Canon Inc. -- Moody's downgrades Canon Inc. to Baa1; outlook changed to stable from negative

Rating Action: Moody's downgrades Canon Inc. to Baa1; outlook changed to stable from negativeGlobal Credit Research - 24 Feb 2021Tokyo, February 24, 2021 -- Moody's Japan K.K. has downgraded Canon Inc.'s (Canon) issuer rating to Baa1 from A3.At the same time, Moody's has changed the outlook on the rating to stable from negative."The downgrade reflects steady demand decline in Canon's core copier/printer business, which we expect will squeeze the company's profit and cash flow, and weakly position it for its previous rating in the single-A category as compared against its peers," says Motoki Yanase, a Moody's Vice President and Senior Credit Officer."The stable outlook reflects our expectation that Canon retains buffers to maintain its credit profile with its strong balance sheet, and its leading market position for certain products in its geographically diversified portfolio," adds Yanase.RATINGS RATIONALEDespite a recovery from the pandemic that Canon's results demonstrated in the second half of 2020, Moody's expects a secular decline in the office segment (copier/printers) will continue to weigh on its profits and margins over the coming years. The segment contributed over 40% of Canon's consolidated operating profit before eliminations in 2020.A post-pandemic recovery underpins Canon's expectation of an operating margin of 4.7% in 2021, recovering from 3.5% in 2020 to the 2019 level. In particular, a recovery in demand for copier/printers from the trough during the second quarter of 2020 and additional work-from-home demand for inkjet printers will support margins. However, a further rebound in operating margins to the 8%-9% level before 2018 remains challenging, given the significant reliance on the office segment and falling printing demand globally from digital transformation. It is also unclear whether incremental earnings from Canon's growth businesses, such as network camera and medical systems, can replace the falling profit from its copier/printer business over the next several years.Some of Canon's credit metrics would also remain weak against its global peers'. Moody's estimates Canon's EBITA margin to be around 6% for 2021, similar to FUJIFILM Holdings Corporation's (FUJIFIILM, A2 stable) and HP Inc.'s (HP, Baa2 stable), but weaker than Xerox Corporation's (Xerox, Ba1, negative), which has been in double-digit percentages.Moody's also expects Canon's free cash flow after dividend (FCF) to debt ratio to remain in single-digit percentages in 2021, much weaker than that of FUJIFILM, HP and Xerox, which are at double-digit percentages. Its FCF would be challenged, at least in the next 12-18 months, considering the pressure from shareholders to restore dividends as operations recover, and additional capital spending needed to renovate its domestic facilities.At the same time, Moody's expects Canon to manage its debt load and keep its leverage around 2x in the next several years, similar to FUJIFILM's, HP's and Xerox's. Canon's operations will also be supported by its sizable operational scale and geographic diversification, with an even dispersion of revenue across Japan, the Americas, Europe, and Asia-Pacific. Moody's expects that the company will maintain its leading market position in multiple products, including laser printers, digital cameras and flat-panel-display lithography equipment, supported by strong brand recognition and technological advantages.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe stable outlook is based on (1) Canon's conservative financial policy with moderate leverage of debt/EBITDA around 2.0x and substantial cash holdings that can cover most of its reported total debt, (2) strong market position with market-leading products such as digital cameras, laser printers, as well as flat-panel-display lithography equipment, and (3) geographic diversification in terms of sales and production locations with strong brand recognition of its office and camera products.Moody's could upgrade Canon's rating if increasing contribution from its growth businesses, mainly its medical systems segment, mitigates the decline on its core businesses while maintaining the strong balance sheet. Specifically, Moody's could consider an upgrade when EBITA margin is sustained above 10% and FCF/debt approaches double-digit percentages, while debt/EBITDA remains below 2.0x.Moody's could downgrade Canon's rating if it fails to restore profitability, such that the company sustains EBITA margin below 6.0% and a deterioration of its net debt position so that its retained cash flow to net debt falls below 50%. An increase in leverage over 2.3x or sustained negative FCF could also lead to a downgrade.The principal methodology used in this rating was Manufacturing Methodology (Japanese) published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1216244. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Canon Inc., headquartered in Tokyo, is one of the leading manufacturers of office equipment, cameras, and optical products globally.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Motoki Yanase VP - Senior Credit Officer Corporate Finance Group Moody's Japan K.K. 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