Fitch Affirms Stanley Black & Decker's IDR at 'A-'; Outlook Stable

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.

LIQUIDITY

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.

KEY ASSUMPTIONS

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.

RATING SENSITIVITIES

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

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013029

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013029

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Ronald Nirenberg
Director
+1-212-612-7747
or
Committee Chairperson
Alex Bumazhny, CFA
Senior Director
+1-212-908-9179
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Ronald Nirenberg
Director
+1-212-612-7747
or
Committee Chairperson
Alex Bumazhny, CFA
Senior Director
+1-212-908-9179
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com