Fitch Rates Texas Instrument's $1B Senior Notes 'A+'; Outlook Remains
CHICAGO -- May 02, 2013
Fitch rates Texas Instruments Incorporated's (TI) $1 billion senior notes
issuance 'A+'. The Rating Outlook remains Negative. Pro forma for the issuance
and planned repayment of senior notes maturing this month, Fitch's actions
affect approximately $7.2 billion of total debt, including the company's
undrawn revolving credit facility (RCF).
TI sold $1 billion of senior notes comprised of $500 million of five-year
notes and $500 million of 10-year notes. The company will use net proceeds
from the issuance, as well as existing cash on hand, to meet $1.5 billion of
senior notes maturing this month. As a result, total debt will decline by
roughly $500 million.
The ratings and outlook reflect lower revenues from ongoing declines in TI's
non-core businesses and weaker profitability across each of the company's
segments. Continued year-over-year revenue declines in TI's non-core Other
segment, which remain more than 25% of consolidated sales, should more than
offset modest near-term growth in core Analog and Embedded Processors
segments. The wind-down of TI's legacy wireless business in 2013 is the
biggest drag on growth but other non-core businesses, including DLP,
application specific integrated circuits, calculators and royalties, have
declined in the mid- to high-single digits in aggregate over recent years.
Operating profit margin has continued to weaken, although Fitch anticipates
revenue decline driven compression will be offset by reduced mix of lower
margin legacy wireless revenues and the flow through of current restructuring
actions. TI is roughly half way through achieving $450 million of annual cost
savings from restructuring related to the wind down of its legacy wireless
business, mostly lower research and development (R&D) spending, which should
decline to $1.5 billion in 2013 from $1.9 billion in 2012. Nonetheless, Fitch
believes operating profit margin will remain in the low to mid 20s over the
near term, below 2008-2009 levels and down considerably from the mid 30s in
The wind down of the legacy wireless business strengthens TI's operating
profile by reducing the company's exposure to cell phones. For the latest 12
months (LTM), roughly 35% of TI's sales are to industrial and automotive
markets, more than the company's exposure to more fickle consumer oriented
communications and personal computer (PC) markets. This increased end market
diversification should smooth operating results and enhance revenue visibility
given longer product life cycles associated with industrial and automotive
Free cash flow (FCF) also will strengthen from the legacy wireless wind down,
driven by modestly higher structural profitability and lower capital intensity
over the intermediate term. TI's capital additions in 2010 reduce capital
spending to below 5% of revenues over the next few years, compared to a high
single digit average over recent years. As a result, Fitch expects more than
$2 billion of annual FCF over the intermediate term and FCF to exceed $1.5
billion in a downturn.
TI has committed to returning 100% of annual FCF to shareholders and recently
announced another $5 billion of share repurchase authorization. Over the
longer term, Fitch believes FCF could be used to support acquisitions, given
the highly fragmented nature of analog and embedded processor markets and TI's
comparative size and financial flexibility. The company estimates it is the
analog market leader with nearly 20% share, approximately double that of its
Pro forma for the expected net debt reduction, Fitch expects credit protection
measures to remain near current levels. Fitch estimates total debt to
operating EBITDA (total leverage) was 1.4 times (x) for the LTM ended March
31, 2013, up slightly from 1.2x for the comparable prior year period. FCF to
debt was approximately 38% for the most recently ended trailing 12 months, up
from 34% in the prior comparable period.
Negative rating actions could result from: i) further operating profit margin
contraction, despite the realization of substantial cost savings, likely
resulting in total leverage above 1.5x, or ii) weakness in TI's non-core
business continue exacerbating negative revenue growth related the wind down
of the company's legacy wireless business.
Fitch believes the ratings could be stabilized if: i) total leverage, pro
forma for today's announced net debt reduction, trends toward 1x, driven by
greater than anticipated operating profit margin expansion, or ii) non-core
revenues, excluding legacy wireless, stabilize or revenue declines are offset
by greater than expected core revenues growth.
KEY RATINGS DRIVERS:
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;
--TI's share leadership in analog and embedded processing. Fitch believes TI's
scale, acquisition of NSC and recent manufacturing capacity additions,
position the company to gain share in analog over time.
--More sustainable operating results from TI's intensified focus on the more
fragmented analog and embedded processing markets and diversified customer
Ratings concerns center on:
--Substantial R&D investments and capital expenditures required to maintain
technology and cost leadership within the semiconductor industry will
constitute approximately 15% TO 18% of revenues on a combined basis over the
longer term. At the same time, TI participates in the less capital-intensive
analog markets, and has deep outsourcing relationships with foundries for
leading-edge manufacturing and next-generation process development.
--Fitch's expectation for profitability pressures as TI potentially prices
more aggressively across the analog space to increase utilization rates of
excess manufacturing capacity.
TI's liquidity was solid as of March 31, 2013, and supported by:
--Approximately $3.9 billion of cash and short-term investments.
--An undrawn $2 billion credit facility due March 2018.
--Liquidity is further supported by Fitch's expectations for annual FCF of
more than $2 billion.
Fitch currently rates TI and its subsidiary National Semiconductor Corporation
--Long-term Issuer Default Rating (IDR) at 'A+';
--Short-term IDR at 'F1';
--Commercial paper (CP) program at 'F1';
--Senior unsecured revolving credit facility (RCF) at 'A+';
--Senior unsecured notes at 'A+'.
--Long-term IDR at 'A+';
--Senior unsecured notes at 'A+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
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Jason Pompeii, +1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Jason Paraschac, CFA, +1-212-908-0746
Jamie Rizzo, CFA, +1-212-908-0548
Brian Bertsch, New York, +1-212-908-0549
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