Fitch Revises TE Connectivity's Rating Outlook to Positive; Affirms 'BBB+' IDR
Fitch Ratings has affirmed the following ratings for TE Connectivity Ltd. (NYSE: TEL, TE Connectivity) and its wholly owned subsidiary, Tyco Electronics Group S.A. (TEGSA):
--Long-term IDR at 'BBB+';
--Short-term IDR at 'F2'.
--Long-term IDR 'BBB+';
--Short-term IDR at 'F2';
--CP program at 'F2';
--Senior unsecured revolving credit facility (RCF) at 'BBB+';
--Senior unsecured notes at 'BBB+'.
Fitch has also revised TE Connectivity's Rating Outlook to Positive from Stable. Fitch's actions affect approximately $3 billion of total debt.
The ratings and Outlook reflect Fitch's expectations that operating performance and annual free cash flow (FCF) will continue strengthening (albeit cyclically). The ratings and Outlook incorporate Fitch's expectations that financial policies will remain conservative.
Fitch expects flat organic revenue growth for fiscal 2013. End markets should remain soft through the first half of 2013. However, positive book to bill metrics across nearly all segments should drive revenue growth in the back half of fiscal 2013. A full year of sales from Deutsche should result in roughly 3% to overall revenue growth.
Fitch anticipates low- to mid-single digit organic revenue growth over the longer-term. TE Connectivity should benefit from secular demand drivers, increasing end market diversification, and share consolidation given the fragmentation in many of the company's end markets.
Operating EBIT margin should range from 10% to 15%. However, it may decline to the mid-single digits during more significant downturns (typically lasting two-to-four quarters). Fitch expects a consistent cadence of new product introductions and productivity gains to offset typical product life cycle related pricing pressures.
Over the near-term, Fitch expects operating EBIT margin to improve from the Fitch estimated 13.1% for fiscal 2012. TE Connectivity's restructuring program will reduce capacity and headcount in businesses serving comparatively weaker networking and consumer end markets.
Fitch is increasingly confident in TE Connectivity's ability to consistently achieve $1 billion of annual FCF, except during more significant downturns. Over the intermediate-term, annual dividend growth, modest pension obligations and cash restructuring will offset higher profitability.
During the 2008-2009 recession, FCF exceed $700 million and was driven by more than $630 million of cash from inventory reductions. Fitch expects a repeat of this pattern during future significant downturns. Capital spending should decline closer to maintenance levels beyond fiscal 2013, also bolstering annual FCF through the intermediate-term.
Fitch expects financial policies will remain conservative and that annual FCF will be used for combination of share repurchases and acquisitions. Acquisitions likely will be at least partially debt financed with TE Connectivity using subsequent near-term FCF to bring total leverage (total debt to operating EBITDA) below 2x.
Total leverage (total debt to operating EBITDA) was a Fitch estimated 1.3 times (x). Interest coverage (operating EBITDA to gross interest expense) was 13.6x for the latest 12 months (LTM) ended Dec. 28, 2012.
End markets remain choppy with weak automotive demand in Europe and Japan offsetting strength in the Americas and China. Networks Solutions remains challenged, given cautious carrier and enterprise spending. Strength from new smartphone and tablet design wins is only partially offsetting weak demand for personal computers (PC).
The ratings and Outlook reflect TE Connectivity's:
--Diversified geographic, end-market and customer portfolios,
industry-leading positions in large and relatively fragmented markets;
and substantial scale and scope, which should result in longer-term
share gains in faster-growing developing markets;
--Consistent annual FCF of more than $750 million; and
--Conservative financial policies, including solid liquidity and commitment to managing debt levels to maintain total leverage target at or below 2x;
Fitch's rating concerns center on:
--The company's need to mitigate average selling price (ASP) pressures
in the majority of its end-markets with efficiency initiatives and new
product introductions, as well as vulnerability of gross profit margin
over the short-term to commodity price volatility;
--The cyclical demand patterns associated with electronics components;
--The company's use of cash for share repurchases and acquisitions, given mature organic revenue growth prospects across certain key end-markets.
Fitch may take additional positive rating actions if TE Connectivity:
--Consistently achieves $1 billion of annual FCF, supporting the company's ability to maintain operating EBIT margins in the mid- to high end of Fitch's anticipated 10%-15% range; and
--Moderates share repurchases when necessary to maintain targeted financial policies.
Conversely, Fitch may take negative rating actions if :
--Operating profit margins fall below the 10%-15% range over the short-term, likely due to TE Connectivity's inability to offset pricing pressures or commodity price volatility with new product introductions and productivity gains;
--TE Connectivity fails to moderate share repurchases to return total leverage to below 2x, indicating a shift in financial policies; or
--Lower than anticipated annual FCF.
TE Connectivity's liquidity was solid at Dec. 28, 2012 and supported by:
--Approximately $972 million of cash and cash equivalents;
--An undrawn $1.5 billion, five-year revolving credit facility expiring June 2016. This credit facility backs up the company's up to $1.25 billion commercial paper (CP) program.
Further supporting liquidity is Fitch's expectations for solid annual
Although legacy litigation issues essentially have been settled, the company anticipates paying its share of legacy tax liabilities over several years. Contributions to the company's pension plans over the next several years are accommodated at existing ratings.
Total debt at Dec. 28, 2012 was approximately $3 billion and consisted of:
--$300 million of 5.95% senior notes due Jan. 15, 2014;
--$250 million of 1.6% new senior notes due 2015;
--$731 million of 6.55% senior notes due Oct. 1, 2017;
--$273 million of 4.875% senior notes due Jan. 15, 2021;
--$498 million of 3.5% new senior notes due 2022;
--$475 million of 7.125% senior notes due Oct. 1, 2037;
--$89 million of 3.5% convertible subordinated notes due 2015 (legacy ADC Telecommunications notes);
--$350 million of borrowings under the company's CP program;
--Other debt of approximately $72 million.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Technology Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Technology Companies
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Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602
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Brian Bertsch, +1-212-908-0549