NEW YORK--()--Fitch Ratings has affirmed Dell Inc.'s (Dell) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'A';
--Bank credit facilities at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper (CP) at 'F1'.
The Rating Outlook is Stable.
Approximately $11.4 billion of debt is affected by Fitch's action, including Dell's undrawn revolving credit facilities with aggregate capacity of $3 billion.
Dell's ratings reflect:
--Strong financial flexibility primarily supported by cash and investments of $14.6 billion, consistent pre-dividend annual free cash flow (FCF) exceeding $3 billion in 10 of the last 11 fiscal years and staggered long-term debt maturities. Fitch estimates FCF of approximately $3 billion - $3.5 billion in fiscal 2013 (Jan. 31) compared with a record of $4.9 billion in 2011.
--Increasing contribution of higher margin enterprise solutions and services (ESS), consisting of servers, networking, storage, services and software. ESS accounted for nearly 34% of Dell's total revenue in the quarter ended Aug. 3, 2012, up 4.3 percentage points year over year, and more than 50% of gross profit.
--Solid market position in industry standard servers (#2), including density optimized servers for large scale datacenters (#1), PC (#3), storage (#5), according to IDC, and services (#13) based on Fitch estimates.
--Strong credit metrics, especially core (non-financing). Core leverage increased to 0.9x at Aug. 3, 2012 from 0.7x in the prior year, but remains below Fitch's threshold of 1.5x. Fitch believes core leverage will continue to remain below 1x through at least fiscal 2013.
--Significant scale, which provides procurement efficiencies for memory, hard disk drives and other common components in the hardware business.
--Disciplined approach to capital allocation and acquisitions, which Fitch expects will continue.
Credit concerns center on:
--An increasingly competitive pricing environment in consumer PCs and entry-level corporate PCs, particularly in emerging markets (India and China) and Western Europe. Dell continues to focus on the mid to high end of the PC market, seeking to maximize operating income rather than unit market share.
--Moderating economic growth in key emerging markets, such as China, India and Brazil, and declining to sluggish growth in mature markets. Despite the near-term slowdown, Fitch believes the long-term outlook for PC demand in emerging markets remains strong due to a growing middle class and a low PC penetration rate of approximately 16%.
--Pressured public sector demand due to budgetary challenges and associated austerity measures in many mature markets.
--Weak commercial and consumer PC demand due to soft economic conditions and consumer preference for tablets and smart phones at the expense of PCs. Fitch believes the release of Windows 8 in late October 2012 will have minimal near-term impact on Dell's overall financial results given the company's relatively low exposure to consumers and slow commercial sector adoption of new technologies.
--Ongoing transformation to a global provider of enterprise solutions and services presents event risk in terms of a large acquisition.
Fitch believes the pressures on consumer PC growth in mature markets is less of a concern since the Consumer segment represented only 4% of Dell's operating income in the latest 12 months (LTM) ended Aug. 3, 2012. Furthermore, Dell maintains more than adequate liquidity to manage any potential negative working capital implications from a substantial decline in consumer PC revenue.
The ratings may be upgraded long term in the event Dell's:
--Revenue mix materially shifts toward enterprise solutions, resulting in significant operating profit margin expansion, reduced reliance on the extremely competitive PC industry and lower financial performance volatility due to a greater percentage of recurring revenue from long-term contracts, such as IT services.
The ratings may be downgraded in the event Dell's:
--Total core leverage exceeds 1.5x on a sustained basis. In evaluating core leverage, Fitch also considers Dell's adjusted net working capital (ANWC) since the company's negative cash conversion cycle (CCC) of 33 days, based on Fitch's estimates, generates significant negative cash flow from working capital when revenue declines.
As a result, Fitch believes cash generated from the collection of financing receivables in a declining sales environment would likely be more than offset by working capital. In the absence of sufficient ANWC, Fitch believes this scenario would lead to an increase in core debt as financing assets decline without a corresponding decrease in total debt. Fitch calculates Dell's adjusted net working capital as the difference between current assets and current liabilities, inclusive of long-term deferred revenues and financing receivables.
--Revenue growth is negative for an extended duration, resulting in significant liquidity pressures. Dell's negative cash conversion cycle generates significant negative cash flow from working capital in a declining revenue environment.
Dell's strong financial flexibility is supported by $14.6 billion of cash and investments as of Aug. 3, 2012, free cash flow of $2.5 billion in the LTM ended Aug. 3, 2012 and $3 billion of aggregate committed revolver capacity.
Dell's committed unsecured revolving credit facilities consist of $1 billion expiring on April 2, 2013 and $2 billion expiring on April 15, 2015. Both credit facilities were undrawn as of Aug. 3, 2012 and primarily serve as a backstop for Dell's $2.5 billion CP program. Dell had $1 billion of CP borrowings outstanding as of Aug. 3, 2012.
As of Aug. 3, 2012, total debt was $8.4 billon, primarily consisting of:
--$1 billion of CP;
--$1.4 billion of structured finance debt relating to the securitization of finance receivables ($429 million due in less than 12 months);
--$600 million of 4.7% senior notes due 2013;
--$500 million of 1.4% senior notes due 2013;
--$500 million of 5.625% senior notes due 2014;
--$300 million of floating rate senior notes due 2014;
--$400 million of 2.1% senior notes due 2014;
--$700 million of 2.3% senior notes due 2015;
--$400 million of 3.10% senior notes due 2016;
--$500 million of 5.65% senior notes due 2018;
--$600 million of 5.875% senior notes due 2019;
--$400 million of 4.625% senior notes due 2021;
--$300 million of 7.1% senior debentures due 2028;
--$400 million of 6.5% senior notes due 2038;
--$300 million of 5.4% senior notes due 2040.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology