November 14, 2012 / 4:55 PM / 5 years ago

TEXT-S&P revises Siemens outlook to stable from positive

11 Min Read

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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