NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Hewlett-Packard Company (HP) and its wholly-owned subsidiary Electronic Data Systems LLC (EDS) at 'A-'. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.
The rating actions affect approximately $26 billion of total debt, including the company's undrawn $7.5 billion unsecured revolving credit facilities (RCF).
KEY RATINGS DRIVERS
HP's ratings and Outlook reflect:
--Significant scale and broad portfolio, which provides purchasing leverage for shared components and strengthens the resiliency of its total revenue.
--Solid liquidity provided by nearly $14.5 billion of cash (primarily offshore), $7.5 billion of undrawn committed credit facility capacity and consistent annual FCF (post dividends) in excess of $5 billion for the past four fiscal years. Fitch expects FCF of $7.4 billion and $4.8 billion in fiscal 2014 and 2015.
--Significant reduction in core debt. HP's core leverage was 0.7x as of July 31, 2014 compared with 1.1x a year ago. Fitch forecasts core leverage will remain below 1x through fiscal 2017 reflecting revenue stabilization, modest EBITDA margin expansion due to restructuring activities and positive revenue mix.
--Strong worldwide market share, including leading unit market share in servers and printers and second largest share in PCs, IT services and networking.
--More than 30% of HP's total revenue is recurring, primarily via printer supplies, outsourcing and technology services, and software maintenance.
--Geographically diversified revenue base with majority of revenue derived from outside the U.S.
Ratings concerns center on:
--Sustainability of PC demand as commercial migrations attributable to Microsoft's end of support for Windows XP subsides.
--Aggressive industry pricing pressure in PCs and servers that has pressured profitability, mitigated by HP's realization of cost savings from restructuring actions.
--Long-term hardware revenue and profitability pressures if commercial customers aggressively adopt cloud computing in lieu of on-premise and the market for cloud services remains highly concentrated.
--Event risk in terms of a major acquisition following recent media reports that HP considered merging with EMC in a purportedly all stock transaction valued at $60 billion.
--Continued profitability pressures in Enterprise Group (EG), which represented approximately 36% of HP's operating income in the latest 12 months (LTM) ended July 31, 2014, down from 40% the prior year. EG operating income has decreased 8.5% in the LTM compared to the prior year.
The lower margin reflects a higher mix of lower margin industry standard servers (ISS), a competitive pricing environment, and continued secular decline in high margin business critical systems (BCS) revenue, which declined 18% in the LTM ended July 31, 2014. HP's technology services revenue and operating margin are also adversely affected as customers gradually migrate to UNIX servers offered by competitors (IBM and Oracle) or x86 servers that have lower attach rates and less profitable support contracts.
In addition to its solid cash position and consistent FCF, HP's liquidity is further supported by two undrawn revolving credit facilities, which had aggregate capacity of $7.5 billion as of July 31, 2014, and multiple revolving trade receivables facilities with $986 million of available capacity as of July 31, 2014. HP's revolving credit facilities consist of a $4.5 billion credit facility expiring in April 2019 and a $3 billion facility expiring in March 2017. Minimum interest coverage of 3x is the sole financial covenant.
Total debt was $19.8 billion as of July 31, 2014, consisting of short-term debt of $2.7 billion, primarily current portion of long-term debt, and long-term debt of $17.1 billion. Fitch estimates approximately $10.8 billion, or 55% of total debt, is attributable to HP's customer-financing business.
The ratings may be upgraded in the event of:
--Strong revenue growth and expanding margins for the Enterprise Group, which provides greater diversity to the company's operating income mix. Printing accounted for 38% of total segment operating profit in the LTM ended July 31, 2014 compared with 35% the prior year and up from 29% in FY 2012.
--Material revenue shift towards software provides margin expansion and greater recurring revenue through subscriptions or maintenance.
The ratings may be downgraded in the event of:
--Continued long-term market share losses in industry standard servers.
--Total debt / FCF stays above 5x for a sustained period.
--Core debt / core EBITDA stays above 2x for a sustained period. Core metrics exclude HP's financing business.
--Significant decline in supplies demand, particularly commercial, which is not offset by growth in other HP segments.
--The company divests any businesses that results in material dis-synergies or EBITDA deterioration.
Fitch currently rates HP and its wholly owned subsidiaries as follows:
--Long-term Issuer Default Rating (IDR) 'A-';
--Short-term IDR 'F2';
--Senior credit facilities 'A-';
--Senior unsecured debt 'A-';
--Commercial paper (CP) 'F2'.
Hewlett-Packard International Bank PLC
--Short-term IDR 'F2';
Electronic Data Systems LLC
--Long-term IDR 'A-';
--Senior unsecured debt 'A-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage