S&P Cuts SMART Technologies (SMT) Rating to 'B-'; Outlook Negative

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Calgary, Alta.-based interactive display producer SMART Technologies Inc. (Nasdaq: SMT) to 'B-' from 'B'. The outlook is negative.

At the same time, we lowered our issue-level rating on SMART's US$125 million term loan. The '1' recovery rating on this loan is unchanged, and indicates our expectation for very high (90%-100%) recovery in the event of a default.

"We base the downgrade on our expectation that the company's operating performance will materially weaken in the next 12 months owing to continued revenue declines in its key education segment," said Standard & Poor's credit analyst David Fisher. We expect this will lead to a material deterioration in SMART's credit measures and result in the company consuming cash as it invests in several growth initiatives aimed at offsetting the decline in its legacy interactive whiteboard (IWB) business. We have revised our financial risk profile to "highly leveraged" from "aggressive," resulting in the downgrade.

SMART's first-quarter fiscal 2016 guidance (announced May 15, 2015, concurrent with fiscal 2015 year-end results) was significantly weaker than we expected, with management expecting continued meaningful revenue declines. At the same time, we expect margins to contract meaningfully due to a mix shift toward interactive flat panels. Despite this, the company plans to invest significant resources into new products (mainly SMART Kapp and software solutions, as well as SMART Room Systems) that have, to date, largely failed to gain meaningful traction either due to sales or execution challenges. These investments include US$25 million of efficiencies harvested from other parts that the company plans to redeploy to SMART Kapp. While some of SMART's new products have received accolades and could eventually offset declines in the IWB business, we are skeptical this will happen in the near term.

Given this, we expect SMART's credit ratios to deteriorate meaningfully in fiscal 2016. Based on our expectations, adjusted debt-to-EBITDA, which was already weak at 5.6x for year-end fiscal 2015, could increase to more than 10x as declining sales and margin compression cut against a relatively fixed cost base. This led to the financial risk profile revision.

The negative outlook reflects our view that SMART's debt levels might be unsustainable if its emerging products and services fail to offset the decline in its legacy IWB business.

We could lower the rating if SMART cannot improve its operating performance such that it appears likely the company will generate positive sustained free operating cash flow.

We could revise the outlook to stable if SMART achieved positive revenue and earnings growth leading to positive free operating cash flow.

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