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Fitch rates Sun Microsystems senior unsecured debt
Thursday November 7, 1:28 pm ET

http://biz.yahoo.com/rf/021107/tech_sunmicrosystems_fitch_1.html

(Full text of press release provided by Fitch Ratings. )
NEW YORK, Nov 7 - Fitch Ratings has initiated coverage of Sun Microsystems, Inc. ('Sun') and assigned a 'BBB' rating to the company's senior unsecured debt. The Rating Outlook is Negative. Approximately $1.3 billion of public debt securities are affected. The rating reflects Fitch's concern about the uncertainty regarding the company's long-term competitive position in the server hardware segment, execution risk of expanding possibly into other hardware areas such as Linux machines and Intel-based servers, event risk of an expanded restructuring program that will continue into 2003, and an aggressive stock repurchase program. Despite adequate credit protection measures and consistent positive operating cash flow, Fitch expects leverage and interest coverage will remain weak for the rating category for at least the first half of 2003 while the company's end markets continue to operate in a difficult environment. Fitch also recognizes the company's strong liquidity as reflected by the cash and investments position, solid balance sheet, consistent market share position in the Unix server segment, and significant research and development effort. The Negative Rating Outlook reflects Fitch's belief that Sun's financial and operating performance in the near term will be more volatile than historical patterns due to an increasingly competitive marketplace and the company's product line could be exposed to significant margin pressures as the expansion of non-Unix servers in the market continues. While Sun has taken actions to achieve higher profitability mainly through restructuring programs which include headcount reductions and facilities rationalization, execution risks will continue as the company evaluates its strategy while significant changes to the management team and the organizational structure have taken place within the last six months. This coupled with continued weakness in the company's end markets provides considerable uncertainty to the timing of Sun's return to profitability. Fitch will continue to carefully monitor the company's quarterly revenues and orders. Further reductions could delay the expected improvements in credit protection measures and potentially pressure Sun's long-term credit rating.

Sun recently reported financial results for the first quarter ending September 29, 2002, which continue to show revenue declines and operating margin pressures even as the overall gross margin was stable. Revenues for the latest twelve months as of the first quarter were $12.4 billion compared to $16.1 billion, a decline of 23% while EBITDA was $574 million compared to $1.7 billion. Sun continues to perform well in shipments of Unix servers as its market share has remained fairly consistent during one of the worst downturns in the IT industry and despite its significant concentration in financial services and telecommunications industries. Overall worldwide information technology (IT) spending in 2002 is expected to grow approximately 2%; however, growth in software and services is being offset by declines in hardware. It is estimated that IT spending will experience worldwide growth of 6% in 2003 as hardware recovers to approximately 5% growth. During the last fiscal quarter ending September 29, 2002, Sun repurchased approximately $500 million of its common stock in addition to the $600 million repurchased in the latest fiscal year ending June 30, 2002, mainly from free cash flow and existing cash. The company continues to pursue an aggressive stock buyback plan under an authorized $1.5 billion program and this remains a concern since net free cash flow remains minimal. There are no put obligations outstanding.

Strong financial flexibility is provided by more than $2.6 billion in cash and investments and $2.6 billion in long-term investments. Fitch estimates that approximately $1.0-$1.5 billion of this combined balanced is permanently invested in overseas locations. Total debt is $1.5 billion, consisting primarily of senior unsecured notes of $250 million due August 2004, $500 million due August 2006, and $550 million due August 2009. The company has no bank credit facility as its previous $500 million facility expired in August 2002 and was not renewed but approximately $600 million of uncommitted lines of credit exists. Leverage for the latest twelve months ending September 29, 2002, is estimated to be 2.6 times (x) with interest coverage at nearly 10x. Fitch does not expect improvement in either of these ratios in the near-term as a result of EBITDA pressure, not debt levels. However, net free cash flow has consistently been break-even the last few quarters in a difficult operating environment. These ratings were initiated by Fitch as a service to users of its ratings and are based on public information.

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