Fitch Ratings affirms the ratings for TE Connectivity Ltd.
(NYSE: TEL, TE Connectivity) and its wholly owned subsidiary, Tyco
Electronics Group S.A. (TEGSA), including the Long-term Issuer
Default Rating (IDR) at 'A-'. The Rating Outlook is Stable.
The ratings affect $4.2 billion of total debt. A list of current
ratings follows at the end of this release.
TE Connectivity announced it will divest the slower growing and
less profitable Broadband Network Solutions (BNS), consisting of
Telecommunications, Enterprise Networks and Wireless businesses, to
CommScope Inc. for $3 billion. The units posted $1.9 billion of
revenue and approximately $300 million of adjusted operating EBITDA
in fiscal 2014.
The company expects the sale to close by the end of calendar
2015 and BNS will be reported in discontinued operations beginning
in the second fiscal quarter. Following the divestiture, up to 80%
of TEL's revenue will serve harsh environment applications, which
include automotive, commercial transportation, commercial aerospace
and appliances.
KEY RATING DRIVERS
The ratings and Outlook are supported by Fitch's expectations
for solid operating performance over the intermediate-term, driven
by increasing electronics content across each of TE Connectivity's
end markets and meaningfully stronger sensors capabilities
following the acquisition of Measurement Specialties Inc.
(Measurement Specialties) for $1.7 billion.
In the near-term, Fitch expects mid-single digit revenue growth,
excluding the planned divestiture of the BNS business. Strong per
vehicle content, robust SubSeas Communications orders and solid
continued demand momentum in harsh applications will offset
meaningful currency translation headwinds and continued weakness in
personal computer markets.
Fitch expects intermediate-term profitability to strengthen,
driven by higher revenues, the divestiture of the less profitable
BNS business and productivity initiatives. Fitch expects
intermediate-term operating EBIT margin to remain in excess of 16%.
Longer-term, operating EBIT margins should follow cyclical top line
patterns and range from the low- to mid-teens.
Fitch also believes TE Connectivity's research development and
engineering (RD&E) investment profile supports profitability by
enabling a steady flow of new product introductions (NPI) that
offset annual price erosion (ASP). At the same time, the growing
mix of products for harsh environment applications requires greater
engineering content, which also offsets ASP erosion.
Fitch expects annual free cash flow (FCF) will approach $1
billion through the cycle with cash from the liquidation of
inventory offsetting lower profitability during a downturn. In
fiscal 2009, TE Connectivity generated $638 million of cash from
lower inventory levels and $972 million of FCF, despite a 29%
year-over-year (YoY) sales decline.
Fitch expects TE Connectivity to use FCF for acquisitions and
share repurchases over the intermediate-term. In connection with
the BNS divestiture announcement, TE Connectivity's board approved
a $3 billion expansion of the share repurchase program, which the
company will fund with net proceeds following the sale. TE
Connectivity had $733 million of availability under the share
repurchase program authorized in March 2014.
Fitch anticipates acquisitions will be smaller in size than the
Measurement Specialties deal but that acquisition spending in
aggregate could be substantial, given significant fragmentation in
the sensors market. As a consequence, significant deals in
aggregate likely will be at least partially debt funded.
Fitch anticipates of which cash pension obligations are minimal
over the next few years and potential cash obligations related to
the company's tax sharing agreement with Tyco International and
Covidien would likely be a longer-term event. As a result, Fitch
expects financial flexibility to strengthen through the forecast
period.
Pro forma for the BNS divestiture, Fitch estimates total
leverage (total debt to operating EBITDA) was 1.6 times (x) for the
latest 12 months (LTM) ended Dec. 26, 2014. Nonetheless, Fitch
expects total leverage will strengthen, falling below 1.5x in the
near-term from a combination of higher profitability growth and the
potential for some debt reduction.
Over the longer-term Fitch anticipates TE Connectivity will
manage debt in accordance to its financial policy, with a targeted
total leverage below 2.0x. The ratings incorporate the potential
for more severe downturns, as well as debt issuance to pre-fund
debt maturities or acquisitions over the short-term. Interest
coverage (operating EBITDA to gross interest expense) should remain
in excess of 10x.
The ratings and Outlook reflect TE Connectivity's:
--Diversified geographic, end-market and customer portfolios,
industry-leading positions in large and relatively fragmented
markets with and substantial scale and scope, which should result
in longer-term share gains in faster-growing developing
markets;
--Consistent annual FCF approaching $1 billion; and
--Continued long-term secular growth in electronic components
and connectivity worldwide, driven by technological improvements
including the miniaturization of electronics, cloud computing, and
the growth of the Internet of Things. Fitch believes Moore's law
will continue to push technological standards higher and lead to
increasing demand across all of TEL's end-markets.
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; and
--TE Connectivity's significant concentration to the automotive
end-market (approximately 45% of revenue), customers within which
can and have exerted significant pricing pressure during
downturns.
RATING SENSITIVITIES
Fitch believes further positive rating action is unlikely in the
absence of expectations for structurally higher mid-cycle FCF or a
commitment to more conservative financial policies.
Fitch may take negative rating actions if:
--Fitch expects operating profit margins to remain below the 10%
over the longer-term, likely due to a diminished ability to offset
pricing pressures with new product introductions or reduced
competitiveness;
--Fitch's expectations for annual FCF below $800 million beyond
short-term operating challenges; or
--TE Connectivity fails to moderate share repurchases to
maintain total leverage below 2x over the longer-term.
As of Dec. 26, 2014, liquidity was solid and supported by:
--$868 million of cash and cash equivalents, a large majority of
which is readily available; and
--Undrawn $1.5 billion senior unsecured revolving credit
facility expiring August 2018, which fully backstops the company's
$1.25 billion commercial paper (CP) program.
Fitch's expectation for annual FCF approaching $1.0 billion also
supports liquidity.
Total debt as of Dec. 26, 2014 was approximately $4.2 billion
and primarily consisted of:
--$597 million of borrowings under the company's CP program;
--$250 million of 1.6% senior unsecured notes due 2015;
--$89 million of 3.5% convertible subordinated notes due 2015
(acquired ADC Telecommunications notes);
--$500 million of L + 20 senior unsecured notes due Jan, 29,
2016;
--$722 million of 6.55% senior unsecured notes due Oct. 1,
2017;
--$324 million of 2.375% senior unsecured notes due Dec. 17,
2018;
--$250 million of 2.35% senior unsecured notes due Aug. 1,
2019;
--$262 million of 4.875% senior unsecured notes due Jan. 15,
2021;
--$504 million of 3.5% senior unsecured notes due Feb. 3,
2022;
--$249 million of 3.45% senior unsecured notes due Aug. 1, 2024;
and
--$475 million of 7.125% senior unsecured notes due Oct. 1,
2037.
Fitch has affirmed TE Connectivity and TEGSA as follows:
TE Connectivity:
--Long-term IDR at 'A-';
--Short-term IDR at 'F2'.
TEGSA:
--Long-term IDR at 'A-';
--Short-term IDR at 'F2';
--CP program at 'F2';
--Senior unsecured revolving credit facility (RCF) at 'A-';
--Senior unsecured notes at 'A-'.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978846
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY
FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,
RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM
THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY,
CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER
RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE
OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD
ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE
ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Fitch RatingsPrimary AnalystJason Pompeii, +1-312-368-3210Senior
DirectorFitch Ratings, Inc.70 West Madison StreetChicago, IL
60602orSecondary AnalystDavid Peterson, +1-312-368-3177Senior
DirectororCommittee ChairpersonMichael Weaver,
+1-312-368-3156Managing DirectororMedia Relations, New YorkAlyssa
Castelli, +1-212-908-0540alyssa.castelli@fitchratings.comElizabeth
Fogerty, +1-212-908-0526elizabeth.fogerty@fitchratings.com