Overview
— U.S. analog and mixed-signal semiconductor provider Semtech
acquired Canadian-based analog and mixed-signal semiconductor provider Gennum
Corp.
— We are assigning our ‘BB’ corporate credit rating to Semtech., as well
as our ‘BBB-‘ issue rating and ‘1’ recovery rating to the $100 million term
loan A and $250 million term loan B due March 2017.
— The company raised the term loan proceeds to fund the acquisition.
— The stable outlook reflects our expectations for continued revenue,
profit, and cash flow growth, along with moderate leverage for the rating.
Rating Action
On May 7, 2012, Standard & Poor’s Rating Services assigned its ‘BB’ corporate
credit rating to Semtech Corp. The outlook is stable.
Concurrently, we assigned a ‘BBB-‘ issue-level rating to Semtech’s proposed
$100 million term loan A and $250 million term loan B, both due 2017. The
recovery rating is ‘1’, reflecting our expectation for very high (90% to 100%)
recovery of principal in the event of default.
Rationale
The ratings on Semtech reflect our expectation that the company’s expanded
product and market position and good communications industry growth prospects
will support continued revenue growth and consistent profitability, despite
near-term integration risks. In addition, we expect the company to maintain
leverage appropriate for the rating, even with a moderately acquisitive growth
strategy. Standard & Poor’s views Semtech’s business risk profile as “fair”
and its financial risk profile as “significant.”
Semtech’s fair business risk profile reflects its niche market position as a
provider of analog semiconductors for the data and telecommunications sectors.
With pro forma combined revenues of about $630 million, the Gennum acquisition
adds product and end-customer breadth. It also further diversifies Semtech’s
business into enterprise and industrial end markets, from its concentration in
telecom and high-end consumer-centric markets historically.
We expect that Semtech’s organic revenue will be subdued in the near term due
to supply chain disruption associated with the Thailand floods, in line with
the broader semiconductor sector. We note that Semtech’s revenues in its
quarter ended January 2012 were down almost 10% year over year. Nevertheless,
we expect the company’s revenues will increase about 5% organically in 2012,
supported by demand for its products serving broadband communications
infrastructure and wireless device markets. We expect minimal near-term
adjusted EBITDA margin improvement from current levels in the high-20% area,
as the company’s expanded product mix will require a significant investment in
research and development (about 20% of future revenues). The company’s analog
product portfolio is characterized by high proprietary content for over 90% of
revenues, supporting a largely recurring revenue stream.
Semtech’s significant financial risk profile reflects its debt to EBITDA of
about 2x as of January 2012, which is moderate for the rating. However, we
anticipate Semtech will continue to pursue growth through acquisitions, with
modest prospects for sustained leverage reduction (notwithstanding the term
loan A’s expected rapid amortization requirements). We note the credit
facility’s $150 million accordion feature as a potential source of future
acquisition funding. We also expect Semtech will balance debt reduction with
shareholder returns, and anticipate the company will expend most of its recent
$50 million share repurchase authorization in calendar 2012.
Liquidity
We view Semtech’s liquidity as “adequate.” In our opinion, sources of cash
include expected cash balances of about $160 million at closing of Gennum. The
company’s discretionary free cash flow, which we anticipate to be about $100
million per year, supplements liquidity.
We assume the following cash uses: capital spending of about 5% of revenues
annually (about $35 million in 2012) and share repurchases of about $50
million in 2012. Debt maturities are steady, at about $20 million per year for
amortization of the term loans prior to their 2017 final maturity.
We incorporate the following factors into our analysis:
— We expect sources of liquidity will exceed uses by 1.2x or more.
— We expect that net sources would be positive, even with a 15% to 20%
drop in EBITDA.
— In our view, the company’s cash and free cash flow would allow it to
absorb low-probability shocks.
— Although Semtech does not have a revolving credit facility, the
current rating and outlook incorporate our expectation that Semtech will
maintain cash balances of at least $150 million.
Recovery analysis
For the complete recovery analysis, see Standard & Poor’s recovery report on
Semtech, published Feb. 23, 2012, on RatingsDirect.
Outlook
The stable outlook reflects our expectation that Semtech will successfully
integrate Gennum’s business and maintain profitability while maintaining no
less than $150 million cash balances and leverage below 3x. Upgrade potential
is currently constrained by the company’s near-term integration risks and lack
of a track record operating at its current scale.
A downgrade would likely be the result of a more aggressive financial policy,
including increased acquisition activity and shareholder returns, or
deterioration in operating performance due to competition or macroeconomic
trends, resulting in cash balances declining below $150 million or sustained
leverage in the mid-3x area.
Related Criteria And Research
— Top 10 Investor Questions: How Will The Global Technology Industry
Fare Amid An Economy In Flux?, April 26, 2012
— 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
— 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
New Ratings
Semtech Corp.
Corporate Credit Rating BB/Stable/–
Senior Secured
US$100 mil term A bank ln due 2017 BBB-
Recovery Rating 1
US$250 mil term B bank ln due 2017 BBB-
Recovery Rating 1
