TEXT-Fitch: EU fines add to electronics manufacturers cash flow woes

Thu Dec 6, 2012 11:18am EST

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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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