The rating and Outlook reflect Fitch's expectations for solid operating results through 2014, driven by a continuation of a multi-year technology upgrade cycle by leading edge semiconductor makers. Visibility beyond the near term will remain limited and operating performance cyclical but yield challenges associated with increased complexity should benefit the company over the long term.
Fitch expects high single to low double digit revenue growth for calendar 2014, in-line with higher semiconductor capital spending, which is projected to be up 10% for the year. Intel Corp.'s transition to 20 nanometer (nm), foundries' 3D technologies pilot programs, memory's technology upgrades and DRAM capacity additions will drive top line growth.
Fitch forecasts operating EBITDA margin to expand to the upper 30s in the near term, driven by substantial operating leverage in the business model. Over the longer term, Fitch expects EBITDA profit margin to range from 30% to 40% through a typical cycle. Research and development will remain essentially fixed, given ongoing design collaboration with customers developing next generation technologies.
Fitch expects annual free cash flow (FCF) of
The ratings and outlook incorporate headroom for acquisitions and more aggressive share repurchases with expectations
The company has 3.9 million shares of remaining availability under the current share repurchase authorizations. Similar to historical patterns, Fitch expects
Credit protection measures should remain solid for the rating with a total leverage (total debt/operating EBITDA) and interest coverage (operating EBITDA to gross interest expense) below 2x and above 10x, respectively. The ratings incorporate headroom for incremental debt. Through the cycle, metrics should range from 0.5x - 3x for leverage and 5x - 20x for coverage.
Key Ratings Drivers
The ratings on
--The company's technology leadership resulting in strong market share positions in the process control market for semiconductors and a growing mix of less volatile services revenues.
--Fitch's expectation that the company will maintain conservative financial policies; and
--Secular long-term growth trends, including increased technological complexity and shortened life cycles for semiconductor products (Moore's Law) and increased outsourcing to foundry partners.
Fitch's ratings concerns focus on:
--Substantial customer concentration with expectations for ongoing customer consolidation; and
--The highly cyclical demand patterns associated with the semiconductor equipment market.
Positive ratings actions are unlikely in the absence of:
--A commitment to maintain higher cash balances or a back-up source of liquidity;
--Stronger mid-cycle annual free cash flow approaching
Negative rating actions could occur if:
--Sustained negative FCF from greater than anticipated customer concentration, meaningful share erosion or a fundamental slow-down in the transition at the leading edge; or
--Liquidity approaching minimal levels of approximately
--Issuer Default Rating (IDR) at 'BBB';
--Senior Unsecured Debt at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Criteria:
--'Corporate Rating Methodology' (
--'Rating Technology Companies Sector Credit Factors' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Technology Companies
Source: Fitch Ratings
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