Applied Systems Inc.

The stable outlook reflects our expectation that Applied will maintain its good market position in the insurance BMS industry. Additionally, we forecast the company will continue to generate predictable cash flow, leading to modest improvements in credit measures over the next 12 months. We could consider upgrading Applied if it continues to organically increase revenue while maintaining stable EBITDA margins lead to sustained leverage of less than 8x. We could lower our rating on Applied on a significant downturn in the P&C industry and increased pricing pressure from competitors, such that we believe it will generate negative free cash flow. This would weaken its overall liquidity and render it unable to meet its debt service obligations. U.S. GDP growth of

...Applied Systems Inc.'s 2021 revenue growth and reported free operating cash flow (FOCF) continue at levels from before the COVID-19 pandemic. Like fiscal 2020, Applied's operating performance in 2021 remains unaffected by the pandemic as the property and casualty (P&C) insurance end market remains broadly insulated. After adjusting for the EZLynx acquisition completed in March 2021, we expect pro forma revenue growth of about 11% in 2021, compared to about 9.5% in 2020. We expect organic revenue growth will be about 10% in 2022. Additional revenue could also arise from acquisitions, which we expect Applied will pursue, though we don't include them in our forecast. Applied spent $271 million acquiring three companies in 2019, $8 million in 2020, and about $362 million in 2021. We believe the pandemic likely affected acquisition opportunities in 2020. We note that in conjunction with its EZLynx acquisition, $80 million cash was prefunded to the balance sheet, which we expect will be used...

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