S&P: Xperi Corp. 'BB' Rating Outlook Revised To Stable From Negative Following Broadcom Resolution

S&P Global Ratings today revised its outlook on San Jose, Calif.-based Xperi Corp. to stable from negative and affirmed the 'BB-' corporate credit rating.

At the same time, we affirmed our 'BB-' issue-level rating, with a '3' recovery rating, on the company's $494 million senior secured term loan, indicating our expectation for meaningful (50%-70%; rounded estimate: 60%) recovery in the event of payment default.

The outlook revision reflects improved credit metrics, with adjusted gross leverage in the 3x area due to the company's settlement with Broadcom and $100 million in debt pay-down. Although the Samsung lawsuit is still ongoing, we project that leverage will fall to the high-2x area over the next 12 months, given our projection of around $425 million in billings in 2018, about $35 million in litigation expenses and stable operating expenses. Getting Samsung back under contract (which represented about $50 million in annual revenues before the contract expired) could result in further improvement in credit metrics, but we aren't including it in our base-case scenario. IP contract agreements with Amkor and PowerTech, which represent about $60 million in revenues combined, will expire in fourth quarter 2018. We see incremental risk to the company's financial metrics in 2019 if the company runs into challenges renewing its licensing agreements with Amkor and PowerTech.

The stable outlook reflects successful resolution of the Broadcom litigation, debt pay-down of about $100 million in the first quarter of 2018, and our expectation that despite ongoing litigation with Samsung, the company will generate discretionary cash flow (free cash flow less dividends) of greater than $80 million over the next 12 months.

We could lower the rating on Xperi if the company's leverage is sustained above the mid-3x area or if annual free cash flow falls to under $80 million. We view this to be unlikely over the near term given that the company's product licensing revenues are predictable and the costs from the Samsung litigation are incorporated into our projections.

We could consider an upgrade if there is a favorable litigation outcome in the Samsung case, resulting in improved liquidity and financial metrics, such that leverage falls to below the 2x area and discretionary cash flow to debt stays above 15%.
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