TEXT-S&P revises Siemens outlook to stable from positive
Overview -- From a high base in fiscal 2011, Germany-based industrial conglomerate Siemens' operating and financial performances weakened slightly during fiscal 2012 and we don't expect a rebound in 2013. -- A EUR3 billion share repurchase program and a higher guidance for distributions to shareholders set a more shareholder friendly course, although we still qualify Siemens' financial policy as conservative. -- We are revising our outlook to stable from positive and affirming our 'A+/A-1+' long- and short-term ratings on Siemens. -- The stable outlook reflects our base-case expectation that operating performance during fiscal 2013 should still be resilient in the face of renewed macroeconomic headwinds and that Siemens will maintain credit ratios commensurate with the upper part of our "modest" financial profile category. Rating Action On Nov. 14, 2012, Standard & Poor's Ratings Services revised its outlook on Germany-based industrial conglomerate Siemens AG to stable from positive. At the same time, we affirmed our 'A+' long-term corporate credit rating and our 'A-1+' short-term corporate credit rating on the company. We also affirmed our 'A+' long-term and 'A-1+' short-term counterparty credit rating on captive finance arm and core subsidiary Siemens Financial Services GmbH (SFS) and revised SFS' outlook to stable from positive. Rationale The outlook revision to stable captures the contraction in the group's operating margin observed during the last quarters of fiscal 2012 (ended Sept. 30, 2012) and our expectation that earnings will weaken slightly further during fiscal 2013, following Siemens' reporting of a weak 0.98x book-to-bill ratio at end-September 2012 and substantial transformation charges to be booked next year. The outlook change also reflects Siemens' pursuit of more shareholder friendly actions in the form of a significant EUR3 billion share buyback plan to be completed before end-December 2012 and a revision in its shareholder distribution policy from the 30%-50% payout range to 40%-60%, including share buybacks. We have assumed that while the company may make debt-financed acquisitions in pursuit of its medium-term growth objectives, divestitures will compensate, so that the impact on leverage should remain limited. The ratings on Siemens continue to reflect our view of its "strong" business risk profile and "modest" financial risk profile. Supportive business risk factors include Siemens' strong technological capabilities and highly diverse portfolio of leading global operations in mainly low-risk industries, offsetting the company's historically moderate profitability. Our assessment of Siemens' financial risk profile as "modest" is founded on the company's strong balance sheet, exceptional liquidity, usually sound discretionary cash flow generation through the cycle, and robust financial flexibility. In our base-case scenario for fiscal 2013 (ending Sept. 30), we expect Siemens' revenue growth to be at best in the low-single-digits and its income from operations to weaken by some 15% compared with the company's fiscal 2012 figures. In 2013, we expect that the earnings contribution from the company's industrial short-cycle businesses will moderate as a result of renewed macroeconomic uncertainty and that the performance of the company's infrastructure and cities business line will remain subdued, owing to a weaker European public sector, the segment's main customer. We expect that 50% joint-venture Nokia Siemens Networks (NSN; not rated) and some discontinued operations (e.g. OSRAM to be spun off during fiscal 2013, or solar operations) will perform below-par, and that restructuring will be required in several segments following the company's announcement of a EUR1 billion transformation charge for the year. Overall, these adverse effects will result in a weakening of Siemens' operating margins compared with the closing year, but not in a significant deterioration, with healthcare continuing to perform strongly. In our base case, we expect Siemens to generate income from continuing operations above EUR4.5 billion for fiscal 2013, compared with EUR5.2 billion reported in fiscal 2012. In our view, the reported EBITDA margin will likely stabilize above 11% in fiscal 2013. Over time, the company's two-year cost savings initiative ("Siemens 2014") with a focus on procurement, industrial footprint, market coverage, and a streamlined corporate structure should also support Siemens' profitability measures once implemented. In fiscal 2012, prices declined somewhat in the company's energy business line and performance in renewable power was below group standards, trends that we would expect to continue going into fiscal 2013. In addition, the company's performance was affected by one-offs: execution delays and cost overruns on four offshore wind power grid connection projects in the North Sea and lower revenue and profit-recognition on a large contract in Iran. In 2012, Siemens reported a 17% return on capital employed from continued operations (ROCE), at the lower end of its internal 15%-20% range and compared with a robust 21.9% pro forma ROCE reported for fiscal 2011. By the end of fiscal 2012, the company's reported 0.23x debt-to-EBITDA leverage ratio remained within Siemens' publicly disclosed 0.5x to 1.0x target range. This ratio can, however, be expected to increase by the end of the first quarter of fiscal 2013, following the full completion of the announced EUR3 billion share repurchase program. In addition, Siemens revised upward its shareholders' distribution range to 40%-60%, from 30%-50%. In this context, we foresee Siemens maintaining its ratio of Standard & Poor's adjusted funds from operations (FFO) to debt at the higher end of our "modest" category at about 60% by the end of fiscal 2013 while the Standard & Poor's-adjusted debt-to-EBITDA ratio should remain around 1.5x. This includes our expectation that increased pension underfunding will have a negative impact on our adjusted ratio calculation. We would expect discretionary cash flow (DCF) to be only marginally positive for the year. We anticipate that capital expenditures (capex) invested in discontinued operations and restructuring outflows will represent drains, albeit manageable, on Siemens' cash flow in fiscal 2013. We also anticipate that Siemens' ability to prefund operations through customer advances will decrease over time, but not so much as to significantly alter its financial profile. Liquidity The short-term rating is 'A-1+'. We classify Siemens' liquidity as "exceptional" under our criteria based on its liquidity position as of Sept. 30, 2012. Siemens' liquidity is supported by: -- Reported cash and cash equivalents of about EUR11.4 billion, of which we consider EUR2.0 billion to be tied to operations; -- A EUR4 billion revolving credit facility maturing in April 2017, with two one-year extension options, and a US$3.0 billion syndicated multi-currency credit facility maturing in August 2013, both of which are currently undrawn; -- Significant financial flexibility, enabled by the company's large business portfolio; and -- Sustained discretionary cash generation over the cycle. We expect Siemens' discretionary cash flow (before any net acquisitions) to be positive over the cycle in our base-case scenario. For 2013, this number may be lower due to the compression in earnings that we anticipate. The above-mentioned liquidity sources compare with about EUR3.6 billion in short-term debt on Sept. 30, 2012, including term notes and bonds that the company could decide to refinance. None of Siemens' credit facilities contain a material adverse change clause, financial covenants, or rating triggers. Outlook The stable outlook reflects our base-case expectation that erosion in operating performance during fiscal 2013 should be limited despite macroeconomic headwinds and that Siemens will maintain credit ratios commensurate with the "modest" financial profile category. We believe Siemens has some headroom under current ratios to cover a slight weakening in operating performance, some increased needs for working capital investments, or slightly higher shareholder distributions. We would, however, revise the outlook to negative if trends in operating performance weaken markedly, for instance, if the EBITDA margin was to fall below double digits, or if the book-to-bill ratio was to remain significantly below 1x for some time. However, we would expect this only under very-low-probability scenarios such as global political events severely affecting the global economy or a severe end-user industry downturn. An outlook revision to negative could also follow Siemens' pursuit of a more aggressive financial policy than we anticipate currently, in the form of sizable cash and debt-financed acquisitions with no offsetting disposals or even larger distributions to shareholders than our base-case assumption of total payout in the 40%-60% range for normal recurring income, excluding disposal proceeds but including any share buybacks. We see no real likelihood for a rating upgrade at this stage. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Global Capital Goods Industry, April 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Captive Finance Operations, April 17, 2007 -- Parent/Subsidiary Links, Oct. 28, 2004 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Siemens AG Corporate Credit Rating A+/Stable/A-1+ A+/Positive/A-1+ Siemens Financial Services GmbH Counterparty Credit Rating A+/Stable/A-1+ A+/Positive/A-1+ Ratings Affirmed Siemens AG Commercial Paper A-1+ Siemens Capital Co. LLC Commercial Paper* A-1+ Siemens Financieringsmaatschappij N.V. Senior Unsecured* A+ Junior Subordinated* BBB+ Commercial Paper* A-1+ *Guaranteed by Siemens AG Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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