May 30, 2012 / 5:27 PM / 5 years ago

TEXT-S&P raises IBM ratings

Overview	
     -- U.S. technology and solutions provider International Business Machines 	
Corp. (IBM) reported revenues of $24.7 billion and net income of $3.1
billion in the quarter ended March 31, 2012; IBM is one of the largest and most 	
diversified global technology companies.	
     -- We are raising our corporate credit rating on IBM to 'AA-' from 'A+' 	
and our the short-term rating to 'A-1+' from 'A-1', reflecting the ongoing 	
business mix shift to software and services.	
     -- The outlook is stable, reflecting IBM's good market position and cash 	
flow stability.	
	
Rating Action	
On May 30, 2012, Standard & Poor's Ratings Services raised its long-term 	
ratings on Armonk, N.Y.-based International Business Machines Corp. (IBM) to 	
'AA-' from 'A+'. At the same time, we raised our short-term rating on the 	
company to 'A-1+' from 'A-1'. The outlook is stable.	
	
The upgrade reflects our revision of IBM's business risk profile to 	
"excellent" from "strong," incorporating an ongoing revenue and earnings mix 	
shift to more stable and higher margin software and services revenues.	
	
Rationale	
The rating on IBM reflects the company's "excellent" business risk profile, 	
incorporating a strong and broad base of technology, expanding presence in the 	
stable service and software markets, and a "modest" financial risk profile, 	
supported by its financial strength and flexibility. A highly competitive 	
industry environment and the continuing challenges of managing a leading-edge 	
technology and product base partly offset these factors.	
	
Standard & Poor's revised its view of IBM's business profile to excellent from 	
strong. The company's base of operations benefits from its broad market reach 	
and improving business mix, as a result of an increasing contribution from 	
software and services (about 84% of fiscal 2011 operating segment pretax 	
income), which generally have stable operating trends and higher margins. 	
Standard & Poor's expects IBM to offset margin pressures from highly 	
competitive industry conditions with cost reductions and efficiency 	
improvements. IBM's profitability has also benefited from the ongoing mix 	
shift to higher margin software, which accounted for 44% of total segment 	
pretax profit in 2011 (up from 40% in fiscal 2008). As a result, we expect 	
EBITDA margins (adjusted for capitalized operating leases and captive finance 	
operations) to remain in the low- to mid-20s area, as a percent of revenues.	
	
In our opinion, IBM's financial risk profile is modest, reflecting moderate 	
leverage, strong cash flow, and a balanced approach to growth and shareholder 	
returns. Debt to EBITDA has remained somewhat below 1x over the past three 	
fiscal years, as funded debt levels and adjustments for pension and captive 	
finance have not materially changed relative to operating earnings. Free 	
operating cash flow (FOCF), excluding changes in finance assets, is expected 	
to remain in excess of $16 billion. Our captive finance adjustment applies a 	
debt/equity leverage factor of 8x to global finance receivables.	
	
While we believe that IBM will remain committed to shareholder returns, we 	
think it will maintain strong debt protection measures and a moderately 	
leveraged financial profile as it deploys its 2015 capital spending plan and 	
continues to pursue growth objectives. The strength of IBM's financial 	
profile, as well as its consistently strong free cash flow, provides important 	
support for the rating. Over time, we expect the company to maintain total 	
debt (adjusted for captive finance and capitalized operating leases, and 	
including underfunded postretirement liabilities) to EBITDA at or below 1.5x, 	
with capacity to temporarily exceed that threshold for a period of 12 to 18 	
months.	
	
Liquidity	
The short-term rating on IBM is 'A-1+'. We expect IBM to maintain "strong" 	
liquidity, reflecting consistent profitability and cash generation, and 	
material, alternative sources of liquidity. Although IBM operates in highly 	
competitive markets, we do not expect the economic and competitive environment 	
to materially affect its liquidity and financial performance in a negative 	
way, in the near term.	
	
The following factors support IBM's strong liquidity and significant access to 	
capital:	
     -- Cash and marketable securities in excess of $12 billion as of March 	
31, 2012. Although cash balances tend to fluctuate, we expect IBM to maintain 	
cash and marketable securities balances of at least $5 billion.	
     -- Discretionary cash flow (excluding changes in finance receivables) has 	
exceeded $10 billion in the past three years.	
     -- Over the next two years IBM has debt maturities of more than $9 	
billion. However the company has committed bank facilities of $10 billion, 	
which are essentially undrawn, as well as excellent access to public debt 	
markets.	
     -- No downgrade triggers exist that would accelerate the maturity of a 	
material amount of IBM's debt. To our knowledge, IBM has no material 	
off-balance-sheet liabilities that we have not already factored into our 	
leverage analysis.	
	
We expect discretionary cash flow to exceed $10 billion a year, based on a 	
diverse earnings base and sustained operating profitability, effective working 	
capital management, and stable capital intensity (adjusted capital 	
expenditures are about 5% of adjusted revenues). Dividends are moderate in 	
relation to FOCF. We expect IBM will remain committed to shareholder returns, 	
with annual share repurchases largely funded by discretionary cash flow.	
	
Outlook	
The outlook is stable. IBM's good market position and broad product and 	
revenue base provide cash flow and ratings stability. Highly competitive 	
industry conditions, a moderately acquisitive growth strategy, and significant 	
share repurchases currently constrain the potential for a higher rating. 	
However, we could lower the rating if increased investment in acquisitions or 	
share repurchases lead to sustained leverage in excess of 1.5x.	
	
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	
	
Upgraded	
                                        To                 From	
International Business Machines Corp.	
IBM Credit Corp.	
 Corporate Credit Rating                AA-/Stable/A-1+    A+/Stable/A-1	
	
IBM International Finance N.V.	
 Corporate Credit Rating                AA-/Stable/--      A+/Stable/--	
	
International Business Machines Corp.	
IBM Credit Corp.	
IBM International Group Capital LLC	
 Senior Unsecured                       AA-                A+	
 Commercial Paper                       A-1+               A-1	
	
IBM Capital Inc.	
 Commercial Paper                       A-1+               A-1

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