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 )


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 )


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 )


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 )


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 )


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 )


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


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 )


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 )


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 )


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.


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 )


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 )


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.



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 )


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 )


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 )


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. Semiconductor Manufacturers

Adaptec (ADPT )


Revenues were up 10% year-over-year in the December, 2004, quarter, but EBITDA profitability fell to nearly breakeven levels because of weak channel performance in storage connectivity components. The balance sheet remains liquid, with more than $517 million of cash, which offsets a leveraged financial profile that includes $285 million of funded debt as of December 31, 2004. Guidance for the March, 2005, quarter calls for recovery in profitability to levels comparable with prior recent performance, i.e., EBITDA margins in the mid- to high-single digits.

Advanced Micro Devices (AMD )


AMD faces aggressive microprocessor and flash-memory competition, steep pricing pressures, and high leverage, offsetting a refreshed product line and improved manufacturing processes. EBITDA margins have been above 25% since the September, 2003, quarter, well above historical levels. Still, free cash flows are expected to remain negative, recognizing annual capital expenditures around $1.4 billion to fund a large factory under construction in Dresden, Germany, and other activities. Pro forma cash balances of $1billion and debt levels of $2.5 billion recognize Fujitsu's share of a joint-venture factory. Maturities through 2007 are about $900 million.

Agere Systems (AGR.A )


The company has refocused on storage, as it deemphasizes the dwindling long-haul communications market. Agere has consolidated its manufacturing into one site in Orlando, Fla., which will be closed by December, 2005, if it isn't sold. A moderate sales decline reflects fluctuating demand for its chips in third-generation cell phones, although the market likely will pick up later in the year. The company hopes to achieve 15% EBIT margins on sales at sales of $500 million per quarter, by the June, 2005, quarter, following late-2004 cost reductions. Cash balances were $692 million as of Dec. 31, 2004. Debt totals $720 million plus about $250 million postretirement benefit obligations, but near-term maturities are moderate. Leverage of 2.2x is moderate for the rating, recognizing aggressive market conditions.

AMI Semiconductor(AMIS )


Solid growth in the company's core automotive, industrial, and medical segments have offset weakness in the communications sector, leading to a modest 2% decline in sales for the December quarter. EBITDA margins are stable, contributing to stable credit protection metrics with debt to EBITDA around 2X. Liquidity is ample, with about $161 million in cash. Flexibility for small acquisitions, such as the DspFactory transaction, is incorporated into the current rating.

Amkor Technology (AMKR )


Aggressive, debt-financed capital spending in fiscal 2004 coincided with an industry downturn, suppressing profitability and cash flow. December quarter revenues slipped 8% from the prior quarter, and are expected to continue to decline by around 9% for the March quarter. EBITDA margin has slipped to 15%, from the low 20% range generated one year ago. Leverage is high at 6.3x, and likely will weaken further as of March. Liquidity could be strained as the company has $266 million maturing in May, 2006, and is forecasting continued low profitability and sustained high capital spending.

Applied Materials (AMAT )


AMAT's revenue and order growth slowed substantially in the January, 2005, quarter as the semiconductor industry continued its struggle with higher product inventories and slower end-growth in 2005. Orders were down 36% sequentially, to $1.68 billion. Still, the company maintained healthy EBITDA margins in the quarter, at 26%, and revenues grew 14% year-over-year. Liquidity remains at solid levels for the rating at $6.4 billion, vs. $463 million of funded debt. Still-healthy cash generation has been offset, in part, by increased share buybacks, which totaled $300 million in the quarter, reducing cash balances by $180 million sequentially.

ASM International (ASMI )


The group's front-end operations in 2004 recorded positive EBITDA for the first time in three years, but the better performance should be more than offset in 2005 by the bleak outlook in back-end operations. The company has prefinanced its $115 million debt maturity of November, 2005.

Chartered Semiconductor


Despite Chartered's weak sales in the fourth quarter of 2004, its revenue for full-year 2004 increased 69%, to $932 million, from the previous year. A higher operating margin (41% in 2004, compared with 26% in 2003) because of increased sales of 0.13 micron chips and cost-savings initiatives enabled the company to post stronger cash-flow measures. Its ratio of funds from operations to debt rose to 32% in 2004, from 8% in 2003.

Chartered's profitability and cash-flow measures, however, are expected to weaken in the near term, as sales are likely to slow further in the first half of 2005 because of customers' inventory correction. Chartered's liquidity position remains strong, with cash of $569 million as of Dec. 31, 2004. The ratings also benefit from support provided by its ultimate parent, Temasek Holdings.

Cirrus Logic (CRUS )


Revenues decreased 7% sequentially in the December, after increasing 22% for the six months ended September, because of depressed sales of DVD recorders, a key endmarket. Earnings are volatile, given the company's high operating leverage, despite being a fabless producer. EBITDA has been nominal over the last two quarters, although financial flexibility is adequate with cash balances of $177 million and no funded debt

Conexant Systems (CNXT )


Sluggish end demand for DSL chips, particularly in Asia, and excess channel inventory have sharply curtailed revenues, with December sales down 34% from September. Expectations are for continued weakness through March. The company has been cash-low negative since June, 2004, and cash and equivalents have eroded by about $50 million to $391 million as of December. Liquidity may be strained, as $197 million of debt matures in May, 2006.

Cymer (CYMI )


Fiscal 2004 revenues were up 47%, but sales growth decelerated rapidly in the December quarter, contracting 7%, vs. the year-earlier period, and expectations are for continued sluggish demand in the near term. Profitability has been equally volatile, as the company reduced factory loadings to reduce field inventories. Cash flow remains adequate and the company recently reduced debt by $50 million. Cash balances remain in excess of debt.

Cypress Semiconductor (CY )


Revenues and profitability have softened in the current industry dip, but should recover in the second half of the year. The company continues its practice of moderate-size acquisitions and point-product divestitures to improve its profitability. December quarter results were down 5% sequentially, as customers burn through excess inventory. The situation likely will continue into 2005. Pro forma cash balances were $200 million as of Dec. 31, 2004. Debt to EBITDA is about 2.5x, moderate for the rating.



Free cash flow generation in 2005 will be challenging for EPCOS, and the company is expected to record small negative cash generation in 2005. Free cash flow generation in 2004 was €51 million. The company is not expected to materially exceed the 2.5x debt-to-EBITDA ratio commensurate with the rating, however.

Fairchild Semiconductor (FCS )


Revenues and profitability vary widely through the business cycle. Recent sales levels have dipped, reflecting industrywide excess inventory in 2004, expected to persist through mid-2005. EBITDA margins are good, around 20%.

The company is a major supplier of power-management chips, now 75% of its sales, with a focus on consumer electronics and personal computers. Debt to EBITDA is in line with the rating, at around 3 to 1, with no near-term debt maturities, while the company has been generating modest levels of free cash flows. The company's acquisitive business practices are still expected to constrain ratings to the current level over the longer term.



Improving operating performance in 2004 helped to strengthen debt-protection metrics. Following four quarters of 20% or more revenue growth and increasing EBITDA margins, which reached 14% in the December, 2004, quarter, adjusted total debt to EBITDA improved to 4.2x at year-end, compared with over 11x at the same time a year earlier. The negative outlook continues to reflect a volatile business profile that leads periodically to high levels of financial leverage and limited cash generation, in part because of high investments in working capital.

Freescale Semiconductor (FSL )


Ratings reflect a brief track record at current profitability levels, the potential challenges facing Freescale as an independent company, ongoing high R&D expenditures needed to maintain its technology base, and its second-tier position in the growing wireless market. Sales were $1.43 billion in the December quarter, flat with September, with EBITDA of $190 million, or 13% of sales. The company has a $1 billion net cash position, and no debt maturities for five years.

Hynix Semiconductor


Hynix has enjoyed the cyclical upturn of the DRAM industry and seen financial improvements as a result of its spin off of its nonmemory business as MagnaChip last year. Net borrowings (including overseas subsidiaries) declined from 3.2 trillion Korean won at year end 2003 to KW1.1 trillion at year-end 2004.

However, despite the improvements, the slowdown expected in the industry this year, and Hynix's significant KW2 trillion capital investments planned this year limit Hynix's ability to further improve its balance sheet and liquidity to cushion periods of cyclical downturns. Furthermore, about KW1.7 trillion of restructured bank debt matures at the end of 2006, and plans to start investment in China in 2006 demonstrate Hynix's need for more cash.

Intel (INTC )


EBITDA margins in the December, 2004, quarter were flat sequentially, and guidance for the March, 2005, quarter is for flat to seasonally down, sequentially, better than previously expected because of lower-than anticipated startup costs in the transition to 65 nanometer process technology. While stock buyback activity has increased to between $2 billion and $2.5 billion per quarter in recent quarters, liquidity remains world class, with $16.8 billion of cash as of Dec. 27, 2004. Semiconductor Manufacturers

International Rectifier (IRF )


Profitability is improving as the company continues to strengthen its product portfolio. International Rectifier maintains substantial liquidity ($839 million as of December 31, 2004) although debt levels are also high, around $600 million. Debt to EBITDA leverage has declined with improved earnings, and is now comfortable for the rating, about 2.2x annual EBITDA. Free cash flows are modestly positive, while there are no near-term maturities. The high percentage of proprietary products permits operating margins above 20%.

Kulicke & Soffa (KLIC )B/Positive

Wire bonder sales, which at their peak in March, 2004, were 61% of total sales, have fallen by more than 75% as of the December quarter, causing revenues to decline 25% compared with the year earlier. EBITDA slipped to approximately breakeven because of reduced fixed-cost absorption, forcing leverage up slightly to 2.9x. Internally generated cash flow has covered capital spending through the cycle.

Lam Research (LRCX )


Operating performance remains cyclically strong, with revenues up 98% year-over-year in the December, 2004, quarter, and operating cash flow for the two quarters ended Dec. 26, 2004, increasing to $190 million from $34 million for the same period one year earlier. Growth may slow in 2005, as customers adjust capital spending to reflect more modest growth in semiconductor markets. Lam's financial profile has strengthened, with unrestricted cash balances reaching $649 million as of December 26, 2004, up from $477 million the previous quarter. The company is funded debt-free.

LSI Logic (LSI )


The company enjoys good sole-source relationships but is reliant on its communications and entertainment equipment-maker customer base, as it has no merchant market. Spinoff of the profitable Storage unit is being deferred, pending market conditions. Overall, some reduction in its asset intensity has contributed to free cash flows.

LSI has good customer relationships, ample liquidity, good levels of free cash flow, and modest net debt, although its business model also locks it into its key customers' market success. December sales levels recovered somewhat from a depressed September quarter, but were still below the year-ago level. The storage separation -- when it occurs -- will reduce LSI's business diversity and profitability. Cash balances as of Dec. 31, 2004, were $1.1 billion, while $420 million in debt matures in 2006.



Overall demand for testers remains very weak. Revenues for the first six months of fiscal 2005 were 33% below the year-earlier period, with forecasts for continued weak demand, well below breakeven levels. Negative cash flow moderated in the December quarter, at about $11 million, from nearly $38 million in the September quarter, but expectations are for additional cash burn of about $20 million in the March, 2005, quarter. Cash levels will erode to equal the company's debt balances, which are due in August, 2006, straining financial flexibility.

Macronix International (MXICY )


Macronix's operating performance was very volatile in 2004 because of volatile pricing and demand for flash memory. The company reported NT$805 million in net loss in the fourth quarter of 2004, down from NT$491 million in profit in the third quarter, while its revenue dropped 24% quarter-on-quarter to NT$5.0 billion. The pricing for flash memory is still steep, and weak profitability is expected in the first quarter of 2005.

Nonetheless, by restricting capital expenditures and strengthening working capital management, Macronix generated NT$3.7 billion of positive free operating cash flow in 2004. The company has used the positive cash flow and a NT$5.6 billion GDR issue to reduce its ratio of net debt to capital to 9.6% as of Dec. 31, 2004, from 32% as of December 31, 2003. The company's total debt to EBITDA was 1.85x in 2004.

Micron Technology (MU )


Earnings and cash flows vary widely through the business cycle for this supplier of high technology commodity products. Micron lost market share to around 20% after a product cycle miss, and market-share growth has been limited. Earnings have been recovering cyclically, while the balance sheet benefited from a $450 million equity infusion from Intel, targeted to enhance Micron's product-development resources. November, 2004, quarter sales were up modestly sequentially, and the company generated $486 million EBITDA in the quarter. Cash and debt are both about $1.1 billion, although high capital expenditures -- $1.5 billion in fiscal 2004 -- remain necessary to retain its industry position.

Nanya Technology


Nanya Technology's net income improved to NT$7.0 billion in 2004, from a loss of NT$1.4 billion in 2003, because of a better pricing environment for dynamic random access memory (DRAM) and lower cost structure. However, we expect Nanya Technology's profit to decline in the first half of 2005 because of weakening DRAM prices. Nanya Technology incurred negative free operating cash flow in 2004 because of large expenditures on 300mm facilities, but it has kept its net debt to capital ratio steady at the 30% level. The ratings on Nanya Technology continue to reflect strong financial support from its parent, Nan Ya Plastics, a member of the Formosa Plastics Group, the island's largest industrial conglomerate.

Nvidia (NVDA )


Rapid new product acceptance has driven a strong increase in December sales, up nearly 10% from the prior quarter. EBITDA margins have improved to15%, up from its 10% average. The company continues to generate good cash flow and cash balances of $670 million provide adequate operational liquidity. The recently announced $300 million stock-repurchase program is expected to be gradual

ON Semiconductor (ONNN )B/Positive

Leverage remains high, at nearly 5x, and cash flows are modest, although interest coverage is now comfortably above 2x following a series of refinancings in recent quarters, which also have extended the maturity schedule. Cash balances of $186 million as of Dec. 31, 2004, should meet operational needs, as free cash flows are approximately breakeven.

RF Micro Devices (RFMD )


Sluggish demand in the Asian hand-set market and market share losses of key customer Nokia Corp. adversely affected December quarter sales, down 12% from the year-earlier period. Still, good positioning and new product introductions should support future sales levels. New product ramp-ups are dampening profitability, with EBITDA margin dropping to 9% from the 20% area earned in the prior year. Liquidity has fallen to $204 million because of a bond redemption and escalated capital spending. There are no near-term maturities.

Siliconware Precision Industries


Despite relatively volatile market conditions, Siliconware Precision's financial profile has been stable. The company's operating margin, before depreciation and amortization, ranged between 24% and 29% between 2000 and 2004. We expect Siliconware Precision to maintain good credit-protection measures and good liquidity over the medium term.



Although the merger with ChipPac doubled revenues, to $769 million, in 2004, the net loss widened to $468 million, from $1.7 million in 2003, as the company recorded a $453 million writeoff of goodwill and incurred extraordinary costs of $22 million associated with the merger. The majority of these costs were non-cash in nature and, therefore, cash-flow measures remained stable from the previous year, with debt to EBITDA of 4x. In the next few quarters, cash flows are expected to weaken because of the industry's inventory correction. Holders of the company's $200 million convertible notes have put the redemption of $126 million in March, 2005, as allowed under the terms of the notes. The company intends to refinance this amount or pay with cash, or a combination.

STMicroelectronics (STM )


Lease-adjusted total debt to EBITDA was a conservative 0.9x as of December 31, 2004, in line with the rating. The company warned of difficult market conditions in the coming months, however.

Texas Instruments (TXN )


Operating performance in the December, 2004, quarter remained relatively strong, with revenues up 14% year-over-year. However, the company has revised down guidance for the March, 2005, quarter because of rising customer inventories.

Expectations for 2005 are for a less robust year than 2004, although Texas Instruments remains well positioned in several key growth semiconductor markets. Texas Instruments' balance sheet remains strong: $400 million of 7% notes were paid off during the September, 2004, quarter, reducing funded debt to $383 million, which was essentially flat at $379 million as of December 31, 2004. Cash remains strong and is growing, at $6.4 billion as of Dec. 31, 2004.

United Microelectronics


The slowdown in the global semiconductor industry has affected United Microelectronics' operating performance. In the first quarter of 2005, capacity utilization rate is expected to decline to 60%, from 72% in the previous quarter, and average selling price is likely to be down 10%. Cash balances remain significantly larger than funded debt: NT$86.4 billion ($2.7 billion), compared with NT$38.3 billion as of December 31, 2004.

Vishay Intertechnology (VSH )


Revenues decreased 5% year-over-year in the December, 2004, quarter and adjusted EBITDA margins fell to 11%, from 17% the previous quarter, as downstream market slowdown and inventory accumulation curtailed demand for components. Charges taken in the quarter amounted to $84 million, for previously announced restructuring and asset writedowns. Operating volatility is incorporated into the rating, and a stronger financial profile continues to help offset business risk: Adjusted total debt-to-EBITDA was 2.8x and cash was $638 million on funded debt of $756 million as of Dec. 31, 2004.

Xilinx (XLNX )


The company, a leading supplier of programmable logic chips, reported sequentially lower December quarter sales, reflecting a slowdown in its served markets. Still, operating margins are near 30% notwithstanding high R&D expenses. The company consistently generates free cash flows, is debt-free, and had $1.6 billion cash as of Dec. 31, 2004.

* This rating was initiated by Standard & Poor's Ratings Services. It 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. Software Service Providers

Accenture (ACN )


In fiscal first quarter ended November, net revenues grew 14% overall, with outsourcing increasing 15% and consulting growing 14%. Additionally, each of the company's five operating groups experienced revenue increases (particularly the Financial Services and Products groups). Liquidity was strong, with cash and investments exceeding $3.2 billion. For fiscal 2005, Accenture projects net revenue growth to be in the 13% to 16% range, a target free cash flow of about $1.5 billion, and target new bookings in the range of $18 billion to $20 billion.

Activant Solutions


Activant recently announced plans to acquire Speedware Corp. for approximately $110 million, which would be funded by a proposed $120 million floating rate senior notes facility. This acquisition, which has not yet closed, would accelerate the company's efforts to expand its reach beyond its traditionally narrow focus on the automotive and retail hardware markets, where growth prospects are limited.

Although Activant's revenues have been essentially flat over the past several quarters, operating margins have improved and stabilized in the mid-20% area following efforts to rationalize products lines and improve operating efficiencies. Further improvements in profitability would require growth in the top line, as cost-reduction opportunities have become fewer. Debt protection metrics have gradually improved over the past few years.

Total debt-to-EBITDA as of December, 2004, was around 3x, and would increase to the low- to mid-4x range following the Speedware acquisition. While our ratings provided capacity to fund an acquisition such as this, Activant's capacity for additional debt leverage would be limited going forward.

Acxiom (ACXM )


Revenues grew 22% in the quarter (of which acquisitions accounted for 15% of that growth), and international expansion was strong. Free cash flow increased in the quarter to $59 million. The company has used its free cash flow to reduce debt and repurchase its shares. Currently, total debt to EBITDA is about 1.5x. The company's $175 million of subordinated notes are expected to convert to common stock.

Affiliated Computer Services (ACS )


Total revenue growth in the quarter was 11% (internal was 4%), and free cash flow was $120 million. During the quarter, Affiliated completed its new $1.5 billion, five-year revolving credit facility. The company expects fiscal-year revenue to be in the $4.4 billion area. The company has about $492 million of availability remaining under its share-repurchase program, and has announced it will purchase Mellon Financial's human-resources consulting and outsourcing unit for $445 million in cash. The company has available debt capacity, and generates good free cash flow to fund its strategic initiatives.

Alion Science & Technology


While Alion currently has a modest share of the highly competitive and consolidating government IT services market, favorable market conditions are expected to support the continuing growth of its business base. As annual revenues grow from current levels of around $300 million, both organically and through modest acquisitions, additional scale and operating synergies are expected to improve operating margins and increase free operating cash flow generation.

A large backlog, combined with no major recompetes over the intermediate term, offer a predictable source of revenue. During the past few months, Alion closed three modest size acquisitions, and the company has recently added an incremental $72 million to its term-loan facility, which will facilitate additional acquisition activity over the near term.

Amdocs (DOX )


Quarterly revenue trends have shown moderate increases, suggesting that customer demand is improving somewhat and stabilizing. The company ended the year with about $1.3 billion of cash and no near-term debt maturities.

Anteon International


Anteon's business pipeline should remain substantial, as federal agencies continue to outsource services and implement new defense and security initiatives. During 2004, Anteon made two modest acquisitions totaling about $45 million, which bolster the company's modeling, simulation, and security offerings. EBITDA margins have hovered at close to 10% over the past several quarters, while operating lease-adjusted debt to EBITDA, as of December, 2004, was 2.4x.

Although continued acquisition activity may increase leverage from current levels, we expect leverage to remain below 3.5x over the long run, which is comfortable at the current rating. Operating cash flow was weighed down by a temporary decline in accounts receivable turnover during the December, 2004, quarter, related to customer-process changes, but is expected to return to normal levels during 2005.



Following its acquisition of SETA Corporation in January, 2005, Apptis essentially doubled its government IT services business. However, Apptis still holds a modest share of this highly competitive and consolidating market. Pro forma operating lease-adjusted debt to EBITDA is expected to be above 6x following this transaction, which is high for the rating. However, a low fixed-cost structure, limited working-capital needs, and minimal capital expenditures should allow the company to generate modest levels of free operating cash flow and improve its financial profile over the next few quarters.

Aspect Communications (ASPT )


Aspect's EBITDA margins have remained in the mid- to high-20% range over the past several quarters. This has led to solid free operating cash flow generation and allowed the company to repay all funded debt in September, 2004. Revenues, however, remain flat, stabilizing around the $90 million to $95 million range per quarter, as revenues from new licenses remain at depressed levels.

Although Aspect's financial profile is currently strong for the rating, growth initiatives, once a general recovery in information-technology spending occurs, would likely require the use of cash and/or debt.

Aspen Technology (AZPN )

B/Watch Negative

Uncertainties surrounding an internal accounting investigation and a delayed filing for the quarter ended September, 2004, prompted the placement of the ratings on CreditWatch, with negative implications.

Automatic Data Processing (ADP )


Operating performance is in line with expectations, with 9% growth in revenues and earnings in the second quarter. Employer Services grew 7%, Brokerage Services rose 4%, and Dealer Services increased 11%. Cash and investments remained over $3 billion. The company guidance is for mid-single-digit revenue growth, and double-digit EPS growth in fiscal 2005.

Software Service Providers

BearingPoint (BE )

BB/Watch Negative

The CreditWatch listing reflects heightened concerns surrounding the refinancing of the company's bridge credit facilities, which mature May 22, 2005, because of BearingPoint's announcement that it has not met the March 16, 2005, deadline to file its annual report on Form 10-K. The company will be in technical default on its interim credit facility if audited financial statements are not received by Apr. 29, 2005. Additionally, the company's review and evaluation of its internal controls over financial reporting to date have identified a number of control deficiencies, some of which will be classified as material weaknesses. A loss is expected for the fourth quarter (prior to a goodwill impairment charge), and the company may record a loss for the year ended Dec. 31, 2004.

CACI International (CACI )


Expectations are that government-related IT outsourcing will remain robust over the intermediate term. A strong backlog and gradually improving operating margins should continue to allow for solid free operating cash flow generation. As of December, 2004, CACI had only $20 million outstanding under its $200 million revolving credit facility, which provides sufficient liquidity to fund its acquisitive growth strategy. CACI continues to face lawsuits surrounding its alleged involvement in the abuse of Iraqi prisoners.

Cap Gemini


Cap Gemini retains a sound liquidity situation, with a net €400 cash position and low near-term maturities. We still expect the company's operating profit margin to exceed 3% in 2005 (at constant accounting rules and before restructuring expenses), from 0.9% in 2004. Most of the improvement should come in second-half 2005, however, because of the difficult U.S. situation and the ramp-up costs of the TXU contract. Also, the extent of future restructuring expenses for 2005 is as yet uncertain, while cash costs of at least €150 million will continue to curtail the group's free operating cash flow generation.

CCC Information Services (CCCG )


While revenue growth is expected to remain modest, EBITDA margins in the mid- to high-20% range should allow CCC to improve its financial profile over the intermediate term as debt is repaid through a cash sweep provision under the credit facility. Operating lease-adjusted debt to EBITDA remains below 4x, which is comfortable for the current rating. Intermediate term contracts with both insurance carriers and repair shops provide CCC with a largely recurring and visible revenue base.

Ceridian (CD )


Ceridian announced that it will not meet the filing deadline of March 16, 2005, for the filing of its Annual Report on Form 10-K for the year ended December 31, 2004. The company expects to report its fourth quarter and 2004 earnings and to provide guidance for 2005 within the next few weeks, and then to file its 10-K with the SEC.

The negative outlook is based on the accounting review currently underway, focusing on the capitalization and expensing of certain costs in its U.S. Human Resources Solutions business. Any meaningful impact to profitability or cash flow could lead to a lower rating.

Certegy (CEY )


In the fourth quarter, revenues grew 13%, driven by growth in card services (13%) and check services (+14%) with consolidated operating margins growing to almost 20%. An increase in debit transactions contributed to overall card growth, while check guarantee volume was driven by strong retail sales. Certegy repurchased about $100 million of stock in 2004. In 2005, the company expects 10% to 12% revenue growth, operating income growth of 12% to 14%, and capital expenditures in the $65 million range.



Revenue growth for fiscal 2004 was 20% and EBITDA margin has been 12%, the highest of the company's cycle. Pro forma for the transaction, debt to EBITDA will be about 5.0x, with little opportunity for deleveraging, given modest free cash flow.

Computer Associates (CA )


Both revenues and cash flow from operations increased about 9% in the third quarter of 2005. The company ended the quarter in a net cash positive position. Computer Associates closed on a new undrawn $1 billion credit facility and issued $1 billion of senior notes which will be used to redeem a $825 million maturity due in April, and provide the flexibility to call $650 million of convertible notes in March.

Computer Sciences (CSC )


Computer Sciences completed the Dyncorp International divestiture for $850 million (a $400 million pre-tax gain), and plans to use the proceeds to reduce debt. During the third quarter, revenues increased 6% and net income improved 9%. Additionally, the company announced over $5 billion of new business, and generated $82 million of free cash flow.

Convergys (CVG )


The company took a $37 million restructuring charge in the fourth quarter ($32 million in cash), mostly to reduce headcount. Operating margins were lower than historical levels, but are expected to gradually improve as restructuring actions take hold. In the fourth quarter, overall revenues grew 13%, driven by a 21% increase in CMG revenues offset by a 3% decline in IMG.

Operating performance has been affected by pricing pressures affecting both segments, coupled with increased investment in CMG's employee care operations. For 2005, Convergys expects about 10% growth in revenue and operating income. Convergys' financial profile remains appropriate for the rating.

Electronic Data Systems (EDS )


Full-year 2004 revenues were flat, free cash flow was $305 million (excluding the $522 million paydown of the NMCI securitization facility). In the fourth quarter, operating margins improved to 5.3%, and the company ended 2004 with $3.3 billion of unrestricted cash. Electronic Data Systems (EDS) expects 2005 revenue to be flat, with free cash flow in the range of $500 million to $700 million.

Our ratings could be lowered if EDS fails to demonstrate its ability to gradually improve its operating margins and free cash flow, while expanding its core business over time. We expect the NMCI contract to show modest improvements in negative cash flows in 2005 and be breakeven or better in 2006.

Equifax (EFX )


In 2004, Equifax increased revenues 5%, and increased free cash flow 9%, to $262 million. The company provided 2005 guidance of revenue growth of 6% to 9% and free cash flow above $255 million. The company's international operations performed strongly, with Europe posting 23% growth with a 21% operating margin. Equifax repurchased $138 million of stock.

Fidelity National Information Services


While recent operating performance has been good, with operating margins exceeding 20%, the company has grown rapidly through acquisitions, and has yet to demonstrate a sustained track record of performance. Analytically, Standard & Poor's has attributed little credit support by the parent company, FNF.

First Data (FDC )


Western Union increased revenues 14% and had 33% margins; Payment Services grew 12% with 32% margins; Merchant Services revenues rose 44% with 26% margins; and Card Issuing Services was up 14% with 21% margins. For the year, consolidated revenues improved 19%, and operating margins were 23%.

In 2004, First Data generated over $2 billion of free cash flow, repurchased about $3.7 billion of stock, and ended the year with about $4.6 billion of debt and $900 million of cash. In 2005, the company expects overall 10% growth, with cash from operations in the range of $2.4 billion and $2.6 billion, and capital expenditures of $500 million to $600 million.

Fiserv (FISV )


Fiserv's revenue grew 29% and net income grew 20% in 2004. Free cash flow for 2004 was $537 million, an 18% increase over 2003. Fiserv announced that it would sell its securities clearing business for about $365 million. Fiserv closed four acquisitions in 2004, and ended with over $500 million of cash and equivalents.



Getronics's revenues in the fourth quarter of 2004 continued to decline by a substantial 10%, partly as a result of the group's strategy to reduce unprofitable hardware sales. Service revenues declined too, however, by 7%. Another 2.2% of the 2003 revenue base was taken out of the group's SG&A cost base, enabling Getronics to post a 4.5% EBITDA margin before restructuring charges. The Pinkroccade acquisition, which is expected to increase Getronics' net debt by €100 million (equivalent to the group's 2004 debt reduction), is progressing as planned.

Global Cash Access


Global Cash Access continues to produce good profitability from higher ATM use and larger cash advances, driving fiscal 2004 sales increases of 12%. EBITDA margins have remained steady at about 22%, although some erosion is expected as the company establishes itself as a stand-alone entity. While total debt to EBITDA remains over 5x as of December, 2004, we expect the company to lower leverage through debt repayment over the intermediate term, as it generates good free cash flow.



An intensely competitive marketplace, combined with pressures from the emergence of alternative technologies, continue to constrain revenues in GXS' core EDI business. EBITDA margins improved substantially in the September quarter as a worldwide restructuring program began to gain traction. We expect GXS to meet operational expenditures, including capital expenditures of around $30 million and interest expense of about $50 million, through a combination of cash flow and cash balances.

GXS amended key covenants under its bank facility twice in 2004, which provided some additional cushion. In October, GXS' sponsor purchased IBM's EDI business, which will be combined with GXS in the near term and may provide some benefits through scale. While the capital structure and profitability of the combined company currently is unknown, it's likely that the ratings will remain in the 'B' category, given the company's business profile.

Mitchell International


Mitchell's operating lease-adjusted debt to EBITDA remains above 5x following a refinancing and dividend payment during 2004. However, we expect Mitchell's largely recurring revenue base and relatively stable operating margins will allow the company to continue to generate modest levels of free operating cash flow, despite expectations for relatively flat revenue. Mitchell's financial profile should improve over the intermediate term, as free cash flow is used to repay debt according to a cash flow sweep provision under the credit facility.

NDC Health


NDC reported modest sequential quarterly revenue and EBITDA improvement, up 7% and 8%, respectively, although pricing and cost pressures in its core pharmaceutical business continue to force the company to reduce headcount in order to sustain current margins. Free cash flow is very thin and debt to EBITDA, on a run rate basis, is about 4x, unlikely to change in the near term.

Oracle (ORCL )


Although the PeopleSoft acquisition has currently added over $9 billion of debt, Oracle remains in a modest net cash position and we expect the company to deleverage rapidly, from peak levels of about 2x debt to EBITDA, because of its strong free cash flow generating ability, expected to exceed $2.5 billion per year over the near term. The company is in the process of establishing a more permanent financing plan to take out the bridge facility, which is expected to include a mix of available cash and debt.

Oracle had combined pro forma cash of about $10 billion, and is expected to continue to generate very strong levels of free operating cash flow. Oracle's bid to acquire unrated Retek (RETK ) is not expected to have an impact on the ratings or outlook on Oracle. Minneapolis-based Retek supplies software to retailers. Oracle possesses adequate financial flexibility to fund this acquisition from cash on hand and available sources of liquidity without materially weakening the company's financial profile.

Per-Se Technologies (PSTI )


Revenue and profitability have been stable for fiscal 2004, with revenues up 5% from the year earlier and EBITDA margin consistently around 16%. Debt to EBITDA at 3x is within rating expectations and flexibility is adequate with cash of $42 million, free cash flow, and unused bank lines. Software Service Providers

Red Hat (RHAT )


Rapid subscriber growth continues to fuel 2004 growth rates of over 50%. EBITDA margin has been maintained at 20%. Still, debt to EBITDA is over 15x on a run-rate basis. Cash in excess of debt provides ratings support. Expectations are for measured acquisitions and share repurchases.

Reynolds & Reynolds (REY )


In the first quarter, revenues for the software solutions segment declined 3% year over year, the documents segment declined 5%, and the financial services segment declined 18% (to $7 million) for a consolidated 4% decline. However, cash flow generation supports the current ratings.

We expect Reynolds & Reynolds gradually to restore operating performance to historic levels as the company's sales force becomes more productive, and order rates improve as the company successfully shifts to its new product suite. The company's 2005 guidance is for flat revenues, mid-teens operating margins, and return on equity of 18% to 19%. Additionally, the company announced the appointment of a new CEO.

Science Applications International


Ratings were affirmed and removed from CreditWatch with a negative outlook following the sale of its Telcordia Technologies subsidiary or about $1.3 billion in cash. While SAIC's cash position will improve following the Telcordia sale to about $3 billion (compared with about $1.5 billion of debt), SAIC's business diversity has been diminished with the loss of Telcordia's higher margin and predictable cash flow generation. Telcordia -- with revenues of about $875 million and $184 million of EBITDA -- represented about 25% of SAIC's profits.

Securus Technologies


The ratings on Securus reflect its narrow focus within a competitive niche marketplace, aggressive financial profile, and the potential challenges with the integration of Evercom. These risks are partially offset by a largely recurring revenue base and the expectation for relatively stable operating margins, which should allow for continued modest free operating cash flow generation.

As Securus integrates its two operating subsidiaries, synergies from the leveraging of Evercom's billing and bad debt management systems, combined with operating efficiencies gained through scale, should lead to EBITDA growth and an improved financial profile. Since the rating was initially assigned, the company has not yet been required to file financial statements.

SI International


The recent acquisitions of Shenandoah Electronics and Bridge Technology broaden SI's customer base into intelligence agencies and strengthens the company's relationship with the Homeland Security Dept., in addition to adding scale. However, SI still holds a relatively modest share of the highly competitive and consolidating government IT services market.

Pro forma operating lease-adjusted debt to EBITDA is expected to be about 3.6x following these transactions, which is solid for the rating. A low fixed cost structure, limited working capital needs, and minimal capital expenditures should allow the company to generate modest levels of free operating cash flow, which should support the company's acquisitive growth strategy.

SunGard Data Systems (SDS )

BBB+/Watch Negative

SunGard announced that its board of directors has authorized its management and advisors to engage in discussions for a sale of the entire company. In October, Standard & Poor's placed SunGard on CreditWatch, with negative implications, following the announced plan for its disaster-recovery technology unit to become an independent, publicly held corporation through a tax-free spin-off to shareholders. We will continue to monitor the events as they unfold, and the impact that they may have on SunGard's credit quality.

Syniverse Technologies (SVR )


In February, 2005, proceeds from a new bank facility, along with approximately $370 million of proceeds from Syniverse's initial public offering, were used to redeem $252 million of preferred stock (which had been treated as equity), repay all borrowings under a previous credit facility, and tender for a portion of the company's senior subordinated notes.

Although these transactions improved Syniverse's financial profile, both in terms of leverage as well as financial flexibility, the company's rating and outlook remained unchanged, constrained by the company's business risk profile. Syniverse is expected to continue to generate moderate levels of free operating cash flow, which should support acquisitions or other investments necessary to facilitate establishment of an international footprint.

Telcordia Technologies


Telcordia has experienced double-digit revenue declines over the past three years. However, we expect stabilization and modest growth over the next few years as telecom service providers begin to reinvest in infrastructure, offsetting likely continued modest declines in profitable maintenance revenues.

Titan (TTN )


Titan's ratings were recently affirmed and removed from CreditWatch, following the conclusion of investigations by the Justice Dept. and the SEC surrounding the company's alleged violation of the Foreign Corrupt Practices Act. Despite distractions associated with these investigations, in addition to the failed merger with Lockheed Martin and continuing allegations surrounding Titan's involvement in the abuse of prisoners in Iraq, operations have performed well.

Operating lease adjusted debt to EBITDA, adjusted for nonrecurring charges, improved to the low 4x area as of December, 2004, from 4.5x one year earlier. Titan's contract win rate has also remains strong. A strong backlog, at about $6.2 billion ($935 million funded), also preserves revenue visibility.



Revenues in the POS division continued to decline during the December quarter, mainly because of a decrease in transaction volumes as First Data continues to move transactions away from Transaction Network Services (TNS). This loss was offset by rapid growth in TNS' international point-of-sale business, which posted more than 60% revenue growth during 2004 compared to 2003. TNS also raised about $21 million in cash through follow-on equity offerings in the December, 2004 quarter, which was used to pay down debt. While this transaction improved TNS' already strong financial profile, ratings remain constrained by the company's narrow business profile.



UGS increased revenues to over $1 billion in 2004 (+14%), while EBITDA rose 16% over the previous year to $258 million. Ratings are currently constrained by UGS' high leverage of about 5x.

Unisys (UIS )


Revenues in the fourth quarter of 2004 declined about 7% year over year, while full year free cash flow was in the $30 million area, from expected levels of more than $50 million. For the full year, revenues decreased by 2%, reflecting a 10% decline in technology sales offset by an increase of 1% in services revenue.

The company reported an operating loss in 2004 reflecting a $126 million impairment charge, $87 million of cost restructuring actions, and $94 million of pension expense. The company received a waiver of one of its financial covenants, and has full availability under its $500 million revolving credit facility. Unisys' good business position and services backlog should limit downside risk. Despite a solid financial profile for its rating, upside ratings is constrained by Unisys' inconsistent operating performance.

VERITAS Software (VRTS )

BB+/Watch PositiveThe CreditWatch placement follows the announced merger agreement of Veritas with unrated Symantec (SYMC ) in an all-stock transaction valued at about $13.5 billion. The combined company will have about $5 billion in revenues, additional business diversity, and strong financial flexibility with modest debt outstanding and large cash balances. Our preliminary assessment is that the combined company has an investment-grade credit profile.

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