FOR IMMEDIATE RELEASE SYMBOL: GISX
Thursday, August 25, 2005 TRADED: Nasdaq
MOODY’S UPGRADES GLOBAL IMAGING SYSTEMS CREDIT RATINGS
TAMPA, Fla., Aug. 25 -- The following press release was issued earlier today by Moody's Investors Service:
MOODY'S UPGRADES GLOBAL IMAGING SYSTEMS' CREDIT RATINGS
(CORPORATE FAMILY AT Ba2); OUTLOOK STABLE
Approximately $335 Million of Rated Debt Securities Affected
New York, August 25, 2005 -- Moody's upgraded all of the credit ratings of Global Imaging Systems, Inc. (Global Imaging) and changed the ratings outlook to stable from positive. The ratings upgrade reflects strong top line growth and solid operating margins, successful integration of recent acquisitions, consistent free cash flow generation and a large and diverse middle market customer base.
Moody's upgraded the following ratings:
$70 million senior secured revolver due 2009, upgraded to Ba2 from Ba3
$207 million senior secured term loan due 2010, upgraded to Ba2 from Ba3
$57.5 million convertible senior subordinated notes due 2008, upgraded to Ba3 from B2
Corporate family (formerly senior implied), upgraded to Ba2 from Ba3
The ratings outlook has been changed to stable from positive.
The Ba2 corporate family rating reflects strong financial performance and credit metrics that are solid within the ratings category. Revenues grew about 10% in the fiscal year ending March 31, 2004 and 23% in fiscal 2005. Organic revenue growth during these periods was 6% and 5%, respectively. Operating margins have exceeded 10% each of the last 3 years, above most of its industry competitors. Free cash flow to debt has been solid, ranging from 15% to 23% over the last 3 years. The ratio of Debt to EBITDA (based on Moody's standard analytical adjustments) was 2.7x for the twelve month period ended June 30, 2005.
Global Imaging is a leading provider of office technology products to middle market customers, targeting businesses with fewer than 1,000 employees. The company has grown through a series of more than 70 acquisitions since its founding in June 1994. The largest acquisition, Imagine Technology Group, Inc., was completed in May 2004 for total consideration of $131 million. Key elements of the acquisition strategy include organizing acquired companies into core and satellite offices, retaining pre-acquisition names and management teams, and consolidating administrative functions into core companies. The company has a strong track record of integration success, with no restructuring charges
recorded in the last 3 years and EBITDA margins in excess of 13%. The company has a publicly stated goal of acquiring $60-$100 million of revenues annually over a three year period.
The ratings also benefit from a significant recurring revenue stream and a diverse customer base. About 90% of office automation sales are accompanied by service contracts. Service and supplies comprised over 45% of gross profit in the 2005 fiscal year. Global Imaging has about 180,000 customers and the top 5 customers account for less than 5% of sales.
The ratings are constrained by the highly competitive nature of the industry, rapid technology change and the company's reliance on its key vendors. Competition includes large independent dealers, large national competitors, manufacturers' sales and service divisions and office superstores. Competition from the large national competitors such as IKON Office Solutions and Xerox Corporation may increase as these companies focus more attention on middle market companies for growth. Pricing pressure on equipment sales may increase as competitors pursue after-market service revenues. It should be noted, however, that the company has maintained gross margins in the range of 38%-39% in each of the last 3 years.
The company's success depends on its ability to acquire the latest office equipment technology from its vendors at competitive prices. Although the company uses multiple vendors, the 3 largest vendors accounted for about 55% of equipment, parts and supplies purchased in fiscal 2005. The ratings reflect the risk that key vendors may fail to anticipate which products or technologies will gain market acceptance or may seek to expand their direct sales business at Global Imaging's expense and capture additional gross margin on equipment sales. However, the company's relationship with multiple vendors and its effective distribution channel for middle market customers (which may be difficult for the original equipment manufacturers to replicate) mitigates these risks.
Moody's expects that liquidity will continue to be very good in the near term, supported by solid cash generation, which should amply cover ongoing cash requirements. The company has limited near term debt maturities and $64 million available under its $70 million revolving credit facility as of June 30, 2005.
The stable ratings outlook anticipates modest organic growth from the company's middle market customer base, stable operating margins and a conservative leverage profile. Although competition is expected to increase, Moody's expects the company's financial performance to benefit from increased sales of color equipment, which generates higher per click service revenues. Acquisitions and share repurchases are expected to be funded primarily from free cash flow from operations.
The ratings outlook could be changed to positive if the company grows equipment and service revenues in the context of stable operating margins, effectively integrates acquisitions and maintains a conservative financial policy so that the ratio of debt to EBITDA (based on Moody's standard analytical adjustments) approximates 2.0 times and the ratio of free cash flow to debt approaches 20%. The ratings outlook could be changed to negative if operating margins erode materially or if the ratio of debt to EBITDA is expected to rise above 3.5 times or the ratio of free cash flow to debt is expected to fall below 12%.
The Ba2 rating on the credit facility, notched at the corporate family rating level, reflects the preponderance of senior secured debt in the capital structure. The credit facility is secured by substantially all the assets of the company.
The Ba3 rating on the convertible senior subordinated notes, notched one level below the corporate family rating, reflects Moody's practice of compressing the notching of subordinated debt at corporate family rating levels of Ba2 and above. The notes are unsecured obligations and are subordinated to all existing and future senior indebtedness.
Global Imaging Systems, Inc. based in Tampa, Florida, is a leading provider of complete office technology solutions to the middle market businesses. Revenue for the twelve month period ended June 30, 2005 was approximately $960 million.
