CEVA Group announced its second quarter (Q2) results last week. They show a company with a modestly growing revenue, reasonable profitability but a heavy and apparently growing burden of interest repayments.

Sales grew at 3% compared with Q2 2006, reaching €905million. Operating income grew more strongly at €27.3million from €16.5million, with EBITDA also growing to €54.8million. These figures reflect a business which is stable from a market perspective. As John Pattullo, the company’s new CEO observes; “We can see that the growth and profit indicators are positive for CEVA and the ability of the company to generate value”.

However the big issue for CEVA is its debt burden. Owned by the private equity company Apollo, it has been saddled with substantial debts, including the more than $1 billion required for the EGL acquisition. This is provided through a mixture of secured bonds and a ‘bridging’ loan. The effectiveness of this corporate financing strategy is crucial to the future of CEVA as it is the company’s biggest single non-operational cost. In the three months ended June 30 2007, the company’s debt repayments were over €60million, up from €42.9million the Q2 2006. Whilst these figures are not really comparable as the sale of CEVA was not concluded in Q2 2006, they illustrate that debt repayments will be a substantial issue for the success of the company.

Eyebrows have been raised amongst bankers in London and New York over the aggressiveness of CEVA’s ‘leverage’; that is the level of debt to equity in the company. CEVA has also had to recently modify the bonds it has issued to reflect the caution of banks and investors towards a company with such high levels of debt.

Whilst the contract logistics market is tough for CEVA, the company is competitive. The dominant issue for the company is its strategic viability as a financial entity in an economy less comfortable with massive leverage.

Source: CEVA logistics / TI

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