Fitch Rates Tyco Electronics' EUR550 Million Senior Notes 'A-'
TE Connectivity will use net proceeds for general corporate purposes. Pro forma for the issuance and Broadband Network Solutions (BNS) divestiture, Fitch estimates total leverage (total debt to operating EBITDA) was 1.7x for the latest 12 months (LTM) ended Dec. 26, 2014 but fall below 1.5x in the near-term from profitability growth and debt reduction.
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.
TE Connectivity will divest the slower growing and less profitable 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 BNS sale to close by the end of calendar 2015. Following the divestiture, up to 80% of TEL's revenue will serve harsh environment applications, which include automotive, commercial transportation, commercial aerospace and appliances.
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.
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 Feb. 24, 2015, liquidity was solid and supported by:
--\$1.491 billion of cash and cash equivalents pro-forma for the issuance, 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.
Pro-forma for the issuance, total debt as of Feb. 24, 2015 was approximately \$4.8 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;
--EUR550 million of new 1.1% senior unsecured notes due in 2023.
--\$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 rates TE Connectivity and TEGSA as follows:
TE Connectivity:
--Long-term IDR 'A-';
--Short-term IDR 'F2'.
TEGSA:
--Long-term IDR 'A-';
--Short-term IDR 'F2';
--CP program 'F2';
--Senior unsecured revolving credit facility (RCF) 'A-';
--Senior unsecured notes 'A-'.
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