CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Stanley Black & Decker, Inc.'s (NYSE: SWK) pending offering of $345 million subordinated notes due Nov. 17, 2018. SWK is currently remarketing these notes, which were originally issued as junior subordinated notes and as a component of Equity Units issued in November 2013. The subordinated notes will be unsecured obligations of the company and will rank pari passu with the existing $632.5 million subordinated notes due 2018. These notes will rank junior in right of payment to all of SWK's senior debt and senior in right of payment to the company's existing junior subordinated notes.
The company will not directly receive any proceeds from the remarketing of these notes. However, upon a successful remarketing, the proceeds will automatically be used to satisfy the equity unitholder's obligations to purchase SWK's common stock (under their purchase contract). As a result, the company may receive proceeds from the notes that are successfully remarketed and issue the corresponding common stock under the purchase contract.
The Rating Outlook is Stable. A complete list of ratings 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 (FCF) generation and solid liquidity. The ratings also reflect the cyclicality of certain of the company's end-markets and SWK's aggressive growth strategy.
On Oct. 12, 2016, Fitch affirmed SWK's ratings, including the company's Issuer Default Rating (IDR) at 'A-' following the company'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.
SWK 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.
Fitch expects SWK's leverage will increase modestly as a result of the acquisition. It is expected 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 (LTM) ending July 2, 2016. Fitch expects debt/EBITDA will be at or below 2x 12-18 months after completing the acquisition as the company pays down debt with FCF.
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.
Since 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 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 $800.6 million of FCF (cash flow from operations less capex and dividends) or 7.1% of revenues for the LTM ending Oct. 1, 2016. This compares with $551 million (4.9%) of FCF during 2015 and $683.6 million (6%) during 2014. 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, we expect the company will use excess FCF to pay down debt and lower its leverage to below 2x before making meaningful share repurchases.
As of Oct. 1, 2016, the company had $420.8 million of cash (of which $369 million was held in foreign jurisdictions) and $1.9 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 our 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 2x at the end of 2016 while interest coverage sustains above 10x 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 2x 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 repurchase program before paying down debt associated with the Newell Tools acquisition, resulting in debt/EBITDA consistently above 2x;
--The company takes on another sizeable acquisition funded with debt, resulting in debt/EBITDA sustained above 2x for an extended period;
--A sustained erosion of profits and cash flows due to either weak global demand, meaningful and continued loss of market share, and/or if sustained cost pressures depress 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/EBITDA consistently within a range of 1.0x-1.5x, interest coverage sustaining above 12x, and the company continuing to maintain a healthy liquidity position.
FULL LIST OF RATINGS
Fitch has the following ratings for the company:
Stanley Black & Decker, Inc.
--Long-Term IDR 'A-';
--Bank credit facility 'A-';
--Senior unsecured notes 'A-';
--Subordinated notes 'BBB+';
--Junior subordinated notes 'BBB';
--Junior subordinated debentures 'BBB';
--Short-Term IDR 'F2';
--Commercial paper 'F2'.
Black & Decker Holdings LLC
--Long-Term IDR 'A-';
--Senior unsecured notes 'A-'.
The Rating Outlook is Stable.
Fitch has assigned a 'BBB+' rating to SWK's pending offering of $345 million subordinated notes due 2018.
Date of relevant committee: Oct. 11, 2016.
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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