Snap-on Incorporated -- Moody's affirms Snap-on's A2 senior unsecured rating; outlook stable

Rating Action: Moody's affirms Snap-on's A2 senior unsecured rating; outlook stableGlobal Credit Research - 30 Apr 2021New York, April 30, 2021 -- Moody's Investors Service ("Moody's") affirmed Snap-on Incorporated's ("Snap-on") A2 senior unsecured rating and P-1 commercial paper rating. The outlook is stable. Moody's expects Snap-on's adjusted debt to LTM EBITDA to decline to 1.2x by the end of 2022 from 1.5x at April 3, 2021 as the company benefits from strong economic growth, debt reduction and completed and ongoing cost cutting initiatives. Free cash flow to debt is expected to decline to over 28.0% from 48.2% as pandemic related inventory liquidations reverse and working capital needs increase to support the projected growth.Affirmations:..Issuer: Snap-on Incorporated.... Commercial Paper, Affirmed P-1....Senior Unsecured Regular Bond/Debenture, Affirmed A2Outlook Actions:..Issuer: Snap-on Incorporated....Outlook, Remains StableRATINGS RATIONALESnap-on's A2 senior unsecured rating reflects the company's relatively resilient operating performance, the ability to generate consistently strong cash flow from its core operations, and the company's robust liquidity. Snap-on's success in part stems from the Tools Group's franchise van channel and the offering of customer credit. Moody's believes that the van channel operations remain well-managed, and that the company has adequate capacity to meet customer financing requirements while preserving prudent underwriting standards. Moody's rating also reflects the company's modest financial leverage and strong adjusted EBITA margin. These strengths are offset by Snap-on's moderate use of cash flow to fund the company's Financial Services segment and the credit risks associated with its borrowers and franchisees, whose average FICO scores are below average. The ability to offer financing to franchisees and their customers is an important element of supporting the sales of the Tools Group as well as supporting franchisee sales of bigger ticket items.Snap-on's overall corporate governance risk is low, with Moody's view incorporating continued maintenance of a conservative financial policy. The company has ten directors on its board, all but one of which are independent. Board members are highly seasoned, with public company, risk management, capital allocation, manufacturing, logistics and supply chain experience. The board administers its strategic planning and risk oversight function as a whole and through its board committees, including an executive, audit, corporate governance, finance and pension, compensation and talent development committee. This level of board experience, independence and oversight should help minimize governance risks, including excessive leverage above target levels and aggressive acquisitions.Snap-on's excellent liquidity is supported by a large cash balance, full availability under an $800 million multi-currency revolver and projected strong free cash flow.Snap-on's stable outlook reflects sound business fundamentals, conservative financial policies, and robust liquidity. The stable outlook is also supported by Snap-on's strong EBITA margin, moderate growth in its Financial Services segment, and globally diverse customer base which provides it with consistent revenue and cash flow generation.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe rating could be upgraded if the company increased its scale (revenue) and end market diversity while maintaining its strong margins, adjusted free cash flow to debt was greater than 25%, and adjusted debt-to-EBITDA was below 1.0x, all on a sustainable basis. Furthermore, continued strength in market share, resilience to volatility in weak economic conditions and evidence of conservatism in its corporate financial policy and underwriting standards in its Financial Services segment would need to be demonstrated for a rating upgrade.The rating could be downgraded should the company's adjusted debt to EBITDA increase above 1.75x or adjusted free cash flow to debt is below 20% for an extended period of time. A downgrade could also occur should there be a decline in business prospects of Snap-on's client and franchise base that materially weakens its accounts receivables quality or should the company's liquidity weaken. A loss in market share, deterioration in franchisee relationships, or weak economic conditions that lead to material revenue decline or margin compression could also lead to a downgrade. Finally, the execution of large debt financed acquisitions or undertaking dividends or share repurchases that contribute to increased leverage would also place negative pressure on the rating.Snap-on Incorporated [NYSE: SNA], headquartered in Kenosha, Wisconsin, is a leading global innovator, manufacturer and marketer of hand and power tools, tool storage, diagnostic software, information and management systems, and shop equipment for vehicle dealerships, repair centers and customers in critical industries. The company operates four segments: the Commercial & Industrial Group, the Snap-on Tools Group, the Repair Systems & Information Group, and the Financial Services Group. Through its distribution channels, Snap-on has presence in more than 130 countries and generates approximately 30.0% of its revenues internationally. The company serves professional customers in a variety of industries including vehicle repair, industrial, agriculture, construction, government and military, aviation and aerospace, natural resources, power generation and technical education in its major geographic markets of North America, Europe and Asia/Pacific.The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.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. 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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.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. Edward Schmidt, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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