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Fitch: U.S. EMS Sector Credit Quality Improves
September 18, 2009 | Business WireEstimated reading time: 1 minute
In a special report issued today, Fitch Ratings says the credit quality of rated U.S. EMS issuers has improved as companies allocated cash proceeds from recent reduced working capital requirements toward debt reduction. Fitch's Outlook for the sector is now "Stable" versus a "Negative Outlook" at the beginning of the year. Fitch expects moderate revenue growth over the intermediate term coupled with marginal improvement in profitability to further stabilize and improve credit metrics. In addition, liquidity remains strong for the sector with minimal near-term maturities.
Results for the sector through the first half of 2009 were predictably dour due to the overall economic environment but exhibited signs of stability that the sector has been missing over the past several years. Specifically, it appears competitors have maintained rational behavior in regard to pricing, which when combined with reduced overall capacity in the sector has enabled EMS vendors to maintain margins at or above levels of early 2007 despite declines of more than 20% in revenue.
Fitch believes management teams appear to be taking a disciplined approach to their respective balance sheets and expects only modest share repurchases, if any, over the next year in preference to preserving liquidity to support increased working capital requirements once normalized revenue growth returns.
There are credit concerns however, with a focus on the potential for pricing pressure to negatively affect profitability and cash flow going forward. While Fitch believes pricing has remained healthy so far through the downturn, several EMS vendors have commented on increasing price competition in the industry. In addition, further revenue declines could lead to additional restructuring activity, negatively affecting cash flow for several quarters.
For a detailed analysis on the EMS sector, download the special report, EMS Review: Outlook Improves as the Sector Turns the Corner, available at www.fitchratings.com.