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|  | APRIL 6, 2005
S&P's Tech Company Report Card, Pt. 3 This installment provides financial and outlook overviews on electronics distributors, office-equipment manufacturers, chipmakers, and software and services companies Here's the third and final part of a sectoral company-by-company look at Standard & Poor's credit ratings for high-technology companies followed by its credit analysts -- along with S&P's comments on the financial strength and business outlook for each company. (Also see the first part on companies in communications gear, and computers, components, and peripherals, and the second part on companies in contract manufacturing and electronic equipment, and diversified tech outfits, and S&P's sector-by-sector overview of the tech industry).In this portion, S&P Ratings looks at: • Electronics distributors • Office equipment manufacturers • Semiconductor manufacturers • Software service providers Electronics Distributors Agilysys (AGYS ) BB-/Stable Improving IT spending levels and acquisitions have contributed to good revenue and earnings growth, particularly in the seasonally strong December quarter. The stable outlook is supported by good liquidity and improvements in debt-protection metrics. Ratings improvement is limited by a narrow business base and an acquisitive growth strategy. Anixter International (AXE ) BB+/Stable The recent downgrade reflects our expectation that Anixter will maintain a more leveraged financial profile. However, consistent operating performance, positive free operating cash flow, and adequate access to capital support the stable outlook. Arrow Electronics (ARW ) BBB-/Negative Continued year-over-year earnings improvement is expected to result in debt-protection measures that are adequate for the rating within the next three to 12 months, at which point the outlook could be changed to stable. Avnet (AVT ) BBB-/Negative Although Avnet has sustained year-over-year revenue and earnings growth, debt-protection metrics remain subpar for the rating. The negative outlook reflects the current lack of cushion within Avnet's financial profile for any deterioration in debt protection measures. Standard & Poor's expects it will take some time -- as much as 12 months or more -- before we will reconsider the outlook. Brightpoint (CELL ) B+/Positive Continued demand for new product features is expected to drive revenue growth in the highly competitive wireless communications distribution market. While consolidated profitability has been relatively stable, operating performance by geography has been considerably more volatile. If Brightpoint can sustain consistent, profitable revenue growth and a moderately leveraged balance sheet, ratings could be raised over the near to intermediate term. Ingram Micro (IM ) BB+/Stable Ingram's recent acquisition of Tech Pacific, a privately held firm based in Sydney, Australia, should significantly enhance its Asia Pacific operations. While operating profitability and debt-protection metrics are expected to show continued improvement over the near to intermediate term, the SEC investigation (announced in the September, 2004, quarter) currently limits the potential for rating improvement. Memec Group B+/Stable Privately owned Memec Group's revenues have benefited from strengthened conditions in the semiconductor sector in 2004. However, near-term profitability in the highly competitive specialty semiconductor product distribution sector is expected to remain thin. A proposed IPO has been delayed but is still active, and is not expected to affect our ratings or outlook on the company. If the IPO is completed, proceeds are expected to be used to repay holding company notes. Navarre (NAVR ) BB-/Negative Navarre is a niche distributor and publisher of home-entertainment and software products to domestic retail customers. Its modest historical earnings base is expected to benefit from acquired entertainment content. Although Navarre has a moderately leveraged financial profile, the negative outlook reflects near-term acquisition integration risks. Tech Data (TECD ) BBB-/Stable Although margins are low in the highly competitive computer products distribution industry, Tech Data has maintained consistent profitability levels. The current rating and outlook incorporate the expectation that annual free operating cash flow will be positive, despite seasonal variations, and leverage levels will remain moderate Danka Business Systems (DANKY ) B/Negative Highly competitive industry conditions continue to challenge Danka's ability to stabilize revenues and achieve sustainable profitability improvements. Despite ongoing cost-reduction actions, EBITDA levels have continued to decline on an annual basis, including the December 2004 quarter. Fuji Xerox Co. A/Positive Financial performance remains strong. During the nine months ended December, 2004, the company's operating income, reflected in parent Fujifilm's segment information, increased by 82% from the same period in 2003, and the EBIT margin was 10.8%, vs. 6.1% a year earlier. Consumable supplies are expected to continue to generate solid cash flow backed by growth in digital color multi-function copier sales. Funds from operation to total debt is expected to improve further from the 60% to 70% level of recent years. The rating could be raised within one to two years if the company continues to improve its financial profile. Global Imaging Systems (GISX ) BB-/Positive Global continues to report good revenue growth and consistent profitability. The current rating reflects a limited market position in the North American office-equipment market and an acquisitive growth strategy. However, continued growth in earnings and cash flow could lead to rating improvement in the near to intermediate term. IKON Office Solutions (IKN ) BB/Stable Highly competitive conditions in the mature global office equipment market continue to pressure revenue growth and earnings base. In January, 2005, IKON announced additional actions that will be taken to reduce costs and improve efficiency. Nevertheless, failure to achieve improvement in core operating earnings over the near to intermediate term could lead to a review of the rating and/or outlook. Katun B+/Positive Privately owned Katun has a good, but niche, position in the office equipment parts distribution market. While revenues were flat in fiscal 2004, sustained profitability and debt reductions led to an improving financial profile. Growth in revenues and cash flow levels could lead to ratings improvement over the intermediate term. Lexmark International (LXK ) BBB/Stable Lexmark has achieved moderate revenue growth and market-share gains, as well as consistent profitability, despite intensely competitive industry conditions. Earnings from high-margin supplies and a strong financial profile provide rating stability. Pitney Bowes (PBI ) A+/Stable Our rating and outlook on Pitney Bowes reflect its position as the dominant maker of mailing equipment, as well as its consistent profitability and cash-flow generation. Although the company's historically conservative financial policy has shifted to include a greater emphasis on strategic acquisitions and shareholder returns, we expects it to maintain a strong financial profile. Xerox (XRX ) BB-/Stable While highly competitive industry conditions have restricted revenue growth, equipment sales have posted modest, annual constant-currency improvement, which is expected to provide the foundation for future revenue growth. Annual nonfinancing EBITDA levels should be sustainable, based on an ongoing focus on cost controls and operating efficiency. The stable outlook continues to reflect the potential for an adverse judgement or large legal settlement stemming primarily from two shareholder lawsuits.
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