 | | RESEARCH | | | | Knorr-Bremse AG |
| | Publication date: | | 13-Nov-2014 | | Primary Credit Analyst: | | Werner Staeblein, Frankfurt (49) 69-33-999-130;
werner.staeblein@standardandpoors.com | | Secondary Contact: | | Eve Seiltgens, Frankfurt (49) 69-33-999-124;
eve.seiltgens@standardandpoors.com | |
| |
Rationale
Business Risk
- Strong niche positions in concentrated segments and a limited threat of new entrants, mainly because of technological leadership.
- Good geographic diversity.
- About one-third of sales in the less cyclical aftermarket business.
- Expected stable operating profitability margins.
- Exposure to cyclical demand from rail and truck original-equipment manufacturers.
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Financial Risk
- Strong free cash flow generation.
- Resilience of financial profile, even if demand from key truck and rail markets were to weaken.
- Conservative financial policy as evidenced by moderate dividend payouts, strong liquidity position, and low likelihood of significant changes in debt position.
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Initial Analytical Outcome |
The initial rating outcome (anchor) of 'a-' is based on our assessment of the group's business risk profile as "satisfactory" and its financial risk profile as "minimal". |
Outlook: Stable |
The stable outlook on German brake specialist Knorr-Bremse AG reflects our belief that diversification will remain essential to the group's performance. In addition, we forecast that weaker earnings in one division will be counterbalanced by stronger earnings in the other. In view of this, we believe that the group could generate funds from operations (FFO) to debt substantially exceeding 60% over the two-year outlook horizon. The outlook also incorporates our belief that Knorr-Bremse will continue to achieve solid free operating cash flow (FOCF) and maintain an FOCF-to-debt ratio higher than 40%. We also assume that management will remain committed to its conservative financial policy and that Knorr-Bremse will continue to improve its geographic and product diversification gradually.
Downside scenario |
A more aggressive financial policy than we currently anticipate or a sharp and long deterioration of demand for Knorr-Bremse's products, leading to negative FOCF and weaker credit ratios, could trigger a negative rating action. Currently, Knorr-Bremse has significant headroom within its financial risk profile to accommodate any such deterioration in end-market demand. |
Upside scenario |
We consider the possibility of an upgrade remote at this stage. We could raise the rating if the group's business risk profile were to strengthen. This could occur if Knorr-Bremse were to improve its operating profitability sustainably. Given our base-case outlook and historic profitability trends, it appears unlikely that such an improvement will be achieved in the near term. We do not think that the group's product diversification or end-market diversification is likely to change materially over the forecast horizon. An upgrade would also require a continuation of the group's conservative financial policy. |
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Standard & Poor's Base-Case Scenario
Assumptions
- Eurozone GDP growth at a sluggish rate of 1.1% in 2014 and 1.6% in 2015. We continue to see stable growth in the U.S. economy of about 2.3% in 2014, rising to 3% in 2015. Solid growth in Asia-Pacific of about 5.5% annually over the next two years supported by growth in China of 7.4% in 2014 and 7.1% in 2015.
- Heavy truck production growth in 2014 of 11.9% in North America and 7.3% in Africa, with contraction of 1.6% in Asia, 10.4% in Western Europe and 14.1% in Latin America.
- Revenue growth of 3.7% in 2014 and 6.1% in 2015 based on moderate growth in the rail and truck division.
- Likely stable profitability with an adjusted EBITDA margin of 15.9% in 2014 and 16.5% in 2015.
- Capital expenditure of about 4% of revenues in line with historical trends.
- €70 million in bolt-on acquisitions in 2014 and €100 million in 2015 and thereafter on the basis of the group's acquisition history and intention to continue to acquire small companies.
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Key Metrics
| |
2013a |
2014e |
2015e |
|
EBITDA margin (%) |
16.5 |
15-16 |
16-17 |
|
Fully adjusted FFO/debt* |
N.M. |
N.M. |
N.M. |
|
Fully adjusted debt/EBITDA* |
N.M. |
N.M. |
N.M. |
*Debt was zero as of Dec. 31, 2013. a--Actual. e--Estimate. N.M.--Not meaningful. |
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Company Description |
Knorr-Bremse is a leading global player in the mature and cyclical markets for truck- and rail-braking systems. In most of its markets, the group is one of two leading suppliers with strong ties to original equipment manufacturers. Knorr-Bremse generates about two-thirds of its sales from original equipment markets, mainly truck manufacturers and rail system houses, with the remainder from more stable aftermarket business. Geographic diversification has helped the group to maintain healthy cash flows in recent years. Knorr-Bremse has two business segments. The Rail Vehicle System segment offers complete braking systems for all types of rail vehicles, door systems, air conditioning installations, control components, and windscreen wipers. It has design, marketing and servicing centers in 25 countries. The Commercial Vehicle System/Truck Division offers complete braking systems and driver assistance system solutions all around the powertrain. It has design, marketing and servicing centers in over 20 countries. |
Business Risk: |
We assess Knorr-Bremse's business risk profile as satisfactory according to our criteria. Our assessment is supported by the group's strong position as the world leader in the mature and cyclical markets for truck- and rail-braking systems. Knorr-Bremse's global market shares in the concentrated truck- and rail-brake markets have exceeded 40% over the past few years. In most of its markets, Knorr-Bremse is one of two leading suppliers with strong ties to original-equipment manufacturers. Knorr-Bremse generates about two-thirds of its sales from original-equipment markets, mainly from truck manufacturers and rail system houses, and the remainder from its more stable aftermarket business. This constrains the group's business risk profile and reflects the cyclical nature of demand from rail and truck original-equipment manufacturers. We believe the group's geographic diversification and stable profitability margins will help it to maintain healthy cash flows in the future.
S&P Base-Case Operating Scenario
- Eurozone GDP growth at a sluggish rate of 1.1% in 2014 and 1.6% in 2015. We continue to see stable growth in the U.S. economy of about 2.3% in 2014, rising to 3% in 2015. Solid growth in Asia-Pacific of about 5.5% annually over the next two years supported by growth in China of 7.4% in 2014 and 7.1% in 2015.
- Growing order intake in 2013 as the main source of revenue generation in 2014.
- Revenue growth of 3.7% in 2014 and 6.1% in 2015 based on moderate growth in the rail and truck division.
- Likely stable profitability with an adjusted EBITDA margin of 15.9% in 2014 and 16.5% in 2015.
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Peer comparison |
Table 1
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Knorr-Bremse AG -- Peer Comparison |
| |
Knorr-Bremse AG |
SKF AB |
Assa Abloy AB |
Autoliv Inc. |
|
Ratings as of Nov. 13, 2014 |
A-/Stable/-- |
BBB+/Negative/-- |
A-/Stable/A-2 |
A-/Stable/A-2 |
| |
--Average of past three fiscal years-- |
|
(Mil. €) |
|
|
|
|
|
Revenues |
4,281.2 |
7,385.5 |
5,203.2 |
6,333.4 |
|
EBITDA |
688.5 |
1,175.3 |
958.7 |
840.2 |
|
Funds from operations (FFO) |
508.1 |
799.3 |
694.7 |
643.8 |
|
Net income from cont. oper. |
287.3 |
442.2 |
507.2 |
399.7 |
|
Cash flow from operations |
538.6 |
656.2 |
704.6 |
587.5 |
|
Capital expenditures |
161.4 |
237.2 |
125.1 |
280.0 |
|
Free operating cash flow |
377.3 |
419.0 |
579.4 |
307.6 |
|
Discretionary cash flow |
192.5 |
137.9 |
383.3 |
171.6 |
|
Cash and short-term investments |
168.6 |
175.8 |
30.4 |
176.9 |
|
Debt |
29.4 |
2,474.0 |
2,120.8 |
177.0 |
|
Equity |
1,001.5 |
2,511.0 |
2,956.7 |
2,809.8 |
|
|
EBITDA margin (%) |
16.1 |
15.9 |
18.4 |
13.2 |
|
Return on capital (%) |
51.3 |
19.5 |
16.9 |
21.2 |
|
EBITDA interest coverage (x) |
34.6 |
8.6 |
10.6 |
19.2 |
|
FFO cash int. cov. (X) |
81.8 |
22.6 |
12.5 |
19.4 |
|
Debt/EBITDA (x) |
0.0 |
2.1 |
2.2 |
0.2 |
|
FFO/debt (%) |
1,727.0 |
32.3 |
32.7 |
366.9 |
|
Cash flow from operations/debt (%) |
1,830.8 |
26.5 |
33.2 |
335.2 |
|
Free operating cash flow/debt (%) |
1,282.3 |
16.9 |
27.3 |
175.4 |
|
Discretionary cash flow/debt (%) |
654.4 |
5.6 |
18.1 |
97.7 |
|
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Financial Risk: |
We assess Knorr-Bremse's financial risk profile as minimal. This view is supported by the group's solid cash flow generation and conservative financial policies. At the end of 2012 and 2013, Knorr-Bremse had a net cash position after our adjustments. The assumptions included in our base case suggest that unrestricted cash will continue to exceed Knorr-Bremse's debt including material adjustments such as pension adjustments in the years ahead. Currently, the group has substantial headroom within its financial risk profile to accommodate even larger bolt-on acquisitions than previously. Knorr-Bremse has a stable dividend policy under which it pays out about 50% of free cash flow generated. In economically difficult years this payout ratio has been lowered and we believe that the group will continue to determine the level of dividend payouts based on the underlying success of the business. Overall, we believe that the group will maintain its conservative financial policy of stable dividend payouts, maintaining strong liquidity, and pursuing only moderate bolt-on acquisitions.
S&P Base-Case Cash Flow And Capital Structure Scenario
- Capital expenditure of about 4% of revenues in line with historical trends.
- €70 million in bolt-on acquisitions in 2014 and €100 million in 2015 and thereafter on the basis of the group's acquisition history and intention to continue to acquire small companies.
- Overall we expect the group's financial credit ratios to remain within the "minimal" category in 2014 and 2015 due to its net cash position and strong credit ratios.
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Financial summary |
Table 2
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Knorr-Bremse AG -- Financial Summary |
| |
--Fiscal year ended Dec. 31-- |
| |
2013 |
2012 |
2011 |
2010 |
2009 |
|
(Mil. €) |
|
|
|
|
|
|
Revenues |
4,302.7 |
4,300.1 |
4,240.8 |
3,712.2 |
2,760.9 |
|
EBITDA |
708.4 |
659.2 |
697.7 |
586.6 |
298.9 |
|
Funds from operations (FFO) |
522.4 |
481.7 |
520.3 |
454.9 |
237.9 |
|
Net income from continuing operations |
316.1 |
254.8 |
291.1 |
240.5 |
92.3 |
|
Cash flow from operations |
516.0 |
536.6 |
563.3 |
474.0 |
359.0 |
|
Capital expenditures |
159.5 |
165.8 |
158.9 |
113.4 |
100.6 |
|
Free operating cash flow |
356.5 |
370.8 |
404.5 |
360.6 |
258.4 |
|
Discretionary cash flow |
164.7 |
185.9 |
227.0 |
295.8 |
134.3 |
|
Cash and short-term investments |
201.6 |
171.0 |
133.1 |
78.2 |
38.7 |
|
Debt |
0.0 |
0.0 |
88.3 |
220.9 |
353.6 |
|
Equity |
1,106.8 |
995.2 |
902.4 |
902.8 |
638.0 |
|
|
EBITDA margin (%) |
16.5 |
15.3 |
16.5 |
15.8 |
10.8 |
|
Return on capital (%) |
54.6 |
49.5 |
49.7 |
38.6 |
15.9 |
|
EBITDA interest coverage (x) |
47.1 |
39.3 |
25.0 |
35.7 |
17.0 |
|
FFO cash int. cov. (x) |
108.6 |
78.4 |
67.9 |
69.6 |
29.2 |
|
Debt/EBITDA (x) |
0.0 |
0.0 |
0.1 |
0.4 |
1.2 |
|
FFO/debt (%) |
N.M. |
N.M. |
589.5 |
206.0 |
67.3 |
|
Cash flow from operations/debt (%) |
N.M. |
N.M. |
638.2 |
214.6 |
101.5 |
|
Free operating cash flow/debt (%) |
N.M. |
N.M. |
458.2 |
163.3 |
73.1 |
|
Discretionary cash flow/debt (%) |
N.M. |
N.M. |
257.2 |
134.0 |
38.0 |
|
|
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Liquidity: Strong |
We consider Knorr-Bremse's liquidity to be "strong," under our criteria. By our estimates the group's ratio of liquidity sources to uses will remain higher than 1.5x through 2015.
Principal Liquidity Sources
- As of June 30, 2014, about €0.7 billion in reported cash, of which we consider about €220 million not to be immediately accessible. This is primarily cash located at the group's Chinese subsidiary. In 2014, Knorr-Bremse started to repatriate some of the cash balances from the Chinese subsidiary.
- As of June 30, 2014, €370 million in undrawn committed lines maturing beyond 12 months.
- About €500 million of FFO that we anticipate the group will generate annually in 2014 and 2015.
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Principal Liquidity Uses
- As of Dec. 31, 2013, €115 million of debt maturities over the following 12 months;
- About €180 million of annual capital expenditure in 2014 and 2015; and
- About €190 million of annual dividends in 2014 and 2015.
- Our assumption of acquisition payouts of €70 million in 2014 and €100 million in 2015.
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Debt maturities as of Dec. 31, 2013
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Covenant Analysis |
Knorr-Bremse has no financial covenants |
Other Modifiers |
Modifiers have no impact on the ratings. |
Ratings Score Snapshot
Reconciliation |
Table 3
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Reconciliation Of Knorr-Bremse AG Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. €) |
| |
--Fiscal year ended Dec. 31, 2013-- |
| |
Knorr-Bremse AG reported amounts |
|---|
|
| |
Debt |
Shareholders' equity |
Revenues |
EBITDA |
Operating income |
Interest expense |
EBITDA |
Cash flow from operations |
Dividends paid |
Capital expenditures |
|
Reported |
130.6 |
935.6 |
4,302.7 |
677.6 |
552.4 |
4.9 |
677.6 |
495.3 |
191.9 |
159.5 |
| |
Standard & Poor's adjustments |
|---|
|
|
Interest expense (reported) |
-- |
-- |
-- |
-- |
-- |
-- |
(4.9) |
-- |
-- |
-- |
|
Interest income (reported) |
-- |
-- |
-- |
-- |
-- |
-- |
(0.8) |
-- |
-- |
-- |
|
Current tax expense (reported) |
-- |
-- |
-- |
-- |
-- |
-- |
(170.2) |
-- |
-- |
-- |
|
Operating leases |
128.9 |
-- |
-- |
30.8 |
10.1 |
10.1 |
20.7 |
20.7 |
-- |
-- |
|
Postretirement benefit obligations/deferred compensation |
208.2 |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
|
Surplus cash |
(604.8) |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
|
Non-operating income (expense) |
-- |
-- |
-- |
-- |
10.9 |
-- |
-- |
-- |
-- |
-- |
|
Non-controlling Interest/Minority interest |
-- |
171.3 |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
|
Debt - Guarantees |
15.7 |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
-- |
|
(252.1) |
171.3 |
- |
30.8 |
21.0 |
10.1 |
(155.2) |
20.7 |
- |
- |
| |
Standard & Poor's adjusted amounts |
|---|
|
| |
Debt¶ |
Equity |
Revenues |
EBITDA |
EBIT |
Interest expense |
Funds from operations |
Cash flow from operations |
Dividends paid |
Capital expenditures |
|
Adjusted |
(121.5) |
1,106.8 |
4,302.7 |
708.4 |
573.4 |
15.0 |
522.4 |
516.0 |
191.9 |
159.5 |
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Related Criteria And Research
Related Criteria
- Methodology And Assumptions: Liquidity Descriptors for Global Corporate Issuers, Jan. 2, 2014
- Corporate Methodology, Nov. 19, 2013
- Corporate Methodology: Ratios and Adjustments, Nov. 19, 2013
- Key Credit Factors For The Auto Suppliers Industry, Nov. 19, 2013
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Related Research
- Surging Auto Product Launches Bring Risks And Opportunities For Suppliers, Sept. 22, 2014.
- Global Auto Suppliers Outlook Remains Moderately Positive, Despite Regional Risks, March 31, 2014.
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| Knorr-Bremse AG | | Corporate Credit Rating | A-/Stable/-- | | Corporate Credit Ratings History | | 01-Jun-2010 | A-/Stable/-- | | 16-Jun-2008 | BBB+/Positive/-- | | 23-Mar-2006 | BBB+/Stable/-- | |
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| | | | Additional Contact: | | Industrial Ratings Europe;
Corporate_Admin_London@standardandpoors.com |
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