Fitch Affirms Intel at 'A+/F1'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings for Intel Corp. (Intel), including the long- and short-term Issuer Default Rating (IDR) at 'A+' and 'F1', respectively. The Rating Outlook is Stable. Fitch's actions affect $25.8 billion of total debt. A full list of ratings actions follows at the end of this release.

KEY RATING DRIVERS

Leading Market Positions: Fitch expects Intel's very strong market positions in the data center and personal computers (PC) to provide significant revenue scale, with cloud markets growing 40% annually offsetting high-single digit PC market (60% of revenues) declines.

Technology Leadership: Intel's technology leadership, driven by significant cumulative investments in research and development (R&D) and capital spending will support growth and strong profitability through at least the intermediate term.

Solid FCF and Financial Flexibility: Fitch expects Intel's annual free cash flow (FCF) to remain robust, despite significant investment intensity. Fitch estimates more than $3 billion annually through the forecast period, providing significant capacity for organic investments, although the majority of pre-dividend FCF is outside the U.S.

Significant Investment Intensity: Fitch expects R&D and capital spending to continue representing 35%-40% of net revenues, driven by the continuation of Moore's Law and non-volatile memory (3D NAND and X-Point) technologies.

Customer Concentration: Fitch expects customer concentration will remain significant, given consolidated PC market. Intel's largest PC customers typically represent 40% of total sales in aggregate. Intel's increasing sale mix of data center and internet of things (IoT) customers should diversify Intel's sales mix.

The ratings and outlook reflect Fitch's expectations for solid operating performance, driven by strength in non-PC markets and despite a weaker than expected PC market. Fitch expects slightly positive revenue growth in 2016, driven mainly by the acquisition of Altera Corporation (Altera) and strong data center and Internet of things (IoT) growth offsetting high-single digit declines in PCs. Profitability will weaken from ramping 14nm and 3D NAND, charges related to Altera and cyclically weaker non-volatile memory pricing.

Beyond 2016, Fitch expects low single digit growth with potential upside from adoption of Intel's X-Point non-volatile memory and a deceleration of PC market declines. Data center growth should remain strong over the intermediate term, although Fitch believes intensifying competition, including from Google, in data center markets could dampen growth and likely will drive a more competitive pricing over the longer term.

Nonetheless, Fitch expects operating EBITDA margins in the high-30s in the intermediate term, driven by the company's just announced restructuring program, targeting $1.4 billion of run rate savings by 2017. Profitability also will improve from positive organic revenue growth and a richer sales mix. As a result, FCF should remain solid and more than $3 billion beyond 2016, which will include cash charges related to the restructuring program and Altera acquisition.

Fitch expects Intel will use FCF for shareholder returns, which likely will result in incremental borrowing given that the majority of pre-dividend FCF is outside the U.S. As a consequence, Fitch expects credit protection measures will weaken through the intermediate term but total leverage will remain below 1.5x. Fitch estimates total leverage was 1.1x for the latest 12 months (LTM) ended March 31, 2016. FCF to adjusted debt was approximately 26% for the same period.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Overall flat organic revenue growth with a portion of growth from the Altera acquisition offset by continued foreign currency headwinds.

--PC business declines by high single digits in 2016 and mid-single digits beyond the near term, although Intel maintains stable average selling prices.

--Data center growth remains solid (mid- to high-single digits) through the intermediate term, although Fitch forecasts lower share and reduced pricing power as customers and competitors seek alternative data center chip providers.

--IoT markets grow in high single digits through the intermediate-term, driven by market growth and the addition of Altera's programmable logic devices (PLD).

--Strong non-volatile memory growth, albeit within a cyclical context, driven by Intel's disruptive X-Point technology.

--Lower near-term profitability related to the Altera acquisition, higher 14nm start-up costs and cyclically lower average selling prices in non-volatile memory will strengthen from the company's just announced restructuring program, which should reduce run rate cost savings by $1.4 billion in 2017.

--Back-end loaded apex of $9.5 billion in 2016 and 17% of net revenues beyond the near term, reflecting the company's investments in growth areas.

--Moderate share repurchases will drive incremental borrowing, given the majority of pre-dividend FCF is outside the U.S.

RATING SENSITIVITIES

Negative rating actions could result from:

--Fitch's expectation for total leverage sustained above 1.5x from weak operating performance within the context of debt-financed shareholder returns, given the majority of pre-dividend FCF is outside the U.S.; or

--Fitch's expectation for normalized FCF-to-adjusted debt sustained below 10%, as a result of significant share gains by Google and others in the rapidly growing data center market amid continuation of mid-single digit negative PC shipment growth.

Positive rating action is unlikely in the intermediate term but likely would require Fitch's expectations for:

--Management's commitment to moderate shareholder returns to maintain total leverage at or below 1x, given the majority of pre-dividend FCF is outside the U.S.; and

--Intel maintains significant share leadership and strong profitability in data center, despite intensifying competition from Google, ARM Holdings and Nvidia.

--Significant disruption from Intel's X-point technology and steady and solid growth in IoT markets, resulting in further diversification of Intel's sales mix and profit pools.

LIQUIDITY

Fitch believes Intel's liquidity was solid as of March 31, 2016, supported by expectation for annual FCF above $3 billion, although Fitch believes the majority of cash flow is outside the U.S. In addition, the company had approximately $15.1 billion of cash, short-term investments and trading assets as of April 2, 2016.

The company does not have a revolving credit facility to support its CP program, but Fitch views Intel's strong liquidity as providing ample support for the program.

Total debt as of April 2, 2016 was $25.8 billion and primarily consisted of:

--$1.5 billion in 1.95% senior unsecured notes due October 2016;

--$500 million in 1.75% senior unsecured notes due May 2017;

--$3 billion in 1.35% senior unsecured notes due December 2017;

--$600 million in 2.5% senior unsecured notes due November 2018;

--AUD 250 million in 3.25% senior unsecured notes due January 2019;

--$1.75 billion in 2.45% senior unsecured notes due July 2020;

--$2 billion in 3.3% senior unsecured notes due October 2021;

--$1 billion in 3.1% senior unsecured notes due July 2022;

--AUD 550 million in 4.0% senior unsecured notes due December 2022;

--$1.5 billion in 2.7% senior unsecured notes due December 2022;

--$2.25 billion in 3.7% senior unsecured notes due July 2025;

--$750 million in 4.0% senior unsecured notes due December 2032;

- $1.6 billion principal value in 2.95% junior subordinated debentures due December 2035;

--$2 billion principal value in 3.25% junior subordinated debentures due August 2039;

--$1.5 billion in 4.8% senior unsecured notes due October 2041;

--$925 million in 4.25% senior unsecured notes due December 2042;

--$2 billion in 4.9% senior unsecured notes due July 2045;

--$1 billion in 4.9% senior unsecured notes due August 2045;

--$915 million in 4.7% senior unsecured notes due December 2045.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings for Intel:

--Long-term IDR at 'A+';

--Senior unsecured debt at 'A+';

--Junior Subordinated Convertibles at 'A'

--Short-term IDR at 'F1'; and

--Commercial paper at 'F1'.

Fitch has also assigned ratings for Altera Corporation

--Long-term IDR 'A+'; and

--Senior unsecured debt 'A+'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: April 20, 2016

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 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003043

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003043

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Matthew Hankin, CFA
Director
+1-646-582-4985
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Matthew Hankin, CFA
Director
+1-646-582-4985
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com