Reuters logo
TEXT-Fitch affirms Snap-on's IDR at 'A-'
August 30, 2012 / 6:40 PM / 5 years ago

TEXT-Fitch affirms Snap-on's IDR at 'A-'

Aug 30 - Fitch Ratings has affirmed the ratings for Snap-on, Inc. 
(NYSE: SNA), 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.

The ratings for Snap-on reflect the company's strong brand recognition,
conservative financial policies, moderate free cash flow generation and
sufficient liquidity to support Snap-on's manufacturing and finance operations.
The Stable Outlook reflects Fitch's expectation that Snap-on will continue to
grow overall sales and maintain current margins as strong sales in the U.S. and
certain emerging markets offset continued weakness in Europe.

Snap-on borrows all public debt at the parent level and funds its Financial
Services operations directly. The company allocates debt internally between its
manufacturing and finance operations. Management allocates debt to leverage the
finance companies at 5 times (x) and intends to manage at this level over the
near to intermediate term. Both businesses are well capitalized on this basis.

Leverage at the manufacturing level (with Financial Services at equity) declined
to approximately 0.4 x for the latest 12 months (LTM) ended June 30, 2012 from
0.6x at the end of 2011 and 1.6x at the end of 2010. Fitch expects manufacturing
leverage will continue to decline gradually as moderate growth at Financial
Services allows it to absorb a higher proportion of allocated debt. On a
consolidated basis, leverage improved to 1.7x for the LTM period ending June 30,
2012 from 1.8x at year-end 2011 and 2.8x at the end of 2010. Fitch expects
leverage to remain in the 1.5x - 2x range in the next 12 - 18 months.

Cash flow generation remains healthy with consolidated free cash flow (FCF) of
$124.5 million for the LTM period ending June 30, 2012. This compares to
normalized FCF of $80.4 million during 2011, adjusted for the one-time CIT
arbitration settlement. Fitch expects Snap-on to generate FCF of $150 - $200
million during 2012. The improvement represents increased operating earnings
partially offset by higher capital expenditures and voluntary pension
contributions.

Revenues at Snap-on's industrial businesses of $2.9 billion for the LTM period
ending June 30, 2012 exceeded sales of $2.85 billion reported in 2011. Fitch
projects revenues to increase in the low-single digits in 2012 as strong sales
in the U.S. and emerging markets are likely to be offset by continued weak sales
in Europe.

Fitch expects manufacturing operating margins to improve slightly in the
near-term as higher sales volumes support incremental margins. Snap-on should
also benefit from a larger mix of higher margin diagnostic and under-car
equipment sales.

The company's strategy includes expansion into the international auto repair
market where there are substantial growth opportunities. While Snap-on has had
success with its established business model in North America, the United Kingdom
and Australia where franchisees sell directly to technicians, a similar dealer
network does not exist in emerging markets. These markets are generally served
through distributors and direct sales staff. However, Fitch believes Snap-on's
sales and support network in China, which represents an underdeveloped market,
will provide a solid base for future growth.

Snap-on's growth strategy also encompasses extending its presence into critical
industries outside the automotive repair segment. The company has leveraged its
technology across the organization to develop new products for the aerospace,
military, oil and gas, natural resources and power generation industries.
Snap-on faces strong competition from well-established industry players as it
expands into these markets. This concern is somewhat mitigated by Snap-on's
reputation for high quality products.

Snap-on has solid liquidity with cash of $169.4 million (excluding cash at
Financial Services) at June 30, 2012 and full availability under a $500 million
revolving credit facility that matures in 2016. Fitch believes that the company
will have continued access to the revolver as Snap-on has sufficient cushion
under its financial covenant. Debt maturities are well laddered, with no major
debt maturities until 2014, when $100 million of senior notes mature.

Fitch expects management will continue to make moderate share repurchases,
primarily to offset dilution from stock awards. During the first half of 2012,
the company repurchased $38.1 million of shares. This compares to $34.5 million
of shares repurchased during the first six months of 2011. As of June 30, 2012,
$162.4 million remained under the current authorization.

Snap-on provides customer financing through its Financial Services businesses.
Financial Services provides financing to customers for the purchase of Snap-on
hand tools, power tools, tool storage and diagnostic products through its
revolving account and extended credit programs. The businesses also provide
franchise finance and equipment leasing financing. Financial Services provides
strategic advantages to Snap-on in terms of attracting and retaining customers
by structuring flexible payment terms and incorporating collections during
weekly customer visits by franchisees.

Snap-on's decision to restrict Financial Services' activity to captive finance
mitigates some risks associated with managing a finance subsidiary. In the
intermediate term, Fitch does not expect Snap-on to expand its financial
services operations beyond its captive finance. Since the finance JV with CIT
was terminated in mid-2009, the value of the company's on-balance sheet finance
portfolio has grown to approximately $1 billion. The transition to on-book
portfolio is nearing completion. Asset growth will likely slow to mirror growth
in domestic sales. Future borrowings are expected to be minimal due to slower
growth in the portfolio, together with normal profitability.

Snap-on's management allocates debt to leverage the finance business at 5x.
Fitch is comfortable with leverage at its current level based on the quality of
receivables financed and support from the manufacturing operations. This
leverage target is consistent with other captive finance subsidiaries tracked by
Fitch.

Although Financial Services finances some sub-prime borrowers, it clearly
benefits from a deep knowledge of its client base and the products being
financed. The company's ability to successfully provide financing to these
borrowers is based upon its unique but well-managed business model wherein
franchisees see the customer on a weekly basis. Additionally, the company
employs consistent underwriting standards and prudent risk management. Asset
quality metrics are adequate and remained within acceptable levels, even during
the economic downturn.

For the six months ended June 30, 2012, Financial Services operating earnings
before interest expense were approximately $50 million excluding one-time
events. Fitch expects operating earnings before interest expense from Financial
Services to continue to improve as the on-book finance portfolio grows.

Positive rating actions may be considered if manufacturing revenues continue to
grow and operating margins expand significantly from current levels due to
higher mix of products in new critical markets and diagnostic equipment, leading
to substantial increases in cash flow from core operations. On the other hand,
Fitch could consider taking a negative rating action if revenue growth is
negative for a prolonged period, resulting in a fundamental weakening of the
company's credit profile. A negative rating action would also be considered if
the Financial Services operation experiences a substantial deterioration in
asset quality and higher leverage levels that require meaningful support from
the manufacturing operations.

Fitch has affirmed the following ratings for Snap-on with a Stable Outlook:

--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured debt at 'A-';
--Unsecured revolving credit facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.

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)
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012)

Applicable Criteria and Related Research:
Corporate Rating Methodology
Global Financial Institutions Rating Criteria

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
here. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE.


     

    Criteria
    Regulatory
    Form NRSRO
    Terms Of Use
    Endorsement Policy
    Privacy Policy
    Code of Ethics
    Site Index
    Press Room

Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries.
Home
Ratings and Research
Tools
Products and Services
Fitch Training

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below