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Rating Action:

Moody's assigns initial ratings to Intelligrated: CFR at B2

Global Credit Research - 25 Jan 2011

$175 million of rated bank credit facilities

New York, January 25, 2011 -- Moody's Investors Service assigned initial B2 Corporate Family and Probability of Default ratings to Intelligrated, Inc. ("Intelligrated"). At the same time, B2 ratings were assigned to the company's secured bank term loan and revolving credit facilities. The rating outlook is stable.

RATINGS RATIONALE

The B2 Corporate Family and Probability of Default ratings ("CFR" and "PDR" respectively) recognize the company's modest revenue size but strong position within a relatively narrow niche. It further considers regional and customer concentration issues as well as ongoing cyclicality. The ratings also incorporate high leverage deployed in the capital structure partially mitigated by strong coverage metrics for the rating category and anticipation of sustainable free cash flow. The latter is expected to benefit from relatively low re-investment requirements for property, plant and equipment and net operating loss carry-forwards minimizing future tax outlays.

The company's volumes are driven by capital expenditure plans of major North American retailers, consumer product manufacturers and shipping/logistics providers. While a large portion of Intelligrated's revenues are tied to the level of investment in new and expanded warehouse and distribution facilities, an increasing portion of its business is tied to projects that can considerably improve the efficiency of existing facilities. The bulk of Intelligrated's revenues will come from new equipment and systems sales. However, its business profile includes an installed base of equipment, establishing a stream of higher margin customer service, aftermarket revenues and license fees, as well as a material backlog of orders providing a degree of revenue visibility. Still, overall EBITDA margins are fairly modest but have strengthened as savings from cost reduction actions have been realized.

The restructuring program is designed to achieve cost synergies from its 2009 acquisition of FKI Logistex Holdings, Inc. At the time of the acquisition, FKI Logistex was larger than Intelligrated and incurring operating losses. Expenditures and cash disbursements for that initiative will affect 2011's performance and cash flows, but once completed, should further improve the company's results.

The rating also reflects concern over the potential for aggressive financial policies. Despite a limited track record of recent material profitability and free cash flow generation, equity owners will have received substantial distributions over the recent past, much of it funded with debt. The resulting level of fixed charges could limit future flexibility should a cyclical downturn occur.

The stable outlook considers prospects for stable-to-low single digit organic revenue growth over the intermediate period along with steady to increasing profitability as more cost savings from the integration and rationalization program are realized over time. In addition, the stable outlook is supported by an expectation of ongoing free cash flow and an adequate liquidity profile.

The ratings and outlook could experience upward pressure should the company's margins appreciably strengthen and resultant cash flows be used to de-lever the capital structure. Quantitatively this could include EBITA margins consistently above 7% through the cycle, debt/EBITDA under 4 times, EBITA/interest consistently above 2 times, and FCF/debt sustained above 7%. Negative pressure on the rating or outlook could develop should prospects for new orders or Intelligrated's market share or margins appreciably decline, leading to lower profitability and slimmer coverage metrics. Similarly, additional returns to shareholders while the company is highly levered could lead to a downgrade. Debt/EBITDA above 5 times, EBITA/interest less than 1.25 times or several quarters of negative free cash flow could adversely impact the ratings

The B2, (LGD-3, 48%) ratings on the bank credit facilities reflect their expected loss from the application of PDR of B2 and their loss given default point estimate which incorporates their priority as first lien secured creditors. The bank debt will constitute the vast majority of claims in the liability waterfall, causing their instrument ratings to mirror those of the overall corporate family.

Ratings assigned:

Corporate Family, B2

Probability of Default, B2

$145 million first lien term loan, B2 (LGD-3, 48%)

$30 million first lien revolving credit facility, B2 (LGD-3, 48%)

The principal methodologies used in this rating were Global Heavy Manufacturing published in November 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Intelligrated, Inc., headquartered in Mason, OH, manufactures high speed automated material handling equipment and is owned by affiliates of Gryphon Investors, Tudor Ventures, and members of executive management. Annual revenues are roughly $360 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Edwin Wiest
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns initial ratings to Intelligrated: CFR at B2
No Related Data.
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