S&P raises Qualcomm Inc ratings
(Press release provided by Standard & Poor's)
NEW YORK, June 29 - Standard & Poor's today
raised its corporate credit, preferred stock, and bank
loan ratings on Qualcomm Inc. (See list below.)
The ratings have also been removed from CreditWatch,
where they were placed June 9, 1999.
The upgrade on Qualcomm reflects the company's
substantially improved business and financial profile
following resolution of patent disputes with AB LM
Ericsson on terms favorable to Qualcomm.
The rating additionally reflects the sale of its
unprofitable base station manufacturing operations to
Ericsson.
These are offset by expected increasing competition
for handsets, which represent nearly 50% of revenues and
price pressures on special-purpose chips which the company
supplies to most suppliers of code division multiple
access (CDMA) wireless products.
Furthermore, the company is obligated to offer a substantial
degree of financial support to several speculative-grade
businesses.
San Diego, Calif-based Qualcomm manufactures wireless
communications products based on the CDMA technology which
it commercialized.
CDMA patent royalties are substantial, based on equipment manufacturers' revenues.
Royalties will also apply to equipment built for the next
generation of the European wireless network, starting in
about three years.
Qualcomm is the dominant supplier of profitable CDMA
semiconductors to the industry, although competition is
developing.
Qualcomm also generates good cash flows from its truck fleet communications service, and provides services and equipment
to the Globalstar satellite communications system.
Royalty income stability has been enhanced by favorable
resolution of intellectual property disputes with Ericsson
and the sale of the unprofitable base station business.
While earlier handset manufacturing problems have been
overcome, the handset business is subject to profitability
pressures, rapid product line evolution, continual execution challenges, and the uncertainty of consumer tastes.
Earnings before interest, taxes, depreciation, and
amortization (EBITDA) margins have recently risen to about
17%, pro forma for the base station divestiture, from the
10%-12% range, including royalties.
While funds flow from operations is good, rapid growth has
entailed substantial increases in working capital levels.
Resulting operating cash flows have been negative,
exacerbated by large historical capital expenditures to
build handset and base station factories, and by rising
levels of vendor finance extended to several customers.
The company's decision to exit the base station business
should moderate its construction expenditures and will
curtail the growth in potential vendor finance commitments.
Still, future prefinancing cash flows will depend on the
growth rate of the handset operations and on customer
requirements for vendor financial support, potentially
totaling over $1 billion.
Cash balances of $200 million are likely to decline over
the near term.
Debt leverage is low, as growth has been financed by over
$1 billion in common and preferred stock offerings in the
last five years.
Financial flexibility is enhanced by $600 million of
revolving credit agreements.
OUTLOOK: POSITIVE
If the company can sustain its recent operating earnings and cash flows and retain its conservative capitalization as the wireless industry evolves, ratings could be raised, Standard & Poor's said. RATINGS RAISED AND REMOVED
FROM CREDITWATCH
To From
Corporate credit rating BB BB-
Preferred stock B B-
Bank loan BB BB- |
