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21 Oct 2010
Approximately EUR 500 million of rated debt securities affected
Frankfurt am Main, October 21, 2010 -- Moody's Investors Service today changed the outlook on SKF's
A3 senior unsecured rating to stable from negative. The outlook
change was triggered by a swift recovery reflected in a record operating
profitability and a strong increase in retained cash flow generation,
which has led to materially strengthened credit metrics.
Oliver Giani, Senior Analyst at Moody's said: "The
results for the third quarter of 2010 confirmed the successful recovery
already seen during the first two quarters of the year. SKF has
fully met Moody's expectations for an outlook stabilization and
is well on track to generate further improvements. The company's
decision to increase the financial targets mirrors management's
confidence that the current development marks a sustainable improvement
pointing to a higher performance level through a cycle. Albeit
the strategic decision to strengthen the lubrication business via the
acquisition of Lincoln is credit negative in a short-term perspective,
it appears to be the right step under a long-term strategic perspective.
The outlook stabilization reflects Moody's view that on a pro-forma
basis the combined entity will be in line with all of our expectations
for the A3 rating category by end of 2011."
Moody's notes that quarterly revenues improved continually since
Q1 2010. However, the positive development in sales volume
(+13.2% during the first nine months) was offset by
a negative currency effect (-5.5%) leading to a total
increase in net sales of 7.7%, only. Combined
with a higher manufacturing level and the cost reduction activities SKF
was able to materially improve its operating results. EBITA margin
has constantly stepped up from the low point of 3.7% in
Q2 2009 to a record high of 15.2% in Q3 2010. 2010
LTM EBITA margin reached 12.7% compared to 6.2%
in 2009 reflecting the further stabilizing economic environment.
In addition, on the back of a strong retained cash flow generation,
capex discipline and a moderate dividend payout, SKF generated more
than SKF 5.7 billion free cash flow since the beginning of 2009.
Together with the publication of the nine month report 2010 SKF announced
a material acquisition: SKF has agreed to acquire Lincoln Holdings,
a US based company, for US$1 billion on a cash and debt free
basis. Lincoln, which is a highly profitable company with
a consistent track record of strong financial performance, is focused
on automated lubrication systems and is a good strategic fit for SKF from
a regional perspective as well as from its product portfolio. SKF
expects to reap substantial synergies largely from higher sales and greater
efficiencies. The transaction, which is still subject to
regulatory approval, will be financed from cash on hand and existing
credit facilities. Though this transaction will somewhat impact
the credit metrics in the short term, the solid performance SKF
has shown during 2010 so far should allow to the company be able to be
fully in line with the triggers set for SKF for the A3 rating category
already by 2011.
Last not least, SKF announced an increase of its financial targets.
The company aims now to reach an operating margin level of 15%
(previously 12%), an annual sales growth of 8% (6-8%)
and a 27% return on capital employed (24%). The inventory
to sales target was left unchanged at 18%. The timing of
this decision -- considering that one year ago the company was in
the midst of the crisis - reflects management's confidence
that the current development will be sustainable as well is a strong commitment
to continuously work on further improvements towards these targets.
The stable outlook reflects Moody's expectation that SKF will be
able to retain the cost savings achieved and maintain a strong cash flow
generation capability. It also implies Moody's confidence
on a continued conservative financial policy including discipline on cash
distributions and share buy-backs as well as with regard to possible
further acquisitions given the fact that there is currently minimum headroom
in the rating category. Moody's expects SKF to bring the
FFO to debt ratio above 40% and to manage leverage below 2.0x
Debt / EBITDA as well as to defend an EBITA-margin level of 11.5%
and free cash flow levels above SEK 800 million. Any indication
that this will not be achievable will put pressure on the rating.
..Issuer: SKF AB
....Outlook, Changed To Stable From
The last rating action for SKF was on February 25, 2009, when
Moody's changed the outlook to negative from stable.
The principal methodology used in rating SKF was Moody's Global
Manufacturing Industry Rating Methodology, published in December
2007 and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
SKF AB, headquartered in Gothenburg, Sweden, is the
leading supplier of roller bearings, seals, mechatronics (i.e.
integration of mechanical and electronic engineering with software engineering),
services and lubrication systems, operating in more than 130 countries
with more than 100 manufacturing sites and sales companies. The
group's business is organized into three divisions: Industrial,
Service and Automotive, each accounting for approximately one-third
of total revenues. In 2009 SKF generated sales of SEK56.2
Lincoln Holdings Enterprises, Inc., headquartered in
St. Louis, Missouri, USA, is a leader in the
design, manufacture and supply of highly engineered lubrication
systems, tools and equipment. The company, which generates
about 50% of its revenues in North America, has around 2,000
employees and is expected to deliver an operating margin of 24%
on revenues close to US$400 million in 2010.
Frankfurt am Main
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
Moody's changes the rating outlook for SKF to stable
An der Welle 5
Frankfurt am Main 60322
No Related Data.
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