New York, September 24, 2021 -- Moody's Investors Service ("Moody's") upgraded Analog Devices, Inc.'s
("Analog") senior unsecured rating to A3 following the closed acquisition
of Maxim Integrated Products, Inc. ("Maxim") in an all-stock
transaction. The outlook is positive.
The credit positive transaction will strengthen Analog with increased
breadth and scale across multiple end markets. In addition to the
acquisition's strong strategic fit and the combined companies' strong
competitive profile, "the rating is supported by governance
considerations, specifically a conservative leverage policy that
targets net debt to EBITDA (company calculated) of less than 2x and our
expectations for the maintenance of a strong liquidity profile and a balanced
capital allocation policy over the longer term," said Moody's
Richard Lane. Lane went on to say that "an improving product
mix (more higher margin industrial and auto revenue) and ongoing cost
savings from Analog's acquisition of Linear Technology in 2017,
have helped to expand Analog's adjusted gross margins, reaching
69.8% in the most recent quarter. And with additional
scale, Analog will be able to leverage research and development
spending over a broader customer base, which will support higher
profit margins".
Concurrently, Moody's affirmed the Baa1 senior unsecured rating
of Maxim Integrated Products, Inc. Moody's will assess
Maxim's credit profile and focus on whether Analog plans to repay,
guarantee, or legally assume Maxim's debt as direct and sole
obligor. If Analog guarantees or legally assumes Maxim's
debt, Moody's would expect to revise Maxim's rating
so that it would be equivalent to that of Analog.
Upgrades:
..Issuer: Analog Devices, Inc.
....Senior Unsecured Regular Bond/Debenture,
Upgraded to A3 from Baa1
Affirmations:
..Issuer: Maxim Integrated Products, Inc.
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
Outlook Actions:
..Issuer: Analog Devices, Inc.
....Outlook, Changed To Positive From
Stable
..Issuer: Maxim Integrated Products, Inc.
....Outlook, Remains Stable
RATINGS RATIONALE
Analog's credit profile reflects its strong market positions from
its portfolio of high performance analog semiconductors (about an $18
billion market), further supported by the stronger and more stable
operating performance of the analog segment compared to non-analog
and more commoditized semiconductor segments. Analog benefits from
broad geographic, customer and end market diversification,
and the proprietary nature of around two-thirds of its products.
The all-stock financed acquisition of Maxim Integrated Products
Inc. that closed August 26 will enhance the company's scale,
product, and end market diversification, much as the purchase
of Linear Technology did four years ago. Long product lifecycles
contribute to strong profit margins and the expectation of stable market
share. Exposure to broad markets contributes to macro driven cyclicality
that we expect will be favorable over the next year. We expect
Analog will generate about $7.5 billion of revenue and $3.5
billion of adjusted EBITDA in fiscal 2021 and over $10 billion
of revenue in fiscal 2022, which includes a full year of Maxim.
The acquisition combines two very profitable analog semiconductor companies
with complementary technologies, products, and capabilities,
solidifying Analog's very strong position in the high performance analog
market. Reflecting very high quality earnings and efficient business
models, the combined companies convert over 80% of EBITDA
into cash flow after capital spending. Both companies have strong
positions in very diversified end markets with Maxim having relative strength
in automotive and data center markets, while Analog excels across
the broad industrial, optical communications and digital healthcare
markets. The combined entity will have highly differentiated products
across similar many end-markets in industrial (49% of combined
revenue in the most recent twelve months), automotive (20%),
communications (18%), and consumer (13%).The
ratings incorporate expectations of semiconductor industry cyclicality,
although this has become less pronounced over time with broadening end
markets from a vertical and geographic perspective.
In addition to expected cost synergies ($275 million) that Moody's
views as achievable, the broader portfolio and revenue base over
which the company will be able to leverage research and development spending,
should improve profit margins and cash flow from already strong levels.
Moody's projects leverage will remain modest over the next few years,
with adjusted gross debt to EBITDA around 1.5x and free cash flow
after dividends to adjusted gross debt over 50%, though leverage
may increase temporarily in connection with the financing of acquisitions.
Analog maintains excellent liquidity, with $1.5 billion
of cash and short term investments at July 2021. The company has
been free cash flow positive every quarter over the last decade,
and over the last 16 years, Analog has had only two quarters of
negative free cash flow ($20 million each). Over the next
year, we anticipate the company will return all of Maxim's
cash at the time of acquisition (approximately $2.5 billion)
to shareholders through an announced accelerated share repurchase program
and thereafter return 100% of cash flow after capital spending
to shareholders in the form of dividends and share repurchases.
Analog also maintains a $2.5 billion unsecured revolving
credit facility that matures in June 2026 under which it has full access,
same day availability, no requirement to re-represent as
to no material adverse change, and significant cushion under its
financial covenant.
The positive outlook reflects Moody's expectation that Analog will sustain
strong profit margins as profitable although moderated revenue growth
continues in 2022 following a strong sector rebound in 2021. The
outlook also embeds our expectations that the company will successfully
integrate Maxim and continue to maintain a conservative financial posture
in terms of leverage, liquidity, and capital return.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be upgraded if Analog grows revenue at least in line
with peers with EBITDA margins approaching 50% while effectively
integrating Maxim. Also, maintaining a modestly leveraged
capital structure with adjusted gross debt / EBITDA less than 1.8
times and maintaining solid liquidity could support a higher rating.
The rating could be downgraded if Analog experiences a deterioration in
business fundamentals resulting in sustained market share loss and EBITDA
margins that trend toward 40%. Ratings pressure could develop
if management adopts a more aggressive use of financial leverage such
that adjusted gross debt / EBITDA exceeds 2.5 times on a sustained
basis.
The principal methodology used in these ratings was Semiconductors published
in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287886.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Analog Devices, Inc. designs, develops, manufactures
and markets a broad portfolio of standard linear analog semiconductors.
Headquartered in Norwood, MA, the company reported revenues
of $6.5 billion for the twelve months ended July 2021.
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
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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
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Richard J. Lane
Senior Vice President
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.
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JOURNALISTS: 1 212 553 0376
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