Fujifilm #AA-/A-1+# Ratings Affirmed After Accounting Outlook Management And Governance Score Lowered

Stocks and Financial Services Press Releases Monday June 19, 2017 16:51
TOKYO--19 Jun--S&P Global Ratings

TOKYO (S&P Global Ratings) June 19, 2017--S&P Global Ratings today said it hasaffirmed its 'AA-' long- and 'A-1+' short-term corporate credit ratings onFujifilm Holdings Corp. The outlook on the long-term corporate credit ratingremains stable.

The affirmation reflects our view that the company's financial results forfiscal 2016 (ended March 31, 2017) were robust and that downward revisions toresults in past years will be within tolerances for the current ratings. Thecompany had postponedannouncing 2016 financial results so as to investigateinappropriate accounting practices at some overseas subsidiaries. Theaffirmation also reflects that downward revision of our management andgovernance assessment does not have such a negative impact as to lead to adowngrade of the company.

Fujifilm's profits excluding the effects of foreign exchange rates increasedin all major business segments in fiscal 2016 despite maturation of thedocument market and the negative impact of a strong yen, and they were withinassumptions in our base-case scenario. The company's profitability is stable

thanks to a portfolio of wide-ranging businesses--including imaging, healthcare, and highly functional materials--and its geographically-diversifiedearnings sources. The company said it is retrospectively amending results ofthe overseas subsidiaries for fiscal 2015 and earlier to correct theinappropriate accounting. We have examined Fujifilm's financial results forfiscal 2015, which it revised downward, and consider that they remain withintolerances for the current rating. The company has strong cash flow generationand a very sound financial base. As a result, we expect the company tomaintain cash and equivalents in excess of debt even after its acquisition oflaboratory chemicals and clinical diagnostic reagents maker Wako Pure ChemicalIndustries Ltd. Consequently, we evaluate the company's business risk profileas strong and its financial risk profile as minimal.

Fujifilm also announced results of its investigation into the inappropriateaccounting practices and together with countermeasures it will adopt in thefuture, and we reassessed the company's management and governance. Whileoverseas subsidiaries of Fuji Xerox, a Fujifilm subsidiary, used inappropriateaccounting practices, Fujifilm enhanced its governance of Fuji Xerox,including a drastic change in management of the subsidiary. Fujifilm alsounveiled a policy aimed at enhancing management of the subsidiary withintegration of both companies' business management processes. Accordingly, weexpect correction of the deficiencies in internal controls that led torevision of the accounting results. Reflecting these views, we maintained aneutral assessment of Fujifilm's governance. Meanwhile, amid maturation of thedocument market and growing difficulty in its business environment, FujiXerox, along with Fujifilm, had excessive expectations about expansion ofoverseas business. As a result, we think the business capability of some ofFujifilm's subsidiaries is no longer consistent with its overseas businessstrategy. In addition, Fuji Xerox has a highly independent-minded businessmanagement, and we doubt Fujifilm has the expertise and experience that FujiXerox possesses to manage the company. Reflecting these views, we lowered ourassessment of some subfactors of management (consistency of strategy withorganizational capabilities and marketplace conditions, and management'sexpertise and experience). As a result, we lowered our assessment ofFujifilm's overall management and governance to satisfactory from strong,though this downward revision doesn't have so strong a negative impact as tolower the rating on the company.

We maintain our strong assessment of Fujifilm's liquidity. We expect sourcesof liquidity to remain more than 1.5x uses over the next year and 1.0x usesover the following year. Favorable relationships with multiple financialinstitutions and prudent management of financial risk are likely to supportthe company's liquidity. We assume principal liquidity sources include cashand equivalents of ¥876 billion and annual expected funds from operations(FFO) of about ¥250 billion, while principal liquidity uses include annualdebt repayment of ¥124 billion, acquisition costs of ¥150 billion-¥200billion, and ¥150 billion in returns to shareholders.

The stable outlook reflects our view that Fujifilm will be able to maintainstable profitability by strengthening its solutions businesses and continuingto reduce costs. In our view, this mitigates the moderate risk that maturationof the document market and intensifying competition pose. We expect the strongmarket positions of many of the company's products, its wide-ranging businessportfolio, and its geographically diversified earnings streams to underpin itsbusiness risk profile. We also believe very low debt ratios and strongliquidity will help it maintain a minimal financial risk profile.

We may consider lowering the ratings if Fujifilm's EBITDA margin stays below10%, potentially as a result of even greater competition or shrinking marketsin the document and other primary businesses. We may also consider a downgradeif the ratio of its debt to EBITDA continuously exceeds 1.5x as a result of ashift to more aggressive policies on both mergers and acquisitions and returnsto shareholders, such as share repurchases and dividend payouts. We may alsoconsider a downgrade if we believe correcting governance issues, includinginternal controls, will take longer than we assume. Conversely, we mightconsider raising the ratings if we determine Fujifilm is further diversifyingits earnings sources thanks to growth in its health care and highly functionalmaterials businesses or if we think it will considerably improve itsprofitability. However, we see a low likelihood of an upgrade over the nextone to two years, because a contribution to profits from pharmaceuticals willtake time.

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