Fitch Ratings has affirmed the Issuer Default Rating (IDR) and outstanding debt ratings of Ingram Micro Inc. (IM) as follows:
--IDR at 'BBB-';
--Senior unsecured credit facility at 'BBB-';
--Senior unsecured term loan facility at 'BBB-'.
The Rating Outlook is Stable.
The ratings and Stable Outlook reflect the following considerations:
--IM is the largest global wholesale distributor with broad customer diversification. Additionally, the company continues to diversify geographically, principally in the Asia Pacific region;
--IM's financial and operating profile remains in line with Fitch's expectations with revenue growth slightly above global GDP, EBIT margins largely steady near 1.5% and consistent CCC days in the low 20-day range. Fitch anticipates that, in-line with IM's financial model, top line growth and operating margins will remain under pressure over the next several quarters, driven by the ongoing economic weakness and a slowdown in IT spending;
--IM maintains a relatively conservative balance sheet despite significant working capital requirements which are primarily financed through on-balance sheet A/R securitization facilities, as well as the company's recent term loan facility;
--IM continues to use free cash flow (FCF) for acquisitions as part of its strategy to expand its geographic footprint and expand into higher margin distribution and service niches. IM has also begun repurchasing shares, with its implementation of a $300 million program in late 2007. Fitch expects IM to continue to use FCF to fund shareholder friendly activities with the potential for some additional debt financing of acquisitions;
--Although revenue growth has been slower in recent quarters, IM continues to outperform its closest competitor, Tech Data, in terms of profitability and geographic diversification, particularly in Asia Pacific.
Rating strengths include:
--IM's scale of operations including its global footprint, financial capability and breadth of product offering, which provides a competitive advantage and a moderate barrier to entry;
--Importance of the wholesale distribution model for OEMs, particularly for serving the small to medium business (SMB) market which is one of the fastest growing end-market segments for IT equipment.
Rating concerns include:
--Exposure to the cyclicality of IT demand and general global economic conditions. Current weak macroeconomic conditions are expected to continue to weigh on IM's results for at least the next several quarters;
--Low margin and high working capital nature of the wholesale distribution model which can lead to significant volatility in profitability and free cash flow;
--Expectations for continued acquisition activity due to the fragmentary nature of the competitive landscape worldwide in addition to IM's strategy of expanding into new product and geographic markets in addition to share repurchase.
Liquidity was solid as of June 30, 2008 and consisted primarily of $748 million in cash and cash equivalents, an undrawn $275 million senior unsecured revolving credit facility expiring Aug-2012, an undrawn (Australian) $100 million senior unsecured revolving credit facility expiring December 2008 and approximately $1.5 billion of available capacity under various accounts receivable securitization programs of which approximately $1.16 billion was undrawn. These accounts receivable facilities include a $600 million US facility that expires in July-2010 as well as several smaller facilities in Canada (expired in Aug-2008), Europe and Asia-Pacific.
Ingram Micro also has several additional credit facilities it utilizes for liquidity purposes with aggregate capacity of approximately $925 million, of which $789 million was available to the company. Additionally, in July 2008, IM entered into a $250 million senior unsecured term loan facility, which will mature in Aug-2012. The proceeds of the term loan will be used to fund working capital needs and replace capacity associated with the company's expiring AR securitization facilities, including the (Canadian) $150 million AR facility expiring Aug. 31, 2008. Fitch expects quarterly FCF to remain volatile in the foreseeable future due to changes in working capital requirements but should average from zero to slightly positive on an annualized basis given current growth expectations. Fitch expects that IM's growth rate will be constrained for the next several quarters, and expects a corresponding decline in working capital needs would lead to an increase in free cash flow.
Total debt was $480 million as of June 30, 2008 and consisted primarily of $294 million outstanding under the $600 million US accounts receivable securitization program which matures in Jul-2010, $51 million outstanding under an Asia-Pacific accounts receivable securitization program which matures in Sept-2008 and $135 million outstanding under various revolving credit facilities. Pro forma for the July 2008 term loan, Fitch estimates that total debt would have been $730 million.
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