TEXT-Fitch: EU fines add to electronics manufacturers cash flow woes
Dec 6 - The European Commission's decision to fine electronics manufacturers a record total of EUR1.47bn comes at a particularly bad time for the sector, Fitch Ratings says. Several manufacturers are struggling with tough competition and weak economic conditions in major markets. The Commission's fines for anti-competitive behaviour among cathode ray tube manufacturers will be manageable for Fitch-rated companies and will not affect ratings, but will further harm the cash flow of those facing the heaviest fines. Philips' EUR313m fine and 50/50 joint liability with LG Electronics for another EUR392m related to a joint venture would probably consume a large portion of the company's 2013 FCF (after gross capex and dividends), if the fine is paid in cash early next year. Payment is due within three months, although it may be possible to delay payment using a bank guarantee while Philips appeals. The fines will have no impact on Philips' ratings, but will reduce its financial flexibility in light of its weak FCF margin, which is already below that of 'A' rated peers. The group has already made significant progress in refocusing on more stable, higher-margin operations such as healthcare, while cutting exposure to consumer electronics. It may be able to partially offset the impact of the fines via further disposals under its ongoing portfolio realignment programme. LG Electronics' fine will weaken its cash flow from operations as the fine represents over 25% of the company's forecast stand-alone EBITDAR in 2012. However, LGE and the proportionately consolidated LG Display's operations have been recovering well since the start of the year. This creates more room to withstand the negative impact. LGE has also said it will appeal against the decision and will not immediately pay the fine but submit a bank guarantee instead, which would delay the impact on its cash flow. We believe that the appellate court will take at least a couple of years to rule on the case - an appeal regarding a late 2010 fine of LG Display is still under review. Among the other companies involved, Panasonic's EUR157m fine is not significant compared to its JPY470bn cash balance. We do not rate Samsung SDI, which had the next highest fine. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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