Fitch Ratings has assigned an 'A' rating to Analog Devices, Inc.'s senior notes.
The senior notes will be pari passu with Analog Devices' existing and future senior unsecured obligations. The company will use net proceeds to repay upcoming debt maturities, including $500 million of senior notes due October 2024 and $400 million of senior notes due April 2025. The Rating Outlook is Stable
The ratings and Outlook reflect Analog Devices' strong market positions across a broad set of customers and applications, benefitting from secular content growth and resulting in industry-leading profit and FCF margins. The company's commitment to a conservative financial structure with net EBITDA leverage below 1.5x and $1.5 billion-$2.5 billion of annual FCF also support the rating.
Key Rating Drivers
Strengthened Financial Flexibility: Fitch expects Analog Devices' financial flexibility to remain solid despite the company's use of cash flow for capital returns, including a target dividend equal to 40% to 60% of pre-dividend FCF. Fitch expects minimum cash of $1.5 billion and debt maturities are comfortably manageable with FCF through the forecast period.
Financial Policies: Fitch expects Analog Devices' financial structure will remain in line with the rating with gross EBITDA leverage in the 1.0x-1.5x range through the forecast. The company targets net leverage below 1.5x over the long term, which provides headroom for tuck-in acquisitions or temporary operational shortfalls. Fitch's base case does not contemplate large debt-funded acquisitions; however, Fitch expects the company to prioritize subsequent FCF for debt reduction to return EBITDA net leverage back to the 1.5x target.
Acquisitive Nature: Fitch expects Analog Devices will remain open to M&A but that acquisition activity will slow, as it has for others in the space. This slowdown is due to elevated transaction multiples and intensified regulatory scrutiny amidst elevated global trade tensions. Because of the 2021 acquisition of Maxim Integrated, Analog Devices is now one of the top 10 largest semiconductor makers by revenue in a space that is increasingly differentiated by R&D scale.
Meaningful Diversification: Analog Devices' end market sales mix includes nearly 30% from automotive and just under 50% from industrial, a segment characterized by significant application and customers diversification, long product life cycles and significant market fragmentation. Analog Devices' exposure to communications and consumer adds uncorrelated demand to these secular growth drivers associated with industrial and automotive.
Meanwhile, the company's hybrid production model and presence across major geographies position it favorably within the context of heightened geopolitical tensions and semiconductor supply chain diversification efforts.
Industry Leading Profitability: Fitch expects the company to sustain industry leading profit margins, driven by significant customization and long product cycles for many of its products. Decade-plus long product cycles and incumbent advantage from long-standing design collaboration enable price increases. Like peers with meaningful internalization production, Analog Devices benefits from higher margin capture, particularly at the back-end assembly and test). Fitch expects operating EBITDA margins in the low- to mid-50% and FCF margins near 20% over the longer term.
Derivation Summary
Analog Devices is well positioned for the rating with significant growth and industry leading profitability profiles, with solid and consistent annual FCF and liquidity. Increasing regulatory scrutiny of large acquisitions and the company's focus on maintaining access to the tier-1 CP markets should reduce event risk. This should leave Analog Devices with ample capacity for tuck-in deals and shareholder returns, including a substantial dividend, with cash flow. The company's focus on investing in R&D through the cycle to take advantage of growth opportunities across a wide range of applications should drive market share gains.
The company is a top-three player in each of the markets in which it competes. These markets are benefitting from secular semiconductor content growth, which should drive mid-single digit average annual addressable market growth. The company's focus on customized solutions support premium pricing, which is reflected in Analog Devices' industry leading profit margins. This positions the company favorably to other profitability leaders, including Broadcom (BBB-/Stable). Analog Devices' financial structure is strong for the rating and Fitch expects EBITDA leverage near 1.0x through the forecast.
The company's 'F1' Short-Term Issuer Default Rating reflects Fitch's view that Analog Devices' financial flexibility and structure rating factors are in line with 'a' ratings. The mid-point of the company's three-notch band for financial flexibility navigator factor is 'a'. Within this factor, Fitch assigns higher weight to the liquidity sub-factor, which aligns with a strong 'a' given that Analog Devices will be able to easily manage debt maturities through the forecast period. Fitch's forecast for $1.5 billion-$2.5 billion of annual FCF.
In addition, 'aa' level coverage ratios offset the company's history of temporarily departing from its conservative leverage targets to support strategic acquisitions. It also aligns the financial policies sub-factor with a 'bbb' rating. Meanwhile, Analog Devices' financial structure factor, one of the two control conditions required for the higher short-term rating option to be applied, is in line with the IDR.
Key Assumptions
Mid-20% negative revenue growth in fiscal 2024, driven by broad-based inventory correction;
Low-single digit recovery in fiscal 2025 and through the remainder of the forecast;
Unadjusted gross profit margins in the low- to mid-60% and operating EBITDA margins in the low- to mid-50% through the forecast period;
Target capital intensity in the mid-single digits;
Debt maturities are refinanced;
Dividends grow by a 10% CAGR and the remainder of FCF is used for share repurchases.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Public commitment to maintaining gross EBITDA leverage below 1.25x with CFO-capex/total debt in the high 30%;
High single-digit positive organic revenue growth, indicating sustained market share gains and driving profit margin expansion.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage sustained above 1.5x and CFO-capex/total debt below 30%;
Sustained market share losses resulting in negative organic revenue growth and FCF margins below the mid-single digits.
Liquidity and Debt Structure
Solid Liquidity: Fitch views Analog Devices' liquidity as solid. s of Feb. 3, 2024, it was supported by $1.3 billion of cash and cash equivalents and an undrawn $2.5 billion five-year revolving credit facility due 2026 that backstops a $2.5 billion commercial paper program ($544 million outstanding at quarter-end). Fitch's forecast for $1.5 billion-$2.5 billion of annual FCF also supports liquidity with manageable debt maturities through the forecast.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Issuer Profile
Analog Devices, Inc. is a leading global provider of high-performance analog, mixed-signal and digital signal processing technologies.
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.
External Appeal Committee Outcomes
In accordance with Fitch's policies the Issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.
ANALOG DEVICES, INC. 
