Cash generation, liquidity offset Li & Fung's sluggish 2014 results

The results were weaker than expected.

Moody's Investors Service says that Li & Fung's operating results for the year ended 31 December 2014 were weaker than expected and had a negative impact on its credit profile.

According to a release from Moody's Investors Service, however, the company's cash generation and liquidity continue to support its Baa1 issuer rating, the Baa3 rating on the perpetual securities, and stable rating outlook.

Li & Fung reported 2014 revenue and core operating profit of $19.3 billion and $604 million, respectively, up 1% and down 18% from 2013. Its core operating profit margin decreased by about 74 basis points to 3.1%.

The company attributed declining operating income and profitability to the adverse impact the competitive retail environment in the US and Europe is having on its major customers, geopolitical uncertainties with the Ukraine and Russia which also affect some European customers, and rising labor costs among suppliers.

Here's more from Moody's Investors Service:

Adjusted debt to EBITDA and EBITDA interest coverage were about 3.1x and 5.3x, which ordinarily would be weak for the Baa1 rating category. However, the company maintains an excellent liquidity profile, with surplus cash following last year's spinoff of Global Brands Group (unrated). Adjusted net debt to EBITDA was about 2.4x at year end.

Cash flow from operating activities for 2014 was about $638 million, while cash and bank balances and availability under committed bank facilities at year end were about $539 million and $704 million, respectively.

These sources were more than sufficient to cover short-term debt of $162 million, annual capex of about $80 million, and declared and special dividends, which in 2015 should amount to about $300 million.

Moody's expects that the retail environment will remain challenging for Li & Fung's customers in 2015 and that the company will remain challenged to grow revenue and operating profit. Nonetheless, the cash generative nature of its business enables the company to manage its leverage and interest costs.

Li & Fung Limited's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk.

Moody's compared these attributes against other issuers both within and outside Li & Fung Limited's core industry and believes Li & Fung Limited's ratings are comparable to those of other issuers with similar credit risk.