-- 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.
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.
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
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
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.
The short-term rating is 'A-1+'. We classify Siemens' liquidity as
"exceptional" under our criteria based on its liquidity position as of Sept.
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.
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,
-- 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 Affirmed; CreditWatch/Outlook Action
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+
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
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