On Jan. 21, 2005, Standard & Poor's Ratings Services raised its corporate credit and senior unsecured debt ratings on Dell (DELL) to A from A-. The ratings outlook is stable. Total rated debt is $505 million.
The upgrade reflects the Round Rock (Tex.) PC giant's improving market position, consistent profitability, and continued product line expansion. Also accounting for the ratings are Dell's strong competitive position (driven by its low-cost, direct-sales business model), consistent operational execution, and conservative financial profile. These factors are partly offset by extremely competitive industry conditions and a hardware-centric business that's exposed to short product life cycles and potentially volatile demand.
Dell is the third-largest U.S. computer systems company, based on total revenues. It pioneered the direct model of build-to-order sales, service, and support of computer systems. It has successfully applied its focus on markets with high-volume, standards-based technology to an expanded array of products, including desktop computers, notebooks, workstations, network servers, printers, services, and storage products.
STRONG CASH FLOW. Bolstered by renewed growth in global info-tech spending, Dell has used this model to profitably gain market share. Revenues rose 19% in the nine months ended Oct. 29, 2004, and are expected to continue to benefit from an expanding market position in more profitable server, storage, services, and networking products. Despite challenging industry conditions, Dell should be able to maintain EBITDA (earnings before interest, taxes, depreciation, and amortization) margins at about 9% and EBITDA interest coverage in excess of 25 times.
Dell's consistent profitability, efficient working-capital management, and moderate capital requirements continue to generate strong free operating cash flow. The ratio of free operating cash flow to total debt exceeds 300%, and annual free operating cash flow has exceeded $2.5 billion in each of the past four years. Moderate debt levels (including capitalized operating leases) and significant cash balances contribute to Dell's strong financial profile, which provides important support to the rating and outlook, given Dell's average business risk profile.
Liquidity: As of Oct. 29, 2004, Dell had more than $12 billion in cash and total investments, compared with long-term debt (including capitalized operating leases) of about $650 million. Although it has no committed credit facility, it has no near-term debt maturities and continues to generate significant levels of discretionary cash flow. Net share repurchases, while material ($2.9 billion for the nine months ended Oct. 29, 2004), are not expected to exceed discretionary cash-flow levels.