Fitch Affirms Stanley Black & Decker's IDR at 'A-'; Outlook Stable
Fitch has also assigned a 'BBB+' rating to SWK's proposed offering of $632.5 million subordinated notes due 2018. SWK is currently remarketing these notes, which were originally issued as junior subordinated notes and as a component of Convertible Preferred Units issued in November 2010. The subordinated notes will be unsecured obligations of the company and will rank junior in right of payment to all of SWK's senior debt. The notes will rank senior in right of payment to the company's existing junior subordinated notes.
A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The rating for SWK reflects a geographically well-balanced company with leading market positions and strong brand recognition in its various business segments, consistent free cash flow generation and solid liquidity position. The ratings also reflect the cyclicality of certain of the company's end-markets and SWK's aggressive growth strategy.
The Stable Outlook reflects Fitch's expectation that the company's credit metrics will remain relatively stable during the next few years.
STABLE CREDIT METRICS
The company's credit metrics have been relatively stable during the past few years. Debt-to-EBITDA for the latest-12-months (LTM) ending Oct. 3, 2015 was 2.0x compared with 1.8x at year end (YE) 2014, 2.2x at YE 2013, and 2.0x at YE 2012. EBITDA-to-interest was 10.2x for the Oct. 30, 2015 LTM period compared with 10.2x at YE 2014, 10.5x at YE 2013, and 11.1x at YE 2012.
Fitch expects leverage will be around 1.8x and interest coverage will be roughly 10.7x at the end of 2015. Fitch expects leverage will settle between 1.5x-2.0x while EBITDA-to-interest should sustain above 10.5x during the next few years.
CONTINUED MARGIN IMPROVEMENT
SWK's EBIT margin (excluding merger and acquisition-related and other charges) expanded 70 basis points (bps) during the third quarter of 2015 (3Q15) compared with 3Q14, led by a 100bps margin improvement in the company's Tools & Storage segment, offset in part by weaker margins in the Industrial and Security segments, which reported lower revenues during the quarter due to the negative impact of foreign currency translation. For the first nine months of 2015, EBIT margins increased 90bps compared with the same period last year, as margin improvement in the Tools & Storage segment more than offset lower margins in the Industrial and Security segments. During 2014, the company also reported overall EBIT margin improvement of 220bps compared with 2013. Fitch expects EBIT margins will be stable-to-up slightly next year.
At the end of 3Q15, SWK had $293.3 million of unrestricted cash ($245 million of which were held in foreign jurisdictions) and $1.55 billion of capacity under its $2 billion commercial paper (CP) program that is backed by the company's $1.5 billion multi-year revolver. The company has sufficient cushion under its financial covenants which allows the company to have continued access to its credit facility. SWK has no major debt maturities until November 2018, when $977.5 million of subordinated notes (including the $632.5 million subordinated notes being remarketed) become due.
CONSISTENT FREE CASH FLOW GENERATION
SWK generated $504 million of free cash flow (FCF: cash flow from operations less capex and dividends) or 4.5% of revenues for the LTM ending Oct. 30, 2015. This compares with $683.6 million (6%) of FCF during 2014, $189.7 million (1.7%) in 2013, $276.2 million (2.7%) in 2012 and $420.9 million (4.1%) in 2011. FCF during 2012 and 2013 were reduced by cash outlays for merger and acquisition-related charges of $280 million in 2013 and $357 million in 2012. Fitch expects FCF margin will be about 5.5% this year and between 5.5%-6.5% during the next few years.
Management expects to return about 50% of its excess FCF to shareholders through dividends and share repurchases, and the remaining 50% will be deployed towards acquisitions. The company has paid dividends for 483 consecutive quarters. SWK is also committed to continued dividend growth. In July 2015, the board of directors approved a $.03 increase in its quarterly cash dividend to $0.55 per share, the 48th consecutive annual dividend increase for the company. This follows a 4% increase in dividend payments ($.02 per share) in July 2014, a 2% increase ($0.01) in July 2013, a 20% increase ($.07) in July 2012 and a 21% increase ($.07) in February 2011. The company has a target dividend payout ratio of 30%-35% of previous year's earnings. The current payout ratio is about 38%.
SWK repurchased $640.1 million of stock during the first nine months of 2015 compared with $39.2 million in 2013, $1.07 billion in 2012, $11.1 million in 2011, $4.9 million in 2010 and $2.6 million in 2009. The increased share repurchase activity during 2012 was funded with proceeds from the sale of its HHI business.
PRODUCT, GEOGRAPHIC, AND CUSTOMER DIVERSITY
SWK is a diversified global provider of power and hand tools, mechanical security and electronic security and monitoring systems, and products and services for various industrial applications. Sales outside the United States account for roughly 51% of total revenues, up from roughly 43% in 2008. Additionally, management estimates that revenues directed to the construction and automotive end-markets have declined from about 76% of its 2010 pro forma revenues to approximately 64% of 2014 sales. Reliance on home centers and mass merchants have also decreased, accounting for about 19% of 2014 sales, down from 40% during 2002.
AGGRESSIVE GROWTH STRATEGY
The company has pursued a growth strategy that has resulted in geographic, end-market and customer diversification. However, this strategy has also resulted in higher debt levels as well as heightened integration risks associated with these acquisitions.
Following the sizeable Black & Decker acquisition in 2010, the company has spent about $3.4 billion on more than 30 acquisitions, including three sizeable entities. During 1Q13, SWK acquired Infastech for $826.4 million. Infastech designs, manufactures, and distributes highly-engineered fastening technologies and applications for various end-markets. During 3Q11, the company completed the $1.2 billion acquisition of Niscayah, a commercial security firm based in Sweden specializing in electronic security systems. In July 2010, SWK also completed the $451.6 million acquisition of CRC-Evans, a supplier of specialized tools, equipment and services used in the construction of large-diameter oil and natural gas transmission pipelines.
During 2013, the company elected to place a moratorium on acquisitions to focus on its near-term priorities of operational improvement, deleveraging its balance sheet and returning capital to shareholders. The company did not do any major acquisitions in 2014 or so far this year, while lowering its leverage levels to 1.8x at year-end 2014 and 2.0x currently and returning about $1.2 billion to shareholders in the form of dividends and share repurchases. Management indicated that it will resume M&A activities, but will do so in a measured way going forward. Fitch expects SWK will continue to be disciplined in its M&A activities and will remain committed to maintaining a strong investment-grade rating.
CYCLICALITY OF END-MARKETS
SWK is exposed to cyclical end-markets including new residential and commercial construction, residential and commercial repair and remodel and the automotive industry. During 2014, management estimates that approximately 52% of its sales were directed towards the worldwide construction sector (with the U.S. construction sector accounting for about 29% of revenues) and 12% to the automotive industry.
During the last U.S. economic and construction downturn, SWK's sales fell 1.3% in 2008 and 15.6% in 2009. At that time, SWK was less diversified by end-market and had meaningful exposure to the U.S. construction market. EBITDA margins fell about 115bps in 2008 and increased slightly (+20 bps) during 2009. While SWK remains exposed to cyclical end-markets, the company's end-market and geographic diversity should somewhat lessen the volatility of financial results. Fitch currently has a stable outlook for the U.S. construction market as well as the global automotive industry.
Fitch's key assumptions within its rating case for the issuer include:
--Total U.S. industry housing starts improve 11.3%, while new and existing home sales grow 20% and 6.9%, respectively, in 2015. Further growth is expected during 2016, with total housing starts advancing 11.2%, new home sales increasing 18%, and existing home sales expanding 4% for the year;
--U.S. home improvement spending advances 4.5% during 2015 and 2016;
--Global auto demand grows in the low-single digits during 2015;
--Continued slight improvement in Eurozone economy in 2015 and 2016;
--Revenues are flat-to-slightly lower during 2015 and grow in the low- to mid-single digits during 2016;
--EBITDA margins of 16.0%-17.0% during 2015 and 2016;
--Debt/EBITDA below 2.0x in 2015 and 2016 while interest coverage sustains above 10.0x during the next few years;
--SWK reports FCF margin of roughly 5.5% during 2015 and about 5.5%-6.5% of revenues during 2016.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Debt reduction and/or EBITDA growth, resulting in sustained improvement in credit metrics, including debt-to-EBITDA consistently situating within a range of 1.0x-1.5x and interest coverage sustaining above 12.0x, and the company continuing to maintain a healthy liquidity position.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--A sustained erosion of profits and cash flows either due to weak global demand, meaningful and continued loss of market share, and/or if sustained cost pressures contract margins, leading to weaker than expected financial results and credit metrics (including EBITDA margins below 14%, debt-to-EBITDA consistently above 2x and interest coverage below 9x);
--Management undertakes a meaningful share repurchase program or completes a major acquisition funded by debt, resulting in debt-to-EBITDA consistently above 2x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Stanley Black & Decker, Inc.
--Long-term IDR at 'A-';
--Bank credit facility at 'A-';
--Senior unsecured notes at 'A-';
--Junior subordinated notes at 'BBB';
--Junior subordinated debentures at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
Black & Decker Holdings LLC
--Long-term IDR at 'A-';
--Senior unsecured notes at 'A-'.
Fitch has also assigned a 'BBB+' rating to SWK's proposed offering of $632.5 million of subordinated notes due 2018.
The Rating Outlook is Stable.