CHICAGO
Fitch Ratings has assigned a 'A+' rating on Texas Instruments Incorporated's (TI) $500 million of 1.85% senior unsecured notes due May 15, 2024. Pro forma for the senior notes issuance and Fitch's expectation, TI will use net proceeds, along with readily available cash, to repay $1 billion of senior notes maturing May 16, 2024. Total debt was $5.6 billion of debt, including the undrawn $2 billion revolving credit facility (RCF). A full list of current ratings follows at the end of this press release.
KEY RATING DRIVERS
The ratings and Outlook reflect Fitch's expectations for solid operating performance for TI, despite headwinds in personal electronics. Automotive electronics markets should remain strong from increasing electronics content in infotainment and hybrid electric vehicle and powertrain systems. Digitalization and increasing electronics content also should drive growth in industrial markets. Slowing mobile phone demand should constrain growth in Personal Electronics over the longer term with communications equipment demand remaining uneven.
Fitch expects profitability will strengthen through the semiconductor cycle from increasing production on more efficient 300mm wafers and a higher mix of more profitable industrial sales. As a result, operating EBITDA margin could remain above 45% through the intermediate-term, versus Fitch's prior expectations of low- to mid-40s. Annual free cash flow (FCF), which contemplates TI's $1.3 billion dividend, will exceed $2 billion over the intermediate-term.
Fitch expects TI will use 100% of pre-dividend FCF plus cash from the exercise of employee stock options less debt repayments for shareholder returns through the intermediate term. During the first quarter, TI paid $383 million in dividends and repurchased $630 million of stock and Fitch expects roughly $2 billion of annual net share repurchases over the forecast period.
Fitch expects total debt-to-operating EBITDA (total leverage) will remain below 1.5x through the cycle and estimates total leverage was 0.7x for the latest 12 months (LTM) ended March 31, 2024. 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 March 31, 2024.
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 $2 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 down revenues in 2024 with strength in automotive and improving industrial offset by weak Personal Electronics demand;
--Low single-digit revenue growth beyond the near-term, driven by increasing semiconductor content;
--Operating EBITDA margin near 45% through the forecast period, from a stable sales mix and increasing production on more efficient 300mm wafers;
--Inventory lead times remain near 4.5 weeks;
--Capital spending near 4% of revenues through the forecast period, as TI increases 300mm capacity;
--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 total leverage 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
Pro forma for the $500 million senior notes offering and $1 billion debt repayment on May 16, 2024, TI's liquidity was solid as of March 31, 2024, and supported by:
--Approximately $2.3 billion of cash and cash equivalents and short-term investments, roughly 80% of which is located within the U.S.;
--An undrawn $2 billion credit facility due March 2024 that fully backstops a $2 billion CP program.
Liquidity is further supported by Fitch's expectations for annual FCF of more than $2 billion.
Pro forma for the $500 million senior notes offering and $1 billion debt repayment on May 16, 2024, total debt was $3.6 billion as of March 31, 2024 and consisted of:
--$250 million of 0.875% senior notes due March 2024;
--$375 million of 6.6% NSC issued senior notes June 2024;
--$500 million of 1% senior notes due May 2024;
--$750 million of 1.65% senior notes due August 2024;
--$500 million of 1.75% senior notes due 2024;
--$250 million of 2.75% senior notes due March 2024;
--$500 million of 1.85% senior notes due May 15, 2024;
--$500 million of 2.25% senior notes due May 2024.
FULL LIST OF CURRENT RATINGS
Fitch currently rates TI and its subsidiary, National Semiconductor Corporation, as follows:
TI
--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
--Long-Term IDR 'A+';
--Senior unsecured notes 'A+'.
Relevant Committee date: Sept. 29, 2024
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 2024)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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