-- TE Connectivity, a global Berwyn, PA-based designer and manufacturer
of connectors and related products, continues to reduce leverage and maintain
strong cash flows, despite a weak global economic environment.
-- We are raising our corporate credit rating on the company to 'BBB+'
-- The stable outlook reflects our expectation that TE's consistent
earnings performance and strong cash generation will continue despite
challenging market conditions.
On Dec. 26, 2012, Standard & Poor's Ratings Services raised its corporate
credit rating on TE Connectivity Ltd. to 'BBB+' from 'BBB'. In addition, we
are raising our senior unsecured debt rating to 'BBB+' from 'BBB' and raising
our rating on the subordinated debt to 'BBB' from 'BBB-'. Our 'A-2' commercial
paper rating is unchanged. The outlook is stable
The rating action reflects the company's strengthened business mix, given its
ongoing successful integration of the ADC Telecommunications Inc. and Deutsch
Group SAS acquisitions, as well as the company's consistent and strong cash
flow generation. That cash flow generation has enabled it to repay debt and
reduce adjusted leverage from the post-acquisition high of 2.1x in June to
below 1.9x currently. We believe that leverage will continue to drop in the
The rating reflects Standard & Poor's Ratings Services' expectations that the
company will continue to benefit from moderate revenue growth in fiscal 2013
and further improve margins from recent levels while reducing leverage.
Our "satisfactory" business risk profile is based on TE's leadership position
in the fragmented connector market and specific strength as a supplier to the
automotive industry, in addition to serving a diverse number of other end
markets. Competitive pressures that require TE to continually invest in new
product development and streamline manufacturing processes offset those
strengths. In our opinion, TE's long-standing relationships create a large
installed base of largely recurring revenue. While TE is not immune to
cyclicality and commodity costs, we believe the diversity of markets and
geographies provide some cushion against volatility and will support low- to
mid-single-digit organic growth rates in the near and intermediate term. TE's
organic growth rate is based on the increasing digital content in the
automotive market and continued global investment in telecommunications
infrastructure. The $2.0 billion acquisition of Deutsch Group in 2012 gave TE
a leadership position in the harsh industrial and aerospace environment
connectivity space, as well as strengthened its position in the industrial
equipment sector. This followed the $1.3 billion acquisition of ADC
Telecommunications in the prior year, which improved the company's position in
network solutions. In our assessment, the company's management and corporate
strategy is satisfactory.
TE continues to streamline its manufacturing footprint, reducing plants,
labor, and overhead and moving to lower cost locations. We expect it to
maintain consistent adjusted annual EBITDA margins in the mid-to-high teens as
a percent of revenue, despite volatility in raw material costs. We expect
leverage to gradually improve over the intermediate term, based on consistent
margins and increasing revenues as well as debt repayment. As of fiscal 2012
year-end--adjusting for the $714 million debt issue repaid in October from
cash and including a $450 million debt-like equivalent for TE's potential
legacy tax settlement--leverage was below 1.9x compared with 2.1x at the time
of the Deutsch acquisition and 1.7x at Dec, 2011. With cash flows exceeding $1
billion and continued earnings growth, we expect further reductions in
leverage in 2013. The company continues to maintain an intermediate financial
We rate TE's commercial paper 'A-2', and expect TE to maintain "adequate"
liquidity. Cash sources include cash and short-term investment balances of
nearly $1.6 billion as of Sept. 28, 2012 (which the company reduced by $714
million with the repayment in October of the outstanding 6% senior notes),
expected annual free operating cash flow of about $1 billion, and a revolving
credit facility of $1.5 billion, which matures in 2016.
We expect uses to include capital expenditures of about $600 million,
dividends of about $350 million, and some investment in working capital to
support expected growth. We expect TE to continue to balance growth
initiatives and shareholder returns, and to prudently manage share repurchase
programs by limiting activity to annual free cash flow generation. The company
has $1.3 billion available under its existing share repurchase program.
Although the company stopped repurchases for a period in the wake of the
Deutsch acquisition, it has since resumed them as its financial metrics have
approached pre-acquisition levels.
Our assessment of TE's liquidity profile incorporates the following
expectations, assumptions, and factors:
-- We expect coverage of uses to exceed 15x for the next 12 months, and
net sources to be positive in the near term, even with a 15% decline in
-- TE has ample headroom under its one performance covenant--funded debt
to EBITDA not to exceed 3.5x--and is likely to retain adequate headroom even
if EBITDA were to decline by 20%.
-- Debt maturities are manageable in our view with no more debt due in
fiscal 2013 and $377 million due in fiscal 2014, which can be repaid with cash
The rating outlook is stable, reflecting the company's consistent earnings
performance and strong cash generation despite ongoing challenging market
conditions. We could lower the rating if the company were to pursue
shareholder initiatives or acquisitions that caused leverage to be sustained
in the low-2x area. We could raise the rating if leverage were to be sustained
below the mid 1x area and the company continued to improve its margins, while
growing sales in line with the market.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Temporary contact number: Jacob Schlanger (917-371-5651)
Upgraded; Outlook Action/Ratings Affirmed
TE Connectivity Ltd.
Corporate Credit Rating BBB+/Stable/A-2 BBB/Positive/A-2
Subordinated BBB BBB-
Tyco Electronics Group S.A.
Senior Unsecured BBB+ BBB
Tyco Electronics Group S.A.
Commercial Paper A-2