http://www.industryanalysts.co...Group_Companies.html
The following appears on reuters.com
-- Ricoh likely requires more time to improve its profitability and cash flows than we expected because the strong yen and impairment losses weigh on company earnings.
-- We lowered the long-term ratings on Ricoh and its group companies one notch to 'A' and removed the ratings from CreditWatch with negative implications. We affirmed the 'A-1' short-term corporate credit ratings.
-- The outlook on the long-term corporate credit ratings is negative, based on our view that a sluggish global economy--including falling demand for Ricoh's main products in European economies, which had shown relatively strong demand--may slow any recovery in earnings.
Standard & Poor's Ratings Services today lowered its long-term corporate credit and debt ratings on Ricoh Co. Ltd. one notch to 'A' from 'A+'. The downgrade reflects our view that Ricoh's expected losses in fiscal 2011 (ending March 31, 2012) are likely to weaken measures of its financial performance, reducing prospects for Ricoh's profitability and cash flow to swiftly recover to levels commensurate with the previous rating. We also lowered our long-term ratings on Ricoh Leasing Co. Ltd. and Ricoh's overseas subsidiaries. We have removed the long-term ratings on the Ricoh group companies from CreditWatch with negative implications, where we placed them Nov. 7, 2011. The outlook on the long-term corporate credit ratings is negative. We affirmed the 'A-1' short-term corporate credit ratings on the companies.
Ricoh cut its business performance outlook Jan. 31, 2012, forecasting a consolidated operating loss of JPY18 billion for fiscal 2011 compared with a JPY60.1 billion profit in fiscal 2010. The main factors behind the revised forecast are the yen's continuing strength; the impact of the Great East Japan Earthquake and Thai floods in 2011; restructuring costs; and JPY36.9 billion impairment losses on goodwill and long-term assets related to its U.S. production printing business. We believe a continuation of the current harsh business environment, including the strong yen, may delay Ricoh's ability to improve measures of its profitability and cash flow. The company's ratio of debt to EBITDA (adjusted for captive finance and lease and pension liabilities, among other factors) worsened temporarily to above 3x in fiscal 2011 compared with 1.8x in fiscal 2010, and we believe it will take a few years for debt to EBITDA to improve to levels commensurate with the previous ratings. Ricoh's funds from operations (FFO) to total debt had long hovered over 100% until Ricoh's acquisition of IKON Office Solutions in 2008 and the global financial crisis of 2008. The ratio worsened to 30% in fiscal 2008 but recovered to around 50% in fiscal 2009 and fiscal 2010. However, it is likely to fall far short of 45% in fiscal 2011, and at this point we see little likelihood of the ratio climbing above 45% over the next one to two years.
We are of the opinion that Ricoh's competitiveness in its main imaging and solutions business, relatively light capital investment burden, and potential for higher earnings in growth markets underpin the company's business. In addition, restructuring efforts are likely to produce a degree of improvement in its earnings in Japan and North America. Therefore, we limited the downgrade to one notch. Although Ricoh's market share in its core copiers and multifunctional printers business has declined over the past three years, it remains a leader in major markets such as Japan, North America, and Europe, and we view this market position as positive for its credit quality. Furthermore, we believe Ricoh can use its existing sales network and clientele to turn its growth businesses, such as managed document services and production printing, into stable earnings sources.
The outlook on the long-term corporate credit rating is negative, reflecting our view that it may take time for earnings to recover because demand in European countries, which was relatively strong until recently, is shrinking and concerns loom over the direction of their economies. Pressure on the ratings may grow if we do not see clear signs of improvement in measures of Ricoh's financial performance, likely due to a further deterioration in the company's business performance or new business investments. We may consider downgrading Ricoh if there is a lower likelihood of its debt to EBITDA improving to below 2x over the next few years. Conversely, we may consider revising the outlook to stable if the company further diversifies its earnings sources, such as by increasing earnings from its production printing business, or if measures of its profitability drastically improve. However, we believe the possibility of an outlook revision is low in the near term.
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