Fitch Ratings has affirmed the ratings of Stanley Black & Decker, Inc. (SWK), including the company's Long-Term Issuer Default Rating (IDR) at 'A-' and Short-Term IDR at 'F1'.

The Rating Outlook is Stable.

The rating affirmation follows SWK's announcement that it has completed the acquisitions of MTD Holdings, Inc. and Excel Industries and has signed a definitive agreement to sell its Commercial Electronic and Healthcare Security Businesses. The company also announced a $4 billion share repurchase plan expected to be executed in 2022.

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 $4 billion share repurchase plan negatively. These transactions increase leverage while financial results are pressured by raw material cost inflation and supply chain bottlenecks. While the transactions allow SWK to focus on growing its core operations, the divestiture also reduces its overall diversification, given the security businesses' exposure to commercial construction, retail, healthcare and government end markets.

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 Excel Industries, a leading designer and manufacturer of commercial and residential turf-care equipment. The combined purchase price of $1.9 billion was funded with cash and CP borrowings. These two entities have combined revenues of almost $3 billion and EBITDA of about $250 million.

SWK also signed an agreement to sell its Commercial Electronic and Healthcare Security Businesses for $3.2 billion. These businesses have forecast revenues of about $1.7 billion and low double-digit EBITDA margin.

Increase in Leverage: Fitch expects total debt with equity credit to EBITDA will increase from 1.4x for the LTM ending Oct. 2, 2021 to 1.9x on a pro forma basis. Excluding the operating results of the planned divestiture, Fitch expects total debt with equity credit to EBITDA will settle around 2.0x at YE 2022. Fitch's base case forecast projects mid-single digit organic revenue growth, EBITDA margin contraction of about 180 bps (owing to the lower margins of the acquired businesses and some margin contraction from input cost inflation), and some debt paydown from FCF.

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 $4 billion share repurchase program will be funded, in part, by proceeds from the divestiture. SWK expects to repurchase $2.0 billion-$2.5 billion of its stock during 1Q22 and complete the remainder in the summer of 2022. The rating affirmation reflects Fitch's expectation that SWK will pull back on share repurchases if leverage meaningfully exceed 2.0x or its liquidity profile weakens. Management is committed to a strong investment-grade rating and has a good track record of managing its balance sheet consistent with its 'A-' IDR. SWK had minimal share repurchases in 2019, 2020 and so far in 2021.

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 $765 million of FCF (cash flow from operations less capex and dividends) for the LTM ending Oct. 2, 2021, or 4.5% of revenues, down from $1.2 billion or 8.5% or revenues in 2020. The FCF for 2020 benefited from improvement in working capital and lower capex. Fitch expects FCF margins will be 5%-6% in 2021 and 2022 as SWK rebuilds inventory and capex return toward more normalized levels.

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 U.S. and international home centers and mass merchants is also meaningful, representing about 42% of 2020 sales. Fitch expects these percentages will increase with the recent acquisitions and planned divestiture.

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, Snap-on Incorporated (A/Stable), is a clear industry leader in selling tools to automotive technicians. Snap-on generates stronger margins and has lower financial leverage, although Snap-on is smaller and less diversified than SWK. SWK's total debt to operating EBITDA is better than PPG Industries, Inc. (A-/Negative) and FCF margin is comparable with that of PPG, a coatings company with somewhat similar end-market exposure as SWK.

Fitch applies its Parent and Subsidiary Linkage Criteria in determining the ratings of Stanley Black & Decker, Inc. (parent) and Black and Decker Holdings, LLC (subsidiary). The determination is that the stand-alone credit profiles are the same and the IDRs of Stanley Black & Decker, Inc. and Black and Decker Holdings, LLC are the same.

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 $3.2 billion and uses all the net proceeds to repurchase stock;

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Solid Liquidity Position: As of Oct. 2, 2021, SWK had $292.7 million of cash and $3.35 billion of borrowing availability under its $3.5 billion CP program which is backed by its $2.5 billion multi-year revolver that matures in September 2026 and its $1 billion 364-day facility maturing in September 2022. Fitch's base case forecast assumes about $1.5 billion drawn under its CP program at YE 2021. The company has no debt maturities until 2026, when $500 million of senior notes mature.

Issuer Profile

Stanley Black & Decker, Inc. is a diversified global provider of hand tools, power tools and related accessories, engineered fastening systems and products, services and equipment for oil and gas and infrastructure applications, commercial electronic security and monitoring systems, healthcare solutions, and mechanical access solutions (primarily automatic doors).

Summary of Financial Adjustments

Fitch has assigned 50% equity credit to the company's $750 million 4% junior subordinated notes due 2060 given this instrument's subordination, ability to defer interest for at least five years, long-dated maturity, and the absence of material covenants.

SWK has also issued 7.5 million equity units with a total notional value of $750 million. The equity units consist of convertible preferred stock and forward stock purchase contracts. Fitch has assigned 50% equity credit to the $750 million convertible preferred stock given its subordination, absence of material covenants, maturity and ability to defer dividends.

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.

(C) 2021 Electronic News Publishing, source ENP Newswire