INTEL CORPORATION
Fitch Ratings has rated
The senior notes will be pari passu with Intel's existing and future senior unsecured indebtedness. Fitch expects the company to use net proceeds for general corporate purposes, including but not limited to refinancing of outstanding debt, funding for working capital and capital expenditures.
Key Rating Drivers
Negative Intermediate-Term FCF: Fitch expects FCF will be negative over the 2023-2025 period as Intel completes its investment super-cycle aimed at regaining manufacturing technology leadership and building out its foundry services business. Meanwhile, revenue and profitability will be down considerably in 2023, driven by record excess inventory following robust PC and server demand surrounding the pandemic-related policies. Profit margins will fall to record low levels in the near term before rebounding in 2024, with the resumption of positive revenue growth and flow-through of benefits from Intel's
Fitch expects cash balances to remain high in the
Structurally Higher Investment Intensity: Fitch believes higher investment intensity is structural rather than temporary given Intel's commitment to regaining process technology leadership and building out IFS. Intel's success, which would enable it to stem or reverse market share losses and gain a meaningful foothold in the
Fitch is cautious on guidance for longer-term capital spending normalization, given that elevated spending levels are in line with technology leaders. Intel's expanded outsourcing of advanced products manufacturing to TSMC adds flexibility to the pace of investments and hedges against technology roadmap missteps. However, Fitch believes dynamics related to the development of a domestic semiconductor supply chain, including significant co-investments and government subsidies, reduces the likelihood of Intel pivoting on its strategy.
Fitch expects annual capital spending net of co-investments and subsidies of
Strong Market Positions: Intel's credit profile benefits from the company's still strong market positions in personal computers PC and DC, despite ongoing share erosion in servers to traditional competitor,
Tower Semiconductor Acquisition: Fitch expects the proposed all-cash acquisition of
Derivation Summary
Fitch believes Intel's weakened financial position within the context of its investment super-cycle and process technology disadvantage position it more in line with a low-'A' category rating. As a result, Fitch expects meaningfully negative FCF and weak leverage metrics over the intermediate term, which is inconsistent with the company previous strong 'A' rating. Beyond the intermediate term, Fitch expects stronger profit margins and FCF; however, a return to historical levels will require strong execution across a number of Intel's strategic initiatives.
Fitch's base case contemplates recovering end markets in 2024, aided by product refreshes that should stabilize market share while Intel's restructuring actions support profit margin expansion. High cash balances, co-investments and government subsidies may be insufficient to support capital spending but these investments over the longer-term position Intel as a market leader with meaningful foundry services capabilities in the
Intel faces intensified competition from rival, AMD, in both PCs and servers for DCs, as well as increasing utilization of custom ARM-based servers by service provider customers. Nonetheless, Intel's market share remains strong despite technology challenges and is poised to stabilize with new products set for production over the coming years, including those sourced from the company's increased use of foundry partner, TSMC, for advanced products. From both an operating and financial profile perspective, Intel is weaker than TSMC, given that company's significant leadership in leading edge foundry services, superior FCF profile and strong credit metrics.
The 'F2' short-term and CP ratings reflect correspondence with Intel's lower long-term ratings. Under Fitch's Corporate Rating Criteria, an 'A-' Long-Term Issuer Default Rating (IDR) links to either an 'F1' or 'F2' Short-Term IDR with the Financial Flexibility factor of Fitch's Global Technology navigator with a particular focus on the Liquidity sub-factor. In Intel's case, Liquidity will be challenged given the company's negative FCF over the rating horizon, yielding a 'bbb' sub-factor rating, as well as a 'bbb' overall Financial Flexibility factor rating, and corresponding to the baseline (F2) rather than higher (F1) Short-Term IDR.
Key Assumptions
Revenue down by mid-teens in 2023 reflecting weak demand conditions, excess inventory levels and market share losses in DC;
Revenue begins recovering in 2024 and grows at high single digits through the remainder of the forecast reflecting improving competitive positioning and modest growth in IFS;
Gross profit margins trough at 40%-45% in 2023 before expanding with the resumption of revenue growth, benefits from Intel's cost reduction initiatives and a richer sales mix;
Intel achieves operating expense reduction targets and operating EBITDA margins trough at 31% in 2023 before returning to low 40% through the forecast period, given operating leverage in the model;
Capital spending remains in the low- to mid-30% as a percentage of revenue with offsets from financial partners and government subsidies;
Dividend growth is modest and no share repurchases;
Intel completes the
Intel refinances upcoming debt maturities and plugs cash burn with incremental debt.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Intel regains a greater than 80% share in DC markets while maintaining profit margins in line with industry peers, demonstrating technology leadership in the face of intensifying competition;
Significant growth in non-PC and DC segments resulting in greater revenue diversification, underscoring the company's technology roadmap;
Expectations Intel will sustain EBITDA leverage near 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustained negative organic revenue growth or non-GAAP gross profit margins in the 40% range due to a structurally weakened competitive position and product roadmap;
Negative FCF beyond 2025, underscoring failure in the company's technology roadmap;
Expectations for EBITDA leverage sustained above 2.0x beyond the intermediate term.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Liquidity: Intel's liquidity as of
Issuer Profile
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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