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Rating Action:

Moody's upgrades Apple to Aaa; outlook stable

21 Dec 2021

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

No Related Data.
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