisition of National Semiconductor Corporation) and the remainder of net proceeds for general corporate purposes. Pro forma for the notes offering and repayment of the June note maturity, total rated debt is $5.6 billion, including the undrawn $2 billion revolving credit facility (RCF). A full list of current ratings follows at the end of this release. Fitch expects TI's solid operating performance will continue through the near-term, driven by healthy demand in both focus segments - analog and embedded processing - and across all product categories. Increasing semiconductor content will continue driving solid growth in automotive and industrial products through any business cycle and further diversify TI's revenue mix away from more mature communications, personal electronics and enterprise systems markets. Within the context of a solid demand environment, Fitch's expectations for higher utilization rates for TI's 300 millimeter (mm) wafers should support elevated non-GAAP gross profit margins above 60% through at least the near-term. Given expectations for flat operating expenses, Fitch forecasts operating EBITDA margins in the mid- to upper-40s, resulting in total leverage (total debt to operating EBITDA) near a half a turn free cash flow (FCF) to debt of more than 60% through the near term. KEY RATING DRIVERS Solid Financial Flexibility: Fitch expects TI's financial flexibility will remain solid, supported by low leverage and Fitch's forecast of more than $2 billion of annual free cash flow (FCF; cash from operations less capital spending less dividends) through the intermediate term and solid liquidity, which is supported by $3 billion of cash, cash equivalents and short-term investments and commercial paper (CP) program with capacity of up to $2 billion. Leading Market Positions: Fitch expects TI's wide product breadth, greater sales channel scale and manufacturing cost leadership have driven leading share positions in analog and embedded processing and position the company to take additional share in analog over time. Fitch estimates TI's share is roughly 2x its closest competitor, which is made more important by the stickiness of customer relationships given significant accumulated design collaboration with customers. In addition, TI's scale supports its expansive catalogue products set and consignment inventory model, which enables share gains at customers marginally consolidating suppliers. More Predictable Results: Fitch expects more predictable operating results, given the company's increasing exposure within automotive and industrial markets with secular growth trends and longer-product life cycles. Fitch believes TI's large breadth of catalogue products sold through distribution partners, for which TI uses a consignment inventory model that enables tighter channel inventories and more even front-end production utilization rates, diversifies operating results. Increasing Handset Exposure: Fitch expects increasing exposure to its largest handset customer, which could reach the mid-teens of total sales versus just over 10% more recently, could partially offset product and customer diversification with volatility around product cycle share and commercial success. At the same time, TI's manufacturing cost leadership from 300mm wafer capacity could mitigate risks around product cycle risk. Commitment to Shareholder Returns: Fitch expects TI will continue using 100% of cash flow for shareholder returns, including dividends approaching 50% of annual pre-dividend FCF. Fitch anticipates TI would curtail share repurchases should the company face meaningful near-term headwinds, although FCF (Fitch defined as after dividends) and, therefore, stock buybacks should be structurally lower as the company approaches its target dividend pay-out. Substantial Investment Intensity: Fitch expects continued high investment levels to support technology and cost leadership, although the company's capital expenditures are relatively low given TI's strategy of buying 300 millimeter (mm) equipment from distressed sellers and, otherwise, trailing edge technology used in analog and embedded processing markets. Nonetheless, Fitch expects R&D intensity to remain significant and, combined with capital intensity, represent mid- to high-teens as a percentage of revenue through the longer-term. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for TI include: --Low-single digit revenue growth through the forecast period, driven by strength in automotive and industrial; --Operating EBITDA margin in the mid-40s, driven by higher gross profit margin and cost savings related to the company's restructuring program; --Capital spending is in the mid-single digits as a percentage of revenues, including expansion of the company's 300mm analog capacity; --TI uses 100% of pre-dividend FCF, proceeds from equity compensation plus net debt issuance for shareholder returns, with expectations for dividends approaching 50% of pre-dividend FCF; --TI will continue debt reduction by meeting upcoming debt maturities with available cash as it has done since 2013; --No significant acquisitions, despite continued consolidation in the 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 at or above 1.5x. Positive rating action is unlikely, given the company's smaller scale for the rating category and event risk within the context of fragmented analog and embedded processing markets. LIQUIDITY TI's liquidity was solid as of March 31, 2017, and supported by: --Approximately $3 billion of cash, cash equivalents and ST investments, although Fitch estimates roughly 80% of cash, cash equivalents and ST investments is located inside the U.S.; and --An undrawn $2 billion credit facility due March 2021 that fully back-stops TI's $2 billion CP program. Fitch expectation for more than $2 billion of annual FCF through the intermediate-term also supports liquidity. Pro forma for the debt issuance and upcoming repayment of the June 2017 debt maturity, total debt was $3.6 billion and consisted of: --$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 May of 2020; --$550 million of 2.75% senior notes due March 2021; --$500 million of 1.85% senior notes due May 2022; --$500 of 2.25% senior notes due May 2023; --$300 of 2.625% senior notes due May 2024. FULL LIST OF CURRENT RATINGS Texas Instruments Incorporated --Long-Term Issuer Default Rating (IDR) 'A+'; --Short-Term IDR 'F1'; --Commercial Paper program 'F1'; --Senior unsecured revolving credit facility 'A+'; --Senior unsecured notes 'A+'. National Semiconductor Corporation --Long-Term IDR 'A+'; --Senior unsecured notes 'A+'. The current Rating Outlook is Stable. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Alen Lin Senior Director +1-312-368-5471 Committee Chairperson Michael Weaver Managing Director +1 -12-368-3156 Date of Relevant Rating Committee: Nov. 3, 2016 Summary of Financial Statement Adjustments - Fitch made no financial statement adjustments that depart materially from those contained in the published financial statements of Texas Instruments Incorporated. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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