uploads///A_Semiconductors_INTC TSM FCF

Here’s What Looks to Be Strengthening Intel’s Balance Sheet

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Oct. 27 2017, Updated 10:31 a.m. ET

INTC’s free cash flow

Intel (INTC) is increasing its profitability by channelizing the cash flows coming from its high-margin PC (personal computer) and data center segments toward the fast-growing markets of AI (artificial intelligence) and NVM (nonvolatile memory). This is enabling Intel to invest in various segments without increasing costs.

In the past, Intel has maintained high FCF (free cash flow), thanks to its dominant position in the PC and data center markets, which help it command a higher price for its technology. In fiscal 2016, Intel earned $12 billion in FCF. The second-largest pure-play semiconductor company, TSMC (TSM), earned FCF of only $6.8 billion in fiscal 2016.

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Capital expenditure

Intel’s and TSMC’s FCFs are likely to be lower in fiscal 2017 because both companies have raised their capital expenditure. In fiscal 2016, TSMC overtook Intel in terms of capital spending, spending $10.3 billion in capital, compared with Intel’s $9.6 billion. In fiscal 2017, TSMC expects to spend $10.8 billion as it ramps up production on the 10 nm (nanometer) node.

Intel expects to spend $12 billion, of which $2.5 billion will be for its memory plant in China (FXI). Micron (MU), SK Hynix, and Samsung (SSNLF) have also increased their capital spending on memory plants.

Cash and debt position

Intel completed the acquisition of Mobileye for $15.3 billion in August 2017. In fiscal 3Q17, Intel’s cash reserves are likely to stand at $18.8 billion, and its long-term debt should come in at $32 billion, resulting in a net debt position of $13.2 billion. TSMC had a net cash position of $9.8 billion at the end of fiscal 3Q17.

Despite its high leverage, Intel has sufficient financial strength to service its debt and pay dividends while supporting its investment-grade credit rating.

Intel earns annual FCF of $12 billion, after removing more than $10 billion in capital spending and ~$5 billion in dividend payments. Intel can use this FCF either to increase its cash reserves or repay debt. If Intel spends its entire FCF on debt repayment, it could become net cash positive in 15 months.

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