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Rating Action:

Moody's upgrades senior unsecured of Analog Devices to A3 following Maxim acquisition; outlook positive

24 Sep 2021

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 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_1288435.

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.

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.
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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