Applica Feels Chinese Heat; Solectron's Problems Persist

Weaker-than-expected financial results and credit protection measures for the last year has hit small appliance manufacturer Applica. Financial performance have declined from significant price erosion and unit declines in the company's toaster-oven and iron-product lines, said Standard & Poor's credit analyst Martin Kounitz. Chinese manufacturers have been shipping lower-priced goods through traditional sales channels and more U.S. retailers are purchasing products directly from overseas, according to S&P. The corporate credit rating has been lowered from B+ to B by S&P and the rating is on watch with negative implications.

The company plans to increase the amount of production lines that it outsources to lower-cost manufacturers in an attempt to improve profitability. Despite these efforts, S&P is concerned about the amount of time needed to stabilize operating performance and to return to prior operating strength. Applica had $156.1 million debt outstanding as of Sept. 30. The EBITDA for the 12 months ended Sept. 30 dropped 36% versus the same period the year before. Total debt-to-EBITDA increased from 3.3 times in 2002 to 4.1 times, even though the company has reduced its debt by $85.6 million since September 2002.

*Moody's Investors Service has downgraded Solectron Corp.'s $450 million in revolving credit facilities to Ba3 from Ba2 as a result of weak operating results and the expectation that neither operating nor gross margin will significantly improve over the near-to-intermediate term. Solectron provides electronic manufacturing services to original equipment manufacturers. The outlook is stable based in part on the company successfully executing a restructuring plan and completing non-strategic asset divestitures. Moody's is concerned with the company's near-term cash flow generating potential and expects the challenges to continue in 2004, but at more modest levels as the economy begins to show signs of recovery. The company has a $200 million revolver maturing in 2004 and a $250 million revolver maturing in 2005. The $450 million in revolving credit facilities is untapped.