Fitch Ratings has affirmed the ratings of
The Rating Outlook is Stable.
The rating affirmation follows SWK's announcement that it has completed the acquisitions of
Key Rating Drivers
Portfolio Transformation: In the aggregate, Fitch views the acquisitions of MTD and Excel, the divestiture of its Commercial Electronic and Healthcare Security Businesses, and the planned
The rating affirmation and the Stable Outlook reflect expectation that SWK will maintain total debt with equity credit to EBITDA around 2x or lower and will be disciplined with share repurchases.
Acquisitions and Divestitures: SWK recently acquired the remaining 80% stake in MTD, a privately held global manufacturer of outdoor power equipment. SWK also acquired
SWK also signed an agreement to sell its Commercial Electronic and Healthcare Security Businesses for
Increase in Leverage: Fitch expects total debt with equity credit to EBITDA will increase from 1.4x for the LTM ending
This provides very limited headroom relative to Fitch's negative rating sensitivity of debt to EBITDA consistently above 2.0x. SWK could report lower EBITDA margins next year if cost inflation and supply chain bottlenecks accelerate or continue longer than Fitch's base case forecast, which could pressure the ratings.
Capital Allocation Strategy: The planned
SWK's strategy focuses on continuing to invest in its core franchises, with capex 3.0%-3.5% of net sales. The long-term capital allocation strategy is to return roughly 50% of FCF to shareholders through dividends and share repurchases, and the remaining 50% will be deployed toward acquisitions. SWK is committed to continued dividend growth and has increased dividends in each of the past 53 years, which Fitch expects will continue.
Consistent FCF Generation: SWK generated
Aggressive Growth Strategy: SWK's growth strategy has resulted in geographic, end-market and customer diversification. However, this strategy has also led to higher debt levels, and, at times elevated leverage, and also heightened integration risks associated with these acquisitions. Fitch expects SWK will continue to evaluate acquisitions to supplement organic growth.
Product and Geographic Diversity: SWK has a broad product portfolio sold across a wide range of end-markets. Nevertheless, revenues directed to the construction and automotive end-markets remain a large part of its business, accounting for approximately 71% of 2020 sales. Reliance on
International sales accounted for roughly 42% of YTD revenues. SWK's product, geographic and end-market diversity provides some cushion from regional and end-market downturns, as demonstrated by SWK's relatively stable margins, credit metrics and FCF.
Derivation Summary
SWK's rating reflects a geographically well-balanced company with leading market positions and strong brand recognition in its various business segments, conservative credit metrics, consistent 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.
SWK has a strong position relative to its peers in the tools segment, including leading market share position in power tools and hand tools. One of its key competitors,
Fitch applies its Parent and Subsidiary Linkage Criteria in determining the ratings of
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer
--SWK completes the divestiture of its Commercial Electronic and Healthcare Security Businesses for
Revenues grow 16%-17% in 2021 and mid-single digit organic revenue growth in 2022;
EBITDA margin of 17.0%-17.5% in 2021 and 15.0%-15.5% in 2022;
Total debt with equity credit to EBITDA of around 2x at the end of 2021 and 2022 (which assumes no EBITDA contribution from the divested businesses in 2022);
FCF margin of 5%-5.5% in 2021 and 2022.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
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 FFO-interest coverage sustaining above 10x, and the company continuing to maintain a healthy liquidity position.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sustained erosion of profits and cash flows either due to 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%, total debt to operating EBITDA consistently above 2x and FFO-interest coverage sustained below 7x;
Debt funded acquisition and/or share repurchase program resulting in total debt to operating EBITDA consistently above 2.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Solid Liquidity Position: As of
Issuer Profile
Summary of Financial Adjustments
Fitch has assigned 50% equity credit to the company's
SWK has also issued 7.5 million equity units with a total notional value of
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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