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30 May 2000
MOODY'S DOWNGRADES CREDIT FACILITY OF FORMICA CORPORATION TO B1; CHANGES OUTLOOK TO NEGATIVE FROM STABLE
Moody's Investors Service has downgraded the $342.2 million credit facility on Formica Corporation to B1 from Ba3 and assigned a B1 rating to a new $110 million term loan within the amended credit facility. Moody's also confirmed the B3 rating on Formica Corporation's $215 million senior subordinated notes due 2009 and the B2 issuer rating. The senior implied rating is confirmed at B1, but the rating outlook is changed to negative from stable.
The ratings reflect Formica's weaker than expected financial performance over the past few years, as well as its high leverage, and thin interest coverage. It also reflects Formica's vulnerability to extensive near-term integration risks (the acquisition of the surfacing division of Perstorp Surface Materials AB ("PSM") -its aggressive acquisition strategy - and to exchange rate exposure in its European and Asian operations. These factors, coupled with the company's vulnerability to cyclicality in the decorative surfacing products market, pose additional threats to the bottom line.
The negative outlook reflects the risk of continued deterioration of profitability in North America as the economy may be reaching its peak, the possibility of not achieving the expected cost savings from restructuring along with the competitive environment. If core operating profits do not start to improve and adequately cover interest there is a strong possibility a downgrade may occur in the near future.
Moody's ratings concerns are tempered by Formica's 87-year history, its strong global market position, broad brand awareness worldwide, and the positive efforts the current management team has made since returning to the company in April 1998. Formica's current management team proved its ability to weather tough times when, during the recession and slow recovery period from 1990 through 1994, it grew sales to $489 million from $437 million. EBITDA improved marginally during that period, to $71.4 million from $66.1 million. In addition, in the two years that the former management team has been back, they have improved EBITDA margins from 7.2% in 1997 to 10.8% at year-end 1999.
Also supporting the ratings are the company's significant investment of capital expenditures over the past four years, its global distribution network, and the diversification of its sales revenues, which flow from both the new construction and the repair and remodeling segments, as well as from both the residential and commercial markets. In addition, an $80 million equity infusion by the sponsors for the PSM transaction (DLJ Merchant Banking Partners II.L.P. and CVC Capital Partners, Limited) enhances the capital structure.
Formica has a senior secured credit agreement with DLJ Capital Funding, as syndication agent, for $342.2 million, expiring May 2004. The facility includes a $150 million revolver that includes four $5 million facilities with the UK, French, Canadian, and Spanish subsidiaries as borrowers, a $85 million amortizing term loan that is broken out among the US, UK, and Canadian subsidiaries at $35 million, $40 million, and $10 million, respectively (each priced at Libor plus 2.75%). In addition the credit facility is comprised of a new $110 amortizing term loan to be used to acquire PSM, (priced at Libor plus 3.50%).
The facility is secured by all property and assets (tangible and intangible) of Formica and its present and future domestic subsidiaries and 100% of the capital stock of Formica and its domestic subsidiaries, and 65% of the capital stock of non-U.S. subsidiaries of Formica (including PSM Holdco).
The downgrade of the $342.2 million bank facility rating to B1 from Ba3 reflects its increased amount of $140 million, its secured position, the collateral package supporting the facility which also takes into consideration that the banks have liens only on U.S. assets not on the foreign assets, and guarantees from all of Formica's existing and future subsidiaries. The B3 rating of the $215 million senior subordinated notes also reflects their contractual subordination to borrowings under the $342.2 million secured credit facility.
The PSM transaction, which is valued at approximately $190 million, including fees and expenses, is 6.2 times pro forma 1999 EBITDA of $30.7 million. The $30.7 million includes expected cost savings in initial restructuring of $12 million. On a pro forma basis, without the cost savings, the multiple is a high 10.2 times.
Formica is highly leveraged with the ratio of total debt to capitalization equaling 78% and debt-to-EBITDA is approximately 4.6 times. Moody's expects it will be difficult to reduce debt in the near-term. Including pro forma for the PSM and STEL acquisitions Formica's book equity is $141 million. After subtracting goodwill, however, it is a negative $61 million at December 31, 1999. Total debt as of December 31, 1999, was $501 million (excluding preferred of $240 million). Sales and total assets for twelve months were $833 million, and $943 million, respectively.
Formica is depending on the success of two cost-savings programs. The first program centers on an anticipated $25 million in cost savings to be generated over the next two years from Formica's acquisition of PSM. The acquisition brings Formica expanded market positions in Europe, Asia and South America.
The second program involves a restructuring of its domestic operations, initiated in the first quarter of 2000 from which Formica is anticipating significant cost savings, of more than $7 million. The program centers on headcount reductions from the closing of the Mt. Bethel, PA solid surfacing facility and rationalizing sales, manufacturing and administration.
The new management team has done a good job at getting the SG&A margin down to 25.3% as of December 31, 1999, from 29.4% as of December 31, 1998. The target level, however, is 24%, the level of the early 1990s.
Formica generated 36% of its sales outside of North America based on figures through December 1999, approximately flat with 1998; however all of its operating income came from Europe and Asia. The North American market continues to be very competitive. Gross profit margins have improved, on a year-over-year basis at December 31, 1999, to 28.4% from 27.7%. But competition, product mix and lower than planned pricing have contributed to a decline in profitability. In response to these pressures, Formica this year formulated an action plan that should improve mix and margins and has implemented price increases.
Formica retains significant brand awareness and leadership in the high pressure laminates (HPL) market. The worldwide HPL market is approximately $3 billion and Formica has a 22% market share. It is the largest producer of HPL in Europe, the second largest producer in North America next to Wilsonart (a subsidiary of Illinois Tool Works Inc.), and one of the largest producers in Asia.
HPL products are used in applications requiring surface durability including kitchen countertops, furniture, doors, and flooring. Formica's products are marketed under the Formica, Surell, and Fountainhead brand names through more than 7,500 locations worldwide by domestic and international independent distributors and dealers. The company also has its own sales force.
1999 sales by category were as follows: high pressure laminates 83%, solid surfacing 7%, and flooring 10%, broken down regionally with North America furnishing 64% of sales, followed by Europe with 24%, and Asia at 12%. In the broad class of residential versus commercial sales, in the United States, sales are split evenly. In Europe, commercial sales make up a larger percentage of total sales than residential sales do. Within both residential and commercial markets, repair and remodeling account for a larger percentage of sales than new markets do.
Formica Corporation, established in 1913 and headquartered in Cincinnati, Ohio, is one of the largest producers of decorative high pressure laminates ("HPL") in the world and a leading brand name in the decorative surfacing products market.
No Related Data.
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