NEW YORK--Fitch Ratings has affirmed the ratings of Stanley Black & Decker, Inc. (NYSE: SWK), including the company's Long-Term Issuer Default Rating (IDR), at 'A-'. The actions follow SWK's announcement that it has entered into a definitive agreement to acquire the Tools business (Newell Tools) of Newell Brands, Inc. (NYSE: NWL) for $1.95 billion. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
PRO FORMA CREDIT METRICS
Fitch expects SWK's leverage will increase modestly as a result of the acquisition. Fitch expects the company will use cash on hand (about 1/3 of purchase price) and incremental debt (approximately 2/3) to fund the $1.95 billion purchase price.
On a pro forma basis, Fitch expects SWK's debt/EBITDA will be about 2.3x compared with 1.9x for the latest-12-months ending July 2, 2016.
The rating affirmation and the Stable Outlook reflects Fitch's expectation that debt/EBITDA will be at or below 2.0x 12-18 months after completing the acqusition as the company pays down debt with FCF.
NEWELL TOOLS ACQUISITION
SWK announced today that it has entered into a definitive agreement to acquire Newell Tools for $1.95 billion in cash. The purchase price represents an approximately 13x EBITDA multiple (about 8x multiple post-synergies). Newell Tools' products include premium industrial cutting, hand tool and power tool accessories. It has market-leading brands (Irwin and Lenox) that are well positioned in their respective categories. Newell Tools serves a variety of end markets, users and channels, including electrical and plumbing trades, home centers, industrial supply channel and construction sites. Newell Tools has annual sales of about $760 million and EBITDA of $150 million. SWK expects to close the transaction during the first half of 2017.
This acquisition is consistent with management's growth strategy by acquiring franchises with global scale/footprint and high value-added vertical solutions.
Management believes that there are opportunities to realize about $80 million to $90 million of annual synergies, including functional efficiencies ($50 million - $60 million), footprint consolidation ($20 million) and overhead reductions and other operational synergies (i.e. purchasing/sourcing, $10 million). The synergies are expected to be realized over 3 years. Total costs to achieve these synergies are estimated to be $75 million to $90 million, of which 60% wil be incurred in the first year.
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.
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, 2015 and so far this year, while lowering its leverage levels to 1.8x at year-end 2015 and 1.9x currently (from over 2x at the end of 2013) and returning about $1.8 billion to shareholders in the form of dividends and share repurchases.
In 2015 the company indicated that it would resume M&A activities in a measured way. Fitch expects SWK will continue to be disciplined in its M&A activities and will remain committed to maintaining a strong investment-grade rating.
CONSISTENT FCF GENERATION
SWK generated $807.3 million of free cash flow (FCF: cash flow from operations less capex and dividends) or 7.2% of revenues for the LTM ending July 2, 2016. This compares with $551 million (4.9%) of FCF during 2016, $683.6 million (6%) 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 between 4%-5% this year and between 4.5%-5.5% 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. Following the Newell Tools acquisition, Fitch expects the company will use excess FCF to pay down debt and lower its leverage to below 2.0x before making meaningful share repurchases.
As of July 2, 2016, the company had $568.2 million of cash (of which $512 million was held in foreign jurisdictions) and $1.66 billion of availability under its $2 billion commercial paper program that is backed by its $1.75 billion revolving credit facility that matures in 2020.
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 represented roughly 47% of 2015 revenues, with emerging markets accounting for about 16%. The company is also diversified by end market, with exposure to the construction, industrial, automotive and retail industries. Management estimates that about 20% of its revenues are directed to the U.S. residential construction market (new and existing/repair and remodel) and about 9% to U.S. commercial construction. Fitch expects mid-single digit growth in overall U.S. construction spending in 2016 and 2017.
Fitch's key assumptions within its rating case for the issuer include:
--Revenues grow in the low- to mid-single digits during 2016;
--EBITDA margins of 16%-17% during 2016;
--Debt/EBITDA below 2.0x at the end of 2016 while interest coverage sustains above 10.0x during the next few years;
--SWK reports FCF margin of roughly 4%-5% during 2016 and about 4.5%-5.5% of revenues during 2017;
--The company completes the Newell Tools acquisition and maintains debt/EBITDA below 2.0x 12-18 months after the closing of the transaction.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Management undertakes a meaningful share repurchases program before paying down debt associated with the Newell Tools acquisition, resulting in debt/EBITDA consistently above 2.0x;
--The company takes on another sizeable acquisition funded with debt, resulting in debt/EBITDA sustained above 2.0x for an extended period;
--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/EBITDA consistently above 2x and interest coverage below 9x);
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.
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-';
--Subordinated notes at 'BBB+';
--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-'.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and also restructuring charges.
Additional information is available on www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
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