Moody's says Samsung's 2014 results are weak but within expectations

Moody's Investors Service says that while Samsung Electronics Co., Ltd. (SEC's) weak 2014 results are credit negative, the results have no immediate impact on the company's A1 senior unsecured rating, because Moody's had anticipated the weak performance, when SEC's rating outlook was revised to stable from positive in October 2014.

This is the first annual earnings decline since 2011 as weakness in the company's mobile business dragged down profitability despite improving performance in semiconductor division.

Moody's remains cautious on SEC's profitability measures in the year ahead, particularly in the key mobile segment, as we expect challenging market conditions globally and competition from Apple Inc. (Aa1, stable) and Chinese manufacturers to persist through 2015.

"Although operating performance remains weak as product and price competition intensifies across several key segments, SEC's credit profile continues to reflect its strong balance sheet flexibility fostered by low leverage, as measured by adjusted debt/EBITDA which remains below 0.5x, and its net cash position. These factors continue to provide a rating buffer to the inherent operating profit volatility" says Annalisa Di Chiara, a Moody's Vice President and Senior Analyst.

SEC reported a 32% decline in operating performance to KRW25.0 trillion in 2014 from a record KRW36.8 trillion in 2013 and operating profit margin contracted to 12.1% for 2014 from 16.1% in 2013.

These results reflect a meaningful contraction in sales in its mobile segment which has been the key driver of operating profit since 2011. Specifically, the mobile segment was a drag on earnings, reporting around a 19% year over year contraction in sales while operating profit declined around 42% to KRW14.6 trillion in 2014 from KRW24.9 trillion in 2013.

On the other hand, the semiconductor segment posted a 6% increase in revenues year-over year and a 27% increase in operating profit to KRW8.8 trillion in 2014 from KRW6.9 trillion in 2013, providing some offset to the declines in the mobile segment.

SEC maintains a healthy liquidity profile reflecting around KRW 61.8 trillion cash and cash equivalents and short-term financial instruments and available-for-sale financial assets on hand at 31 December 2014.

Downward pressure could arise, if weak earnings persist or volatility in the company's profitability measures becomes more evident. Metrics that would evidence such deterioration in profitability includes operating profit margin falls below 10% on a sustained basis due to a weakening n in the company's competitive strength, for example, in its cost competitiveness, market share and/or technology development.

A rating upgrade is unlikely at this time, given SEC's volatile operating performance and the potential for lower free cash flow generation, should the mobile segment weaken further, and/or capex rises to support its semiconductor and components business strategy.

The principal methodology used in this rating was Asian Consumer Electronics published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Seoul, Korea, SEC is a global leader in the memory semiconductor, mobile handset and flat panel TV markets. Its semiconductor division and IT and mobile segments, generated 93% of consolidated operating profit in 2014. The consumer electronics division and display panel segments generated the remaining 7% of consolidated operating profit.