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14 Dec 2010
Approximately $2.4 billion in debt affected
New York, December 14, 2010 -- Moody's Investors Service revised Tyco Electronics Group S.A.'s
ratings outlook to positive from stable and affirmed the company's Baa2
senior unsecured debt rating and Prime-2 rating for commercial
paper. The revision in the company's outlook to positive
reflects the company's improved cost structure, lower funded
debt levels and management's adherence to conservative financial
policies during the recent industry downturn as well as improving performance
Tyco Electronics has improved its revenues, margins and credit metrics
significantly since the trough of the downturn in mid-2009.
Revenues and EBITDA for the fiscal year ended September 2010 are up 18%
and 81% respectively. While the gains were assisted by re-stocking
of inventories by distribution and OEM partners, strength in end
markets, particularly the automotive sector, also drove the
trends. End market demand is expected to continue to fuel organic
revenue growth in 2011 although likely at a lower overall pace.
Operating margins likewise improved as the company realized benefits from
its long term plant consolidation initiatives as well as from restructuring
actions implemented throughout 2009. Although revenues have not
returned to their fiscal 2008 peak, operating margins have surpassed
Funded debt decreased to $2.4 billion for the fiscal year
ended September 24, 2010 from $3.4 billion at fiscal
year end 2007. Given the cyclical nature of the business,
Moody's views the reduction in absolute funded debt levels as an
important rating driver. Debt levels when incorporating Moody's
standard adjustments for leases and pension liabilities were relatively
flat over the period due to increases in pension obligations which resulted
from decreases in underlying discount rate assumptions. As the
value of pension liabilities can be volatile, the company's
future pension funding requirements, which Moody's views as reasonable,
will remain a more significant rating driver.
Leverage levels, as measured by debt to EBITDA (which includes adjustments
for leases and unfunded pension liabilities), have improved to 1.9x
as of FYE 2010 compared to 3.3x in the midst of the downturn (and
improved to 2.2x from 3.7x when including estimates of remaining
shared tax liabilities). The recently closed ADC transaction is
expected to be fairly neutral to credit metrics, based on expectations
of adding $250-350 million of additional debt. Leverage
levels should modestly improve once initial transaction and restructuring
costs are behind them and the company is able to realize on planned operating
The ADC acquisition, which expands Tyco Electronics 's connectivity
product line for the telecom industry and its geographic reach,
appears to be a reasonable strategic fit. The acquisition improves
overall diversification and although it increases exposure to the telecommunications
industry, it adds expertise in the wireless sector and in China,
both of which have strong growth prospects. In addition,
the company has indentified approximately $100 million in synergies
from combining the two businesses, though the improvements are expected
to take several years to realize.
The Baa2 rating is driven by Tyco Electronics' leading position within
the electronic connector industry, strong credit metrics,
good liquidity and global and end customer diversification. The
ratings are constrained by the cyclical nature of the connector business
and exposure to volatility in raw material pricing. The company's
customers operate in cyclical industries and the ratings accommodate a
moderate downturn. The ratings also incorporate the possibility
for a substantial payout of contingent liabilities (as part of its 2007
separation from Tyco International Ltd., Tyco Electronics
shares in 31% of the liabilities arising from certain pre-separation
lawsuits against International and pre-separation tax contingencies).
The ratings could face upward pressure if the company is able to sustain
leverage levels (inclusive of contingent liabilities) below 2.0x
while maintaining conservative financial policies.
Moody's most recent rating action was on January 28, 2010 when Moody's
changed Tyco Electronics' ratings outlook to negative. The principal
methodology used in rating Tyco Electronics was Moody's Global Manufacturing
Industry 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
Tyco Electronics Group S.A. is the primary holding company
and debt issuing subsidiary of Tyco Electronics Ltd. Tyco Electronic
Ltd., with fiscal 2010 revenues of $12.1 billion
is one of the world's leading suppliers of engineered electrical connectors
and components. The company has manufacturing and sales operations
around the globe serving the global computer, telecommunications,
consumer electronics, automotive, aerospace and power industries.
The company is headquartered in Switzerland.
Matthew B. Jones
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's revises Tyco Electronics outlook to positive
250 Greenwich Street
New York, NY 10007
No Related Data.
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