Moody’s confirms Siemens’ Aa3 ratings but changes outlook to negative

Frankfurt, Dec. 4, 2002 — Moody’s Investors Service Wednesday confirmed the Aa3 senior debt ratings of Siemens AG (Siemens) and the company’s Prime-1 rating for short-term debt but changed the outlook on these ratings to negative from stable.

The confirmation reflects the company’s strong liquidity position and Moody’s expectation that a stronger focus on efficiency and cost-competitiveness will result in material improvements in operating performance.

However, the outlook change is based on the recurring under-performance of several business areas, including Information & Communication and Automation & Control, as well as its VDO Automotive division, that together comprise more than 65% of the group’s business activities. In addition, the weak economic climate is likely to pose some challenges for the achievement of Siemens’ Operations 2003 program, the rating agency added.

Moody’s views positively Siemens’ healthy liquidity profile with EUR11.6 billion of cash and marketable securities for the group versus EUR12.3 billion in gross debt. Recent cash flow generation was driven primarily by reductions in working capital and improved asset efficiency.

However, the recovery from the weak fiscal year 2000/01 was slow, because of the serious slump in the telecom equipment divisions that absorbed most of the improvement in power generation. In addition, Siemens continues to experience volatility in individual business segments that offset the benefits derived from strategic improvement programs.

While its large, well-diversified operations with many leading market positions mitigate continued economic pressure, the group still faces the challenge of maintaining the momentum of its restructuring program in cyclical downturns and controlling a very large range of businesses to maximum efficiency, Moody’s noted.

Siemens’ two large business areas — Information & Communication and Automation & Control (contributing nearly 60% of group’s revenues) — have been persistently under-performing and continue to display significant earnings volatility.

In particular, Siemens’ Information & Communication Networks has been realigning itself for an outlook of weak demand globally even throughout 2003, which has caused Siemens to defer its profitability targets from 2003 to 2004.

The second largest business area, Automation & Control — comprising the four divisions Automation & Drives, Industrial Solutions and Services, Siemens Dematic and Siemens Building Technologies — had benefited in the past from a stable performance of its largest division, Automation & Drives, even while its remaining three units were consistently under-performing.

The achievement of its 2003 EBIT margin targets set for this business area and each of its respective divisions depends heavily on the successful implementation of cost-cutting and efficiency measures given the wide gap between recent performance and Operation 2003 targets.

Siemens’ two smaller business areas, Transportation (16% of group revenues) and Power (15%), have shown in the past a volatile earnings development, which was mitigated through the stable profitability improvement since 1999 of the two units Power Generation and Transportation Systems, which are already in line with their Operation 2003 targets.

However, this stabilizing effect may be impaired by the worldwide economic deterioration, which would particularly affect Power Generation in 2003. Although Siemens’ two remaining entities, Medical and Lighting, had so far been the only units with stable operating improvements approaching the Operations 2003 targets, from 2002 onwards Lighting has been experiencing the pressure of the economic down cycle.

In summary, Moody’s views the EBIT margin targets for 2003 as particularly ambitious given the recent performance. In light of the outlook for weak demand globally, Siemens may have to accelerate its measures to offset rising competitive pressures and to achieve its medium-term profitability targets that would bring the group closer to international standards. Achieving its self-defined operational targets will be critical to maintaining the group’s Aa3 rating, Moody’s said.

The negative outlook reflects the downward rating pressure that would arise if Siemens were to lag behind its operating profitability improvement targets in a challenging market environment.

Siemens AG, headquartered in Munich, is Germany’s largest electronics and electrical equipment company and generated revenues of about EUR84 billion in the fiscal year ending 30 September 2002.


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