Overview
— We are raising the ratings on U.S. semiconductor manufacturing
equipment provider Lam Research based on an improved business risk
profile
following the pending merger with Novellus Systems Inc. (unrated) in a
stock-for-stock transaction valued at about $3.3 billion.
— We are raising the corporate credit rating to ‘BBB-‘ from ‘BB+’,
assigning a positive outlook, and removing the rating from CreditWatch.
— We are also raising the issue-level ratings on the company’s $450
million senior unsecured convertible bonds due 2016 and $450 senior unsecured
convertible bonds due 2018 to ‘BBB-‘ from ‘BB+’.
— The positive rating outlook reflects our view of potentially enhanced
profitability and a leadership position if the merger integration is
successful and Lam Research maintains its current financial risk profile.
Rating Action
On April 25, 2012, Standard & Poor’s Ratings Services raised its ratings on
Lam Research Corp. to ‘BBB-‘ from ‘BB+’ and removed the rating from
CreditWatch, where it was listed with positive implications on Dec. 15, 2011.
The outlook is positive.
The rating change reflects the company’s expanded leadership position beyond
its previously narrow business focus to include adjacent markets within the
wafer fabrication equipment industry, while maintaining its “intermediate”
financial risk profile after the stock-for-stock merger with Novellus.
We are also raising the issue-level ratings on the company’s $450 million
senior unsecured convertible bonds due 2016 and $450 senior unsecured
convertible bonds due 2018 to ‘BBB-‘ from ‘BB+’.
Rationale
Lam Research is a global producer of plasma etch and single-wafer cleaning
tools used to manufacture memory, logic, and micro-electromechanical system
devices.
We placed Lam Research’s ratings on CreditWatch following the announcement
that the company will merge with Novellus Systems Inc. in a stock-for-stock
transaction valued at about $3.3 billion or 1.125 shares of Lam Research for
each share of Novellus. We view the proposed merger as a positive for our
assessment of Lam Research’s business risk profile as the company expands its
leadership positions beyond its previously narrow business focus in plasma
etch and single-wafer clean segments of the semiconductor wafer equipment
addressable market. Novellus is a leader in deposition and surface preparation
semiconductor equipment, with sales and EBITDA at approximately half of Lam
Research’s current size. As a result, we revised Lam Research’s business risk
profile to “satisfactory” from “fair.”
We continue to view Lam Research’s financial risk profile as intermediate. Pro
forma for the transaction, funded debt will increase due to the assumption of
Novellus’ existing $700 million of debt, thereby increasing pro forma
debt-to-EBITDA to 1.9x from about 1.7x (for Lam Research stand-alone) at the
quarter ended March 31, 2012. Although the pro forma leverage increases, it is
currently strong for our assessment of the company’s intermediate financial
risk profile, which incorporates our view that the company’s credit metrics
may fluctuate significantly along with the industry cycle. In the severe
industry downturn in 2009, Lam Research’s debt-to-EBITDA temporarily exceeded
6x, but recovered to below 1x the following year.
Liquidity
Liquidity is “adequate,” but limited to unrestricted cash and short-term
investments of about $3.4 billion (including Novellus’ cash) as of March 31,
2012, and combined adjusted free operating cash flow (FOCF) of about $780
million for the 12 months ended March 31, 2012, as Lam Research currently has
no revolving credit facility. As a result, Standard & Poor’s views the
company’s existing cash balances as a key liquidity source. Additionally, the
company intends to use a portion of the existing cash balance and FOCF to fund
its planned $1.6 billion share repurchase program to be executed over the 12
months after the closing of the merger with Novellus. We believe Lam
Research’s FOCF will still be sufficient to cover its working capital and
capital expenditure needs.
Additional relevant aspects of the company’s liquidity, in our view, are as
follows:
— We expect ratio of cash sources to uses to be materially above 1.2x in
the near term.
— We believe that sources will exceed uses, even if EBITDA were to
decline by 50% for the 12 months ended March 31, 2012.
— Material additional acquisitions are not expected or incorporated in
the current rating.
Outlook+
The outlook is positive, reflecting the company’s expanded leadership
positions beyond its previously narrow business focus to include adjacent
markets within the wafer fabrication equipment industry and a continued
moderate financial policy after the stock-for-stock merger with Novellus. We
could upgrade the company to ‘BBB’ if it successfully integrates the merger
with Novellus and achieves the $100 million cost synergies as outlined, while
maintaining its current pro forma financial profile. We could revise the
outlook to stable if the company experiences difficulty with the integration
of Novellus, leading to sustained leverage in excess of 2.5x throughout an
industry cycle.
Related Criteria And Research
— Global Technology Ratings Trend Shifts To Negative In The First
Quarter, April 11, 2012
— Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March
29, 2012
— U.S. Technology Companies’ Liquidity Is Higher, For Now, Jan. 18, 2012
— Reshuffling The Debt: Global High-Tech M&A; Activity Accelerates, Oct.
13, 2011
— Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
— Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
— 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Upgraded And Off CreditWatch
To From
Lam Research Corp.
Corporate Credit Rating BBB-/Positive/– BB+/Watch Pos/–
Senior Unsecured BBB- BB+/Watch Pos
Recovery Rating 3 3
