New York, June 30, 2020 -- Moody's Investors Service ("Moody's") has changed
the outlook for Eaton Corporation ("Eaton") to stable from positive and
affirmed all ratings for the company, including the Baa1 senior
unsecured debt rating.
"The current industrial downturn that has been deepened by the effects
of coronavirus has halted Eaton's path towards deleveraging and
margin improvement, and a credit profile supportive of a higher
rating now seems unlikely for at least two years," says David Berge,
Moody's Senior Vice President and lead analyst for the company.
"While the sale of the hydraulics business later in the year will
provide a significant cash injection for a company that otherwise maintains
only modest cash reserves, there remains considerable uncertainty
as to how these proceeds will be deployed," added Berge.
The rapid and widening spread of the coronavirus outbreak, the deteriorating
global economic outlook, low and volatile oil prices, and
asset price declines are creating a severe and extensive credit shock
across many sectors, regions and markets. The combined credit
effects of these developments are unprecedented. The industrial
goods industry sub-sector has been one of the most significantly
affected given its sensitivity to consumer demand and sentiment.
More specifically, Eaton's exposure to the aerospace and automotive
end markets, in particular, render the company vulnerable
to shifts in market sentiment and operational disruption in these unprecedented
times, and Eaton remains vulnerable to the lingering adverse effects
of the outbreak. Moody's regards the coronavirus outbreak as a
social risk under its ESG framework, given the substantial implications
for public health and safety.
RATINGS RATIONALE
Eaton's ratings are broadly supported by its stature as a highly-diversified
manufacturer with significant scale at approximately $21 billion
in revenues and consistent EBITA margins in the mid-teens range
that will likely be maintained throughout the downturn. This results
in free cash flow generation that is expected at close to $1 billion
annually in 2020 and 2021, an important factor supporting strong
underlying liquidity as the company maintains relatively modest cash balances
compared to industrial peers (approximately $417 million in cash
and marketable securities as of March 31, 2020). Eaton has
demonstrated a commitment to maintaining a strong credit profile,
exemplified by a Moody's-adjusted debt-to-EBITDA
sustained at approximately 2.5x over the last few years.
However, Moody's expects that leverage will exceed 3x in 2020
as earnings decline due to end market weakness this year, and only
gradually restored to the mid-2x range by 2022 as business conditions
improve.
Like most industrial companies, Eaton will encounter a significant
drop in revenue in 2020 as the coronavirus pandemic will have a modest
impact (less than 10% decline from 2019 levels) on the company's
core electrical segments (over 60% of revenue), but will
more dramatically affect Eaton's aerospace, vehicles,
and hydraulics segments where revenue declines in excess of 20%
are expected. Although cost reduction initiatives are underway
during this downturn, Moody's expects Eaton's EBITA
margins to fall below 15% for the first time in several years.
However, over the long run, revenue growth and margin improvement
will likely resume, aided by the company's current portfolio rebalancing
strategies, with the planned disposal of the cyclical and less profitable
hydraulics business replaced in time by higher margin acquired businesses
that will add diversity to Eaton's portfolio.
Moody's expects that Eaton will deploy a majority of its free cash flow
along with proceeds from the planned business disposals towards a combination
of M&A and share repurchases, with an increased focus on acquisitions.
As such, debt is expected to remain close to current levels over
the next few years, which will allow the company to restore and
maintain leverage in the mid-2x range over that time.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Eaton's ratings could be upgraded if the company employs fiscally conservative
financial policies, including the prioritization of capital deployment
towards planned acquisitions (if not debt repayment) rather than shareholder
returns (with no material increase in debt). The company would
also need to demonstrate that it can maintain EBITA margins in excess
of 15% and debt-to-EBITDA of 2.5x or below.
Ratings could be downgraded if Eaton encounters a meaningful and enduring
decline in revenue past 2020, or weakening demand characteristics
in major markets without a corresponding reduction in its cost base.
Lower ratings could also be considered in the event of a sizable debt-funded
acquisition or shareholder distribution, resulting in debt-to-EBITDA
sustained above the mid-3x level, or if EBITA margins are
expected to decline to the low-teens percentage range.
Eaton Corporation (NYSE: ETN), headquartered in Ireland with
offices in Cleveland, Ohio, is a diversified industrial company
with LTM revenues of $20.9 billion as of March 2020.
The company is focused on managing electrical, fluid and mechanical
power and organizes its operations into six segments: Electrical
Americas, Electrical Global, Hydraulics, Aerospace,
Vehicle, and eMobility.
The following rating actions were taken:
Affirmations:
..Issuer: Cooper US, Inc.
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
..Issuer: Eaton Capital Unlimited Company
....Commercial Paper, Affirmed P-2
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
..Issuer: Eaton Corporation
....Senior Unsecured Shelf, Affirmed
(P)Baa1
....Commercial Paper, Affirmed P-2
....Senior Unsecured Medium-Term Note
Program, Affirmed (P)Baa1
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
..Issuer: Turlock Corporation (all debts assumed by
Eaton Corporation)
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
Outlook Actions:
..Issuer: Cooper US, Inc.
....Outlook, Changed To Stable From
Positive
..Issuer: Eaton Corporation
....Outlook, Changed To Stable From
Positive
..Issuer: Eaton Capital Unlimited Company
....Outlook, Changed To Stable From
No Outlook
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 DISCLOSURES
For 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. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. 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_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
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.
David Berge, CFA
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
