New York, December 21, 2021 -- Moody's Investors Service ("Moody's") upgraded
Apple Inc.'s ("Apple") senior unsecured rating to Aaa,
from Aa1, and affirmed its Prime-1 rating for commercial
paper. The ratings outlook is stable.
Upgrades:
..Issuer: Apple Inc.
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)Aaa from (P)Aa1
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Aaa from Aa1
Affirmations:
..Issuer: Apple Inc.
....Senior Unsecured Commercial Paper ,
Affirmed P-1
Outlook Actions:
..Issuer: Apple Inc.
....Outlook, Remains Stable
RATINGS RATIONALE
Moody's analyst Raj Joshi said, "The upgrade of Apple's
rating to Aaa reflects the company's exceptional liquidity,
robust earnings that we expect will continue to grow over the next 2 to
3 years, and its very strong business profile. Apple's
ecosystem of products and services provides enhanced revenue visibility
over time despite some level of volatility that is inherent in its business
from product introduction cycles." Governance considerations,
specifically, Apple's financial policy of transitioning into
a net cash neutral position "over time" and its capital allocations
since US tax reform, further support our expectation that the company
will maintain an exceptionally strong liquidity profile over the next
3 to 5 years. The Aaa rating considers the strength of Apple's
business and financial profile relative to other very highly rated issuers.
Moody's believes that Apple has substantial financial flexibility
to manage its business risks, including growing regulatory uncertainties,
make investments in new growth opportunities, and balance shareholder
returns.
Apple's very strong business profile reflects its substantial operating
scale, a large installed base of products and users of its services,
strong customer loyalty, and premium brand positioning that drives
its industry-leading profitability across product categories.
The company's broad portfolio of products and services, solid
track record of innovation and execution, and significant opportunity
to monetize its installed base of over 1 billion of active iPhones support
our expectations for long-term earnings growth. Apple benefitted
from strong demand for its products and services in the fiscal year ended
September 2021. Operating income grew 64% in FY '21
with growth in all Products and Services categories and in all reportable
geographic regions. Moody's expects operating income growth
to average mid-single digits over the next 12 to 24 months,
driven by growth in Services, Wearables and iPhone categories.
Although revenue diversity continues to improve over time, overall
revenue growth and profitability still depend upon the sales of iPhones
to a large degree. Moody's expects that a mix shift toward
higher-value 5G smartphones and sustained growth in higher margin
Services will support strong profitability and annual free cash flow of
$80 billion to $90 billion (over 50% of total Moody's
adjusted debt) over the next 12 to 24 months. Apple's $173
billion of unrestricted cash balances and free cash flow result in an
unmatched liquidity profile with substantial financial flexibility.
Apple has a strong track record of generating growth from new categories
targeting large addressable markets and leveraging its large installed
base and core strengths in innovation, design, and integration
of hardware, software and services. Apple is increasingly
differentiating its hardware products through its internally designed
processors, which will preserve or grow profitability despite intense
competition in product categories.
Apple has maintained gross leverage around 1.8x since US tax reform
but solid EBITDA growth in FY '21 drove a half turn of deleveraging
to 1.3x (Moody's adjusted total debt to EBITDA, including
tax repatriation liability, which added 0.2x to leverage
ratio). Moody's expects the company to maintain gross leverage
in the range of low to mid 1x, and that transition to a net cash
neutral position will occur gradually and likely over the next 3 to 5
years. This expected range of leverage, coupled with Apple's
substantial liquidity provide the company ample flexibility to invest
in growth opportunities and pursue acquisitions. It has relatively
modest capital expenditures (3% to 4% of revenues) and a
strong track record of entering new markets largely from organic investments.
Apple also has substantial financial strength to manage business risks.
The company faces intense competition across its product and service offerings.
As a product-centric company, it faces execution risks from
short product cycles, the need to adapt to shifting consumer preferences,
and managing a large and complex supply chain with frequent product upgrades.
In addition, Apple has a high concentration of manufacturing operations
through its partners in China. China is also Apple's second
largest market by revenues and Apple's strong rebound in revenues
in China was a key contributor to its strong performance in FY '21.
Apple has largely side-stepped any adverse impact on its businesses
from US -- China trade tensions, but it faces risks if trade
relations between the two countries deteriorate.
But its principal risks stem from regulatory uncertainties targeting large
technology companies that operate in digital commerce markets, and
these risks have materially amplified in recent years. For Apple,
these risks are primarily centered on certain parts of its Services segment.
Apple's gross profit from the Services category has nearly doubled
over the last 3 years and Moody's expects the contribution from
the Services category to increase from 31% of company gross profit
in FY '21, to about 36% over the next couple of years.
The growth in the Services segment will continue to increase Apple's
business diversity and reduce earnings volatility. But its App
Store business (part of the Services category) faces risks from new laws
in the US and Europe aiming to promote competition in digital marketplaces
and platforms; heightened scrutiny from antitrust regulators in a
number of countries; and private antitrust legal challenges in the
US and Europe. In addition, Apple's licensing revenues
(also part of Services revenues) that it generates from Google are under
legal scrutiny. The US Department of Justice has initiated an antitrust
lawsuit against Google alleging that Google's agreements with device
manufacturers, wireless carriers and browser developers that require
Google's search engines to be preset as a default search engine,
are exclusionary and anticompetitive. Under these agreements,
Google pays substantial (and growing) amounts to its distribution partners.
Apple does not break out its revenues from App Store or licensing agreements
with Google. Moody's estimates that revenues from these businesses
accounted for over half of Apple's Services revenues and an even
larger share of gross profit for its Services segment. Given the
significance of these revenue streams, regulatory and legal risks
will remain Apple's principal risks until there is greater clarity
about how legislative changes and regulatory actions could affect its
highly profitable revenue streams. It is likely that the fog of
uncertainty may not clear over the next several years given the history
of antitrust cases. The Aaa rating incorporates Moody's view
of Apple's world class risk management capabilities, robust
financial flexibility, and diversifying offerings, which should
allow the company to preserve or strengthen its financial profile over
the medium term despite these challenges.
It is also likely that multinational corporations, including Apple,
will face higher taxes on revenues generated outside their domestic jurisdictions
after several countries joined the global tax reform initiatives.
Moody's does not expect higher taxes to have a meaningful impact
on Apple's credit profile given its substantial profitability and
cash flow.
Apple's ESG Credit Impact Score is Neutral-to-Low
(CIS-2). Moody's believes that Apple's moderately
negative social and environment risks over time are mitigated by its robust
financial profile and clarity from management's financial policy of shifting
to a net cash neutral position over time. Apple's large scale and
its extensive semiconductor and hardware manufacturing footprint,
including its network of suppliers, result in moderately negative
risks from physical climate, carbon transition, water management,
and waste and pollution environmental factors. These risks are
partially mitigated by ongoing efforts of the company and its manufacturing
partners to increase the share of renewable energy and resources,
reduce water consumption, and limit the creation of hazardous waste.
In addition, the increasing use of recycled components and rare
earth and critical minerals in new products will reduce Apple's environmental
risk exposure. Apple's moderately negative social risk primarily
reflects the heightened regulatory scrutiny and litigation risks.
The company's premiere brand reputation, a broad portfolio
of products and services, and its very large consumer base raise
the risk of reputational harm from potential cybersecurity breaches,
data privacy concerns, or health and safety risks in its suppliers'
facilities. At the same time, Apple benefits from strong
positive demographic and societal trends that are driving higher adoption
of Internet and technology solutions.
The stable rating outlook reflects Moody's expectation that Apple
will maintain robust liquidity and generate annual free cash flow of approximately
$80 billion to $90 billion over the next 12 to 24 months.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
• Shifts in financial policy that lead to a material erosion in liquidity
or higher financial leverage
• Adverse outcomes from regulatory changes or legal actions that
substantially weaken long-term earnings growth prospects and cannot
be mitigated over time through changes in financial policy or business
activities
• Sustained erosion in Apple's market position and profitability
from execution challenges
Apple Inc. designs, manufactures and markets mobile communication
and media devices and personal computers, and sells related software,
accessories and third-party digital content and applications.
The principal methodology used in these ratings was Diversified Technology
published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Raj Joshi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
