Fitch Affirms Stanley Black & Decker's IDR at 'A-'; Outlook Stable
Fitch Ratings has affirmed its ratings for Stanley Black & Decker, Inc. (NYSE: SWK), including the company's Issuer Default Rating (IDR) at 'A-'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
Fitch has also assigned an 'A-' rating to SWK's proposed offering of $800 million principal amount of senior notes due 2022. Net proceeds from this notes offering will be used for general corporate purposes, including the repayment of short-term debt.
The ratings and Outlook for SWK reflect a geographically well-balanced company with leading market positions and strong brand recognition in its various business segments. The ratings also incorporate the cyclicality of certain of the company's end-markets and integration risk associated with its aggressive acquisition strategy, although overall risk is mitigated by merger integration expertise and considerable liquidity.
In July 2012, SWK entered into a definitive agreement to acquire Infastech for $850 million. Infastech is a leading global manufacturer and distributor of specialty engineered fastening technologies based in Hong Kong. With revenues of approximately $500 million, Infastech is one of the largest Asia-based global players in the specialty mechanical fastener market. More than half of Infastech's 2011 revenues were generated in the Asia-Pacific region and once combined with SWK's engineered fastening platform, the combined business will generate about 36% of its revenues from the high growth region. Total company revenues from emerging markets will increase to approximately 16%, which is an important step towards SWK's mid-decade goal of 20+%.
The company also recently announced that it has it has reached an agreement to sell its Hardware & Home Improvement Group (HHI) to Spectrum Brand Holdings, Inc. for $1.4 billion in cash. With revenues of $940 million during 2011, HHI is a provider of residential locksets, hardware and plumbing fixtures. Approximately 90% of the revenues from these businesses are generated from North America and more than 50% of the revenues are from U.S. Home Centers. The tax-efficient transaction is expected to generate after-tax cash proceeds of $1.3 billion. Management expects to use $700 million-$750 million of the cash proceeds for share repurchases, partially fund the acquisition of Infastech and for modest deleveraging.
If these transactions are completed, SWK's leverage metrics are expected to remain elevated in the next 12 months. Fitch currently projects debt to EBITDA will be at around 2x by year-end 2013. Interest coverage is projected to be roughly 10x for fiscal 2013.
While these credit metrics are weak for the rating category, the rating affirmation reflects Fitch's expectation that SWK's financial results and credit metrics will improve in 2014 as the U.S. housing and commercial construction markets continue their moderate recoveries. Additionally, SWK's profitability should benefit from restructuring and integration initiatives that have been implemented. Fitch projects leverage will be below 2x by the end of 2014.
The Stable Outlook is also supported by the company's solid liquidity position. SWK has $769.5 million of cash and approximately $690 million of borrowing availability under its $2 billion commercial paper program as of June 30, 2012. The company also continues to generate strong free cash flow (FCF: Cash Flow from Operations less Capital Expenditures and Dividends). SWK had $306.5 million of FCF for the latest 12 months (LTM) period ending Sept. 29, 2012 compared with $420.9 million during fiscal 2011. Fitch expects FCF will be $350 million-$400 million during fiscal 2012.
SWK has demonstrated conservative financial management over the past decade and management remains disciplined in allocating the uses of its FCF. Over the long term, the company expects to deploy, on average, roughly two-thirds of its FCF for acquisition and growth opportunities and to return approximately one-third of FCF to shareholders in the form of dividends and share repurchases.
Fitch is somewhat concerned that the company continues to do acquisitions at a time when it is still integrating the sizeable Black & Decker (BDK) acquisition, which was completed in 2010. Since 2010, the company has completed 21 other acquisitions, including the purchase of two sizeable entities. During the third quarter of 2011, 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.
The integration risks are mitigated by management's integration expertise as well as the fact that assimilation activities will occur in different business segments, allowing each segment's management team to focus specifically on each individual acquisition. Furthermore, integration remains a top priority, and management has now indicated that it plans to curtail any other major bolt-on acquisition activity for a period of at least 12 to 18 months while it completes its ongoing integration activities.
The company's operations are exposed to the economic difficulties in Europe. Management estimates that approximately 24% of the company's second quarter 2012 revenues were derived from Europe. SWK's European sales activity are somewhat concentrated in more stable economies such as France, the Nordic regions, Germany and the UK. Management indicated that about 16% of its European exposure in terms of volume and revenues is in Portugal, Italy, Spain and Greece. During the third quarter, organic growth in the EMEA region declined 3% compared to the third quarter of 2012.
Future ratings and Outlooks will be influenced by broad end-market trends, as well as company specific activity, particularly FCF trends and uses and liquidity position.
Negative rating actions could occur if SWK's projected leverage levels consistently remains above 2x in the next 24 months. While Fitch does not currently anticipate a positive rating action in the next 12-18 months, a positive rating action may be considered if the company shows significant improvement in its operating results, leading to sustained improvement in credit metrics (particularly debt to EBITDA levels in the 1x-1.5x and interest coverage above 12x), and a continued robust liquidity profile.
Fitch affirms the following ratings for SWK with a Stable Outlook:
--Issuer Default Rating (IDR) 'A-';
--Bank credit facilities 'A-';
--Senior unsecured notes 'A-';
--Junior subordinated notes 'BBB';
--Junior subordinated debentures 'BBB';
--Short-term IDR 'F2';
--Commercial paper (CP) 'F2'.
Additionally, Fitch also affirmed the following ratings:
Black & Decker Corporation
--Senior unsecured notes 'A-'.
Black & Decker Holdings LLC
--Senior unsecured notes 'A-'.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Treatment of Hybrids in Corporate and REIT Credit Analysis' (Dec. 15, 2011);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Treatment of Hybrids in Bank Capital Analysis
Liquidity Considerations for Corporate Issuers
Robert Rulla, CPA, +1-312-606-2311
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Bob Curran, +1-212-908-0515
Phil Zahn, +1-312-606-2336
Brian Bertsch, +1-212-908-0549