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Here's the first part of a sectoral company-by-company look at Standard & Poor's
credit ratings for the high-technology outfits followed by its credit analysts -- along with S&P's comments on the financial strength and business outlook for each company. Additional portions of the review will be published in subsequent days (also see S&P's sector-by-sector overview of the tech industry).
In this portion, S&P looks at:
Communications equipment manufacturers
Computer component manufacturers
Computer peripherals manufacturers
Communications equipment manufacturers
Corporate credit rating: BB; Outlook: Stable
Alcatel achieved results in line with expectations for the fourth quarter of 2004, in a typically strong season for the industry. Quarterly revenues were €3.8 billion, reflecting 10.7% year-over-year growth, after restatements of assets disbursed. Sales grew in Mobile Communications and Private Communications, but fell by 1.6% in Fixed Communications as legacy PSTN continue their structural decline.
Gross margins fell to 34.4%, down 330 basis points sequentially, as the group took up some early positions in growth markets such as India and Brazil. The operating profit reached €393 million for the quarter, equivalent to a 10% margin. Free cash flow was modestly positive for the first time in 2004, reflecting cost cutting and the deconsolidation of some underperforming operations. Alcatel's liquidity remained strong at Dec. 31, 2004, with net cash of €752 million. Alcatel gave guidance of low-to mid-single-digit sales growth in 2005.
Andrew Corp. (ANDW
In the first quarter ended Dec. 31, 2004, sales were higher than expected because of increased demand for wireless infrastructure overseas and for certain products supporting the consumer broadband satellite market. This offset some of the weakness in wireless infrastructure demand in North America because of operator consolidation. Nevertheless, growth opportunities will materialize as carriers upgrade their networks for thirdgeneration (3G), next-generation services and expand coverage.
The gross margin improved sequentially to 23.3% from 22.2% in the fourth quarter of 2004 because of the relocation of certain facilities and lower startup costs associated with new products. However, further improvement in the margin will be somewhat offset by higher raw material costs. In the first fiscal quarter, total debt to EBITDA annualized and adjusted for operating leases was about 1.9x, which we believe is comfortable for the rating.
Avaya Inc. (AV
EBITDA profitability gradually has improved over the past eight quarters, reaching a 12% margin in the December, 2004, quarter. Acquisitions and divestitures, including Tenovis, which closed during the December quarter, may help to strenghten Avaya's business profile. Funded debt levels have been reduced to $368 million as of Dec. 31, 2004, and cash balances have increased. At $911 million as of Dec. 31, 2004, cash is down sequentially because of the Tenovis acquisition, but it remains at healthy levels.
Ciena Corp. (CIEN
Market conditions for the high-speed communications components industry remain weak, and Ciena remains heavily dependent on a handful of network operators. Ciena is shuttering its San Jose (Calif.) facility and cutting staff by 25%, hoping to slash costs by $60 million, after a restructuring charge of $80 million. While Ciena continues its product development and marketing programs, visibility of future sales levels is minimal.
Although sales have been increasing, operating profitability remains constrained. Negative EBITDA and free cash flows are expected to continue. Still, financial flexibility is ample for operational requirements. Cash balances were $1.2 billion, and debt $861 million, as of Jan. 31, 2005.
Comverse Technology (CMVT
Operating performance continued to improve in the Jan. 31, 2005, quarter, with revenues growing 28% year-over-year and EBITDA margins up sequentially to 13.1%. The improvements are underpinned by increased wireless telecom spending on enhanced service offerings. Liquidity remains strong ($2.3 billion of cash against $508 million of funded debt) and is an ongoing source of ratings support in light of a narrow, volatile business profile.
Ericsson posted a strong operating performance in the fourth quarter and full year 2004. Critically, yearly turnover grew by 12% to Swedish krona (Skr) 132 billion from Skr118 billion in 2003 and the core mobile systems division -- which accounts for 74% of the group's revenues -- grew by a record 20% year-over-year. Ericsson achieved strong operating profitability of 22% for the year, reflecting strong sales momentum combined with the benefits of its aggressive cost cutting.
As a result, it generated strong free cash flow of Skr17.7 billion (about €2 billion) for the year. The group also exhibited a strong and conservative financial profile at Dec. 31, 2004, with gross cash and equivalents of Skr76.5 billion against gross financial debt of only Skr23.5 billion, a conservative lease- and pensions-adjusted gross financial debt to 2004 EBITDA of 1.2x.
Harris Corp. (HRS
Strength in government-related communications businesses continues to offset weaker performance in commercial telecom and broadcast businesses. Total revenues grew 22% year-over-year in the December, 2004 quarter, consistent with recent performance. Profitability in the commercial businesses, particularly microwave, has improved, turning modestly positive in recent quarters, although still below healthy levels. Debt coverage remains comfortable for the rating level, with total debt-to-EBITDA at 1.4x in the December, 2004, quarter, which provides Harris some flexibility to pursue strategic objectives, such as the recent acquisition of Encoda Systems.
IPC Acquisition Corp.
Although financial flexibility currently is constrained following a $20 million special dividend and the purchase of Orbacom Systems for up to $18 million, including deferred consideration, Standard & Poor's expects cash generated from operations over the near term to be sufficient to pay down the revolver balance, as well as to cover any operational needs. Credit protection measures remain adequate for the ratings level.
Juniper Networks (JNPR
Juniper retains a good share of its niche market, and revenues continue to grow as it expands its product offerings and distribution channels. The company has ample flexibility to execute its business plan, with cash ($1.7 billion at Dec. 31, 2004) well in excess of its $400 million funded debt. Juniper has generated $250 million in free cash flows over the past year. A common stock repurchase plan will not significantly affect financial flexibility.
Lucent Technologies (LU
Sales appear to have stabilized at about $2.2 billion per quarter. Lucent's profitability has been improving, and it has brought costs down to reflect this revenue range. Still, with a narrow customer base and rapid technology evolution, overall visibility remains limited, and revenue fluctuations are likely. Cash balances were $3.7 billion at Dec. 31, 2004, sufficient to support operations over the intermediate term, and Lucent is expected to receive a $900 million tax refund in 2005.
It will be compelled to address substantial postretirement health-care benefit obligations, as fund assets will be depleted by 2007. Pension-adjusted debt to EBITDA is around 7x, including postretirement benefit obligations.
A moderate level of diversification, ample cash levels ($11 billion at Dec. 31, 2004), and positive free cash flows (around $3 billion per year) have helped offset the challenges of the cell-phone market, where Motorola recently gained share. Still, cell phones essentially are commodity fashion items, possibly presenting longer-term profitability challenges. Divesting the semiconductor operations (Freescale Semiconductor Inc.) in December has yielded more stable free cash flows for Motorola. Asset turnover has improved to 9x, benefiting from an asset-light strategy. Return on capital has only recently been in double digits, while leverage is well within the rating at about 1.7x EBITDA, including the effects of unfunded postretirement benefit obligations.
Nokia reported satisfactory results in the seasonally strong fourth quarter of 2004. The group seems to be containing the downward trend in terms of market share (34% in the fourth quarter) on the back of its defensive cuts on prices and the update of its mobile handsets portfolio among a very aggressive competitive environment. Nokia generated healthy operating margins in mobile phones of 19%. Free cash flow generation was strong, at €3.8 billion for the past 12 months. Nokia's net cash position remains very large, at €11.3 billion at Dec. 31, 2004. The group returned €4.1 billion cash to shareholders in 2004 through dividend distribution and share buybacks, close to its annual free cash flow generation.
Nortel Networks (NT
A number of recent positive developments are happening at Nortel Networks: The independent review of its audit committee has been completed, the restatement of fiscal 2002 and 2001 financial statements is complete, and Nortel has made all necessary regulatory filings in the U.S. and Canada for fiscal 2003 and first and second quarters of 2004.
It has made significant progress toward addressing the material weaknesses in its internal controls. However, those weaknesses likely will continue for the foreseeable future. Third-quarter 2004 and full-year 2004 financial statements are expected to be filed by the end of March, 2005, and April, 2005, respectively. The ratings will remain on CreditWatch until a full review of 2004 results can be completed.
SR Telecom is having difficulties obtaining all necessary commitments from various financial stakeholders for a refinancing of its debt, and it's now clearly operating under severe time constraints, with its debentures due on April 22, 2005. It will be difficult for SR Telecom to raise new equity or subordinated debt in light of recent performance.
Privately owned Verifone has a leading position in the niche market for electronic payment devices. It has a short financial history as an independent company and a leveraged financial profile. However, Verifone recently filed a common stock registration statement with the Securities & Exchange Commission. Verifone intends to use a portion of the net proceeds from the prospective IPO to repay debt. If it successfully completes its IPO and reduces debt, we expect to revise the outlook on the company to positive.
These ratings were initiated by Standard & Poor's Ratings Services. They may be based solely on publicly available information and may or may not involve the participation of the issuer's management. Standard & Poor's Ratings Services has used information from sources believed to be reliable, but does not guarantee the accuracy, adequacy, or completeness of any information used. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Other analytic services performed by Standard & Poor's may be based on information that was not available for this rating and this report.Computer Component Manufacturers
Recent strong operating performance continues: Revenues of $404 million in the December, 2004, quarter were up 18% year-over-year. Rising profitability continues to improve debt protection metrics, with total debt-to-EBITDA falling to 2 from 3x one year earlier, adjusted for unfunded pension liabilities, operating leases, and an active accounts-receivable facility. Guidance is for 9% to 12% revenue growth in 2005. Continuation of current trends could lead to Standard & Poor's raising the rating on Amphenol some time in the next several quarters.
Belden CDT (BDC
Revenues, unadjusted for metals prices but pro forma for the CDT acquisition, increased 21% year-over-year on currency effects and higher volumes in the December, 2004, quarter. EBITDA margins were flat sequentially at just over 12%. The outlook for operating performance in 2005 is for revenue increases of 5% to 10%, which -- in conjunction with improved balance-sheet liquidity (cash increased to $189 million during the quarter)--is within the expectations of the rating.
EBITDA margins declined to 7% in the December, 2004, quarter from 11% the previous quarter, the result of cost pressures from rising raw materials prices and the integration of the connectivity solutions business. Product price increases and restructuring actions at the acquired Omaha facility should help to alleviate margin pressures in coming quarters. Operating cash flows for calendar 2004 increased to $108 million from $91 million, and cash balances remain adequate for the rating at $177 million.
This company is being acquired by Japan's Toppan Printing Co.
FLIR Systems (FLIR
In the fourth quarter of 2004, financial results continued strong both in the thermography and imaging businesses because of expansion of FLIR's distribution network and increased sales across all product lines. Gross margin continued healthy at about 53% similar to the fourth quarter of 2003. The integration of Indigo systems, acquired in January, 2004, has been successfully completed. EBITDA margin remained strong in the mid-20% area because of the 48% growth in revenues and good cost management. Although debt leverage remained relatively strong for the rating at 1.9x, it partially offsets FLIR's below-average business risk profile.
General Cable (BGC
Product volume gains and price increases are helping to offset higher raw-material costs to maintain profitability. Metals-adjusted revenues grew 5% year-over-year in the December, 2004, quarter, and EBITDA margins were flat for the same comparison at 5.4%. Debt-protection metrics have remained flat in recent quarters, at around 4.8x total debt to EBITDA, with greater profitability offset in part by increased borrowing to fund growing working capital investments. The outlook for flat performance in 2005 is consistent with expectations for the rating. Leverage, while improved somewhat over the last year, remains a concern for the rating.
Hon Hai Precision Industry
Hon Hai continues to expand its customer base and product lines and exhibit robust operating and financial performance. Consolidated sales in 2004 grew 48% year-over-year to about new Taiwan Dollar (NT) $540 billion (US$17 billion), with EBITDA margin of 8%, which compares favorably with its peers. Total debt to EBITDA was about 1x. Hon Hai is expected to continue its growth momentum, estimating 30% growth in sales and 20% growth in earnings in 2005.
Knowles Electronics Holdings
While an amendment to the credit facility in the first half of 2004 reduced Knowles' interest burden and increased the cushion under financial covenants, capacity for a decline in EBITDA remains limited. Revenues have risen over the past few quarters compared to 2003 levels, driven by an improving economy. However, margins have softened as Knowles continues to invest in the development of its silicon microphone product.
Knowles has no near-term debt maturities and limited liquidity in the form of a $9 million cash balance and about $6 million of availability under its revolver. In December, 2004, Knowles closed a new $10 million credit line which bolstered near-term liquidity. On an ongoing basis, debt protection remains weak.
This leading independent maker of photomasks for chip production has grown through acquisitions of original equipment manufacturers' (OEMs') in-house capacity. Revenues are dependent on new chip designs, rather than on chip production volumes. Business is moving to Asia, and surplus capacity (mostly trailing-edge capabilities in the U.S.) is being shuttered. Resulting cost reductions thus far largely have offset secular price pressures in the industry. Debt to EBITDA is about 2.5x. Cash was $149 million, and debt was $324 million, as of Jan. 31, 2005. Debt of $153 million matures in December, 2006. A $100 million unused, unsecured revolver, which expires in July, 2005, provides additional flexibility. Photronics likely will renew the revolver with a multiyear line.
The aggressive pricing environment for TFT-LCD flat-panel displays has led to Quanta' volatile earnings in 2004. EBITDA margin was as high as 40% in the first half of 2004, but fell to below 20% in the second half. The pricing environment is expected to remain weak, at least in the first half of 2005. Free operating cash flow has been negative: Quanta needs to invest substantial capital to maintain its competitive edge. Its liquidity is adequate, with cash and short-term investment totaling NT$40.8 billion as of Sept. 30, 2004, compared with its long-term debt due within one year of about NT$4.6 billion.
SMART Modular Technologies
EBITDA in fiscal 2004, ended August, 2004, increased to $35 million from $30 million in the previous year. Pro forma leverage, following the refinancing, is expected to be modest, with total debt to EBITDA of between 3x and 3.5x for the fiscal year 2005. Profitability improvements because of a refocusing on more highly engineered products is expected to help keep leverage at levels comfortable for the rating.
Superior Essex (SPSX
Metals-adjusted EBITDA margins were down slightly sequentially, to 5.1%, but up year-over-year. Metals-adjusted revenues, however, grew 31% year-over-year in the December, 2004, quarter as a result of increased volume, in part resulting from the acquisition of assets from Belden earlier in the year. The outlook is for relatively flat operating performance in 2005, which is consistent with expectations in the rating. Debt protection is adequate at 3.9x total debt-to-EBITDA rolling four quarters, as of Dec. 31, 2004.
TDK's financial performance remained strong during the nine months ended December, 2004, owing to robust performance of electric materials and devices and continuous companywide cost cutting measures, offsetting weaker performance of heads for hard-disk drives (HDDs) and recording media. TDK also maintains a very conservative balance sheet, with 0.2 billon yen of total debt and 237 billion yen of cash at hand as of Dec. 31, 2004. Very low debt usage, ample cash on hand, and technological strength in mainstay electronic materials and components should allow TDK to maintain high credit-protection measures.
Adjusted revenues and orders grew 4% and 8%, respectively, in the February, 2005, quarter, slower than rates in 2004 because of more difficult comparables. Profitability remains healthy, with EBITDA margins of 17% in the most recent quarter, and financial flexibility remains strong for the rating, supported by $551 million of cash and no funded debt (capitalized operating leases and unfunded pension obligations contribute about $200 million of liabilities). The outlook for 2005 is for similarly slowing growth rates, but operating performance and the balance sheet remain comfortable for the current rating and outlook.
These ratings were initiated by Standard & Poor's Ratings Services. They may be based solely on publicly available information and may or may not involve the participation of the issuer's management. Standard & Poor's Ratings Services has used information from sources believed to be reliable, but does not guarantee the accuracy, adequacy, or completeness of any information used. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Other analytic services performed by Standard & Poor's may be based on information that was not available for this rating and this report.Computer Manufacturers
Dell Inc. (DELL
With an expanding product line, a low-cost manufacturing model and efficient asset management, Dell is expected to preserve double-digit revenue growth and consistent profitability levels, despite highly competitive industry conditions. Ratings also are supported by ample liquidity (cash and investments exceed $14 billion) and a strong financial profile for the rating.
Although HP reaffirmed its strategic goals, the recent departure of its CEO adds an element of uncertainty to its long-term strategic direction. HP continues to post strong results in its imaging and printing group, but operating performance in the highly competitive personal systems and enterprise segments has been more variable and, in aggregate, subpar for the rating level. However, excellent liquidity and significant free cash flow generation provide ratings stability.
IBM Corp. (IBM
IBM's diverse product and customer base is expected to drive single-digit revenue growth and consistent profitability. Strong cash-flow generation is expected to support internal investments, an active acquisition profile, and share repurchases. Debt protection metrics (adjusted for captive finance operations and underfunded post-retirement obligations) are expected to remain within acceptable levels for the rating.
Backed by strong growth momentum in the fourth quarter, Quanta's revenue grew 11.6% in 2004 and maintained its 24% share of global notebook PC production. Nonetheless, Quanta reported declining margins in 2004 because of an aggressive pricing environment and very intense market competition. Still, Quanta's financial profile remains sound, backed by good cash flow, and large net cash position. As at Sept. 30, 2004, the company had NT$54.5 billion cash on hand, compared with total debt of NT$24.9 billion.
Silicon Graphics (SGI
Silicon Graphics continues to struggle with weak profitability and limited financial flexibility, despite posting its first year-over-year revenue growth in years in the seasonally strong December quarter. The developing outlook reflects Standard & Poor's concerns about volatile EBITDA and negative free operating cash flow in the past four quarters, offset by an improving revenue trend and ongoing cost reductions.
Privately owned Stratus is a provider of fault-tolerant computers and related services for mission-critical applications. Despite modest revenue growth, profitability and cash flow measures weakened on a year-over-year basis in fiscal 2005. A recently announced workforce reduction is expected to bring Stratus' cost structure more in line with revenue growth prospects. However, failure to improve profitability, cash flow and financial flexibility over the intermediate term could lead to a downgrade.
Sun Microsystems (SUNW
Increased market acceptance of lower-cost Windows and Linux systems, highly competitive industry conditions, and a high R&D investment rate will continue to challenge Sun's revenue growth and profitability in the near to intermediate term. Ongoing cost-reduction and productivity improvement actions are expected to help sustain recent improvements in operating profitability, but historical EBITDA levels have been volatile. Nevertheless, Sun's cash and investments of more than $7 billion provide ample liquidity and a cushion for potential operational cash requirements.
Computer Peripherals Manufacturers
CMC's performance continues to exhibit the highly cyclical characteristics of the optical media storage industry. The EBITDA margin was between 20% and 40% in 2003 and 2004 throughout the cycles. Pricing environment has stabilized in the first quarter of 2005, which should help ease the earnings pressure. Continuing negative free cash flow and aggressive trading in the stock market remain rating concerns.
Compal continues to maintain its position as the second-largest notebook PC producer in the world. Total revenue grew 30% year-over-year in 2004, but EBITDA margin fell below 5% in 2004 from 6% in 2003 because of severe market competition. In addition, higher losses from its TFT-LCD subsidiary and foreign exchange losses negatively affected Compal's profitability in 2004. Nonetheless, good working capital management has allowed Compal to continue generating healthy free cash flow and maintain a net cash position. Total debt to EBITDA was around 1.3x. The company had NT$22.7 billion cash on hand, compared with total debt of NT$13.7 billion as at Sept. 30, 2004.
EMC is projecting 14% to 18% top-line growth for full-year 2005, from $8.2 billion in 2004, and for operating margins in the high teens by the fourth quarter. Factors behind EMC's operating performance include market-share gains in hardware systems, particularly in the midrange product line, and increasing software in the product mix, which is contributing to growth and profitability. EMC's financial profile remains strong, with $7.4 billion of cash, compared to $128 million of funded debt. Progress in meeting 2005 operating goals could result in an outlook revision to positive in the next several quarters.
Although down 2% year-over-year, revenues increased 12% sequentially in the December, 2004, quarter and EBITDA margins increased to 7.6% from 4.4% the previous quarter, in part because of improved high-margin media revenues. The Certance acquisition will enhance media revenues and give Quantum entry into the LTO tape market, against which it currently competes. Operating performance is improving off of a weak base.
Ritek incurred a net loss of NT$209 million in the first nine months, and we expects more losses in the fourth quarter because of the severe pricing environment. Nonetheless, better working capital management and cutbacks on capital spending helped Ritek generate positive free operating cash flow and lower its leverage. Net debt totaled NT$16.6 billion at Dec. 31, 2004, compared with NT$17.8 billion at the end of 2003.
Seagate Technology (STX
Revenues in the December, 2004, quarter grew on a year-over-year basis for the first time in three quarters, as some of the competitive and market issues that depressed results in 2004 began to subside. Seagate regained share, particularly in enterprise, and saw acceleration in consumer applications, particularly the new line of one-inch hard-disk drives. Average selling prices and EBITDA margins both increased sequentially in the quarter. These improvements indicate the extent to which Seagate's business profile incorporates operating volatility. Still, the company is well positioned in its markets and has a liquid financial profile, which included $1.5 billion of balance sheet cash, compared with $739 million of funded debt as of Dec. 31, 2004.
These ratings were initiated by Standard & Poor's Ratings Services. They may be based solely on publicly available information and may or may not involve the participation of the issuer's management. Standard & Poor's Ratings Services has used information from sources believed to be reliable, but does not guarantee the accuracy, adequacy, or completeness of any information used. Ratings are statements of opinion, not statements of fact or recommendations to buy, hold, or sell any securities. Other analytic services performed by Standard & Poor's may be based on information that was not available for this rating and this report. From Standard & Poor's Ratings Services