Fitch Ratings has affirmed the Long-Term Issuer Default Rating for Vontier Corporation (Vontier) and all of the outstanding debt at 'BBB-'.
The Rating Outlook has been revised to Negative from Stable.
The Negative Outlook reflects the impact of lower earnings on Vontier's leverage, which is declining more slowly than originally anticipated by Fitch. The Outlook also considers the uncertainty over Vontier's longer-term business mix, growth strategy and capital allocation policy in a scenario where demand for retail fueling hardware does not recover materially. Fitch expects to resolve the Outlook in the next 12-18 months as the longer-term operational and financial plans become clearer.
Vontier's ratings continue to reflect the company's position as a global leader in several key markets and strong FCF generation.
Key Rating Drivers
Weaker Demand for Fueling Hardware: Following the end of a multi-year upgrade cycle for enhanced credit card security requirements, Vontier has seen a sharp drop in demand for its U.S. fueling dispenser operations. The business had seen strong performance in 2019-2021, driven by the adoption of the U.S. Eurocard, Mastercard, Visa (EMV) smart card payment standard, which led many fueling stations to upgrade to chip card-compliant payment terminals during that period. Vontier's other businesses are growing, but are not sufficient to offset the EMV-related headwinds.
Lower EBITDA, Higher Leverage: The EMV roll-off means that both 2022 earnings and the outlook for 2023-2024 are weaker than previously expected. The company now forecasts a low-to-mid single digit decline in revenues in 2023 and for operating margins to compress, though management expects innovation and efficiency gains to drive margin recovery from 2024 onwards. Fitch-calculated EBITDA leverage had risen to 3.7x at the end of 2021 following the acquisition of DRB Systems, and as a result of weaker near-term earnings Fitch now expects leverage to remain above the downgrade trigger of 3.25x through 2024.
Early Debt Repayment in 2023: Vontier has revised its near-term capital allocation plans to prioritize debt reduction toward its stated net leverage target of 2.5-3.0x EBITDA, and plans to repay $150 million-$200 million of debt in 2023 using FCF. As a result, Fitch expects EBITDA leverage to stabilize at around 3.6x in 2023, despite a decline in EBITDA. The company is also considering the divestiture of two smaller business units, GTT and Hennessey, the proceeds of which may be used for further debt reduction.
Competing Capital Allocation Priorities: Fitch believes that Vontier has strong capacity to reduce debt beyond the stated target of $150 million-$200 million in 2023, given its robust cash flow generation. However, the longer-term demand uncertainty for the fueling hardware business means that Vontier is likely to seek out higher-growth opportunities via M&A. Fitch expects acquisition spending to be minimal in the coming 12-18 months but re-accelerate from 2024 onwards. At the same time, the company may also face pressure from equity owners to increase dividends or share repurchases.
Ongoing Business Diversification: Vontier is a leading provider of hardware and software solutions for retail fueling stations in the U.S., which is a relatively mature business. One of the longer-term risks facing the company is the adoption of electric vehicles, which may diminish the role of fueling stations if vehicles are charged at home or at work. Mitigating this risk is the slow adoption of EV technology (currently approximately 10% of global new car sales) and the size of the global internal-combustion engine car parc, which is forecast to remain around the current level of approximately 1.1 billion-1.2 billion through 2030.
The company has been pursuing M&A opportunities to diversify its business. In 2021-2022, Vontier acquired DRB Systems, a leading provider of software and control solutions to the car wash industry, Driivz, a software platform supporting electric vehicle charging infrastructure providers, and Invenco, a provider of self-service payment solutions. Revenue contribution from the retail fueling hardware has fallen to 27% in 2022, from 31% in 2019. The credit implications are mixed - while Fitch views diversification as a credit positive, this is offset by a more competitive landscape and higher execution risks in these new businesses.
Marker Leader in Mobility Technologies: Vontier has size and scale in several key markets. It is the global leader in fueling infrastructure and number one integrated technology provider to the car wash industry in the U.S., while its convenience retail solutions are number 2 in the US market and number 1 in high growth markets. In auto repair solutions, Matco Tools, a subsidiary, is an entrenched number 2 provider in the U.S. Fitch views Vontier's large installed base, diversified customers, and global footprint as a credit positive.
Strong FCF and Adequate Liquidity: Vontier generates strong pre-dividend FCF of about $400 million-$500 million yearly, on margins in the low-to-mid-teens. This will support debt reduction in the near term and support acquisition activity in the medium term. Vontier's liquidity position is adequate, with a Dec. 31, 2022 cash balance of $205 million and full revolver availability of $750 million.
Matco's Financing Business: Matco has a sizable financing operation, which plays an important strategic role of attracting and retaining customers by structuring flexible payment terms. Fitch views this business, which directly accounts for about 8%-10% of balance sheet assets, as relatively more-risky than the manufacturing operations. As such, an extended period of growth of the receivables portfolio in excess of the growth of the manufacturing operations, which causes the credit business to represent a materially larger proportion of consolidated assets and earnings, could be a rating concern.
Derivation Summary
Vontier's rating reflects its leading market position in several key markets, solid operating profile, and strong FCF generation. The Negative Outlook reflects the weaker demand outlook for fueling hardware, Fitch's expectation that EBITDA leverage will remain above the negative sensitivity of 3.25x in the next 2-3 years, and the execution risks associated with ramping up newer businesses.
Vontier's credit profile is comparable with other diversified industrials rated 'BBB-', such as Regal Rexnord Corporation (BBB-/Stable), Flowserve Corporation (BBB-/Stable), Valmont Industries (BBB-/Stable), and Allegion plc (BBB-/Positive). Compared with Flowserve, Vontier is exposed to less cyclical end markets, but has higher financial leverage. Compared with Regal Rexnord, Vontier has smaller operating scale and less diversified end markets, but higher FCF margins. Both Vontier and Regal Rexnord have relatively high leverage for the rating level as a result of recent acquisitions.
Snap-on Incorporated (A/Stable) is the leading provider of auto repair tools in the U.S. market and a direct competitor to Vontier's Matco Tools business, which accounts for approximately 20% of Vontier's consolidated revenues. Compared with Vontier, Snap-on has larger scale, a stronger market position, and much lower leverage.
Key Assumptions
Revenues to decline 4% in 2023 mainly due to EMV-related headwinds, then grow by 3% per year from 2024 onwards;
Fitch-calculated EBITDA margin declines to 22.0% in 2023 (from 22.6% in 2022) then recovers to 22.5% from 2024;
FCF remains robust throughout the forecast, with FCF margin at low to mid teens;
Debt repayment of $200 million in 2023. Other debt maturing in 2024 or later refinanced;
Share repurchases of $100 million-$150 million per year in forecast period;
Minimal spending on M&A in 2023, gradually recovering to approximately $200 million per year.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A conservative capital allocation strategy leading to EBITDA leverage sustained below 2.5x;
Improved product and end market diversity that enhances its cash flow risk profile.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A shift in financial and capital allocation policies leading to EBITDA leverage sustained above 3.25x;
A sustained deterioration in operating profile, scale and competitive position that heightens the variability of, or constrains the cash flow profile.
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
Liquidity: VNT's cash balance was $204.5 million as of Dec. 31, 2022. Together with the undrawn $750 million revolver and robust FCF generation, Fitch views liquidity to be more than sufficient to cover operating requirements and manage debt maturities.
Debt Structure: As of Dec. 31, 2022, VNT's capital structure consisted of a $750 million revolver, $400 million 2024 term loan, $600 million 2025 term loan, as well as $1.6 billion of unsecured bonds maturing 2026-2031. This leaves the company with staggered debt maturities through 2031. The unsecured bonds rank pari-passu with the term loan and revolver.
Issuer Profile
Vontier is a diversified industrial technology company with global scale across the retail & commercial fueling segment, and significant scale in the U.S. professional tools and repair solutions segments.
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.
VONTIER CORPORATION 
