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Rating Action:

Moody's changes Eaton's ratings outlook to positive from stable; affirms Baa1 senior unsecured rating

12 Aug 2019

New York, August 12, 2019 -- Moody's Investors Service ("Moody's") has changed the outlook for Eaton Corporation and affiliated entities to positive from stable and affirmed all ratings, including Eaton's Baa1 senior unsecured debt rating.

"The outlook change to positive reflects our belief that Eaton will continue to make progress towards margin improvement and leverage reduction, even as it undertakes portfolio changes while facing headwinds in certain of its markets," says David Berge, Moody's Senior Vice President and lead analyst for the company.

Moody's believes that Eaton will benefit from its diversified portfolio of businesses, which should limit downside exposure to weakening sectors such as automotive and hydraulics markets. This kind of revenue stability, along with EBITA margins that are expected to be maintained at about 16% and debt-to-EBITDA of around 2.5x or lower over the next few years, would position the company reasonably well against A3-rated industrial peers, according to the rating agency.

RATINGS RATIONALE

Eaton's ratings are supported by its stature as a highly-diversified manufacturer with significant scale at approximately $22 billion in revenues and a track record of continued margin improvement. This results in free cash flow generation that is expected to range between $1.2 billion and $1.5 billion annually in 2019 and 2020, an important factor supporting strong underlying liquidity as the company maintains relatively modest cash balances compared to industrial peers (approximately $400 million as of June 30, 2019). Eaton has demonstrated a commitment to sustaining a strong credit profile, exemplified by a reduction in debt levels with debt-to-EBITDA expected to remain near 2.5x. Moreover, Moody's believes that the company should be able to sustain these metrics over the next two years, despite expected cyclical downturns in certain key markets such as hydraulics and vehicles (automotive), which combined for 29% of 2018 revenue. Modest growth is still expected from the company's cornerstone electrical products and systems businesses (approximately 61% of 2018 revenue) that cater largely to industrial, buildings and power distribution markets, while demand from the growing aerospace sector (9% of sales) is expected to remain robust.

Margin improvement will also likely be aided by the company's current portfolio rebalancing strategies, with the planned disposal of the less profitable lighting and automotive fluids conveyance businesses replaced in time by higher margin acquired businesses, along the lines of the pending Souriau-Sunbank purchase, an aerospace components manufacturer with strong growth potential 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 toward a combination of M&A and share repurchases, with an increased focus on acquisitions following a period of inactivity over the last several years. As such, debt is expected to remain close to current levels over the next few years, which will allow the company to maintain leverage over that time.

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 through 2020, even as it executes its portfolio rebalancing endeavors amidst what is likely to be an industrial slowdown.

Ratings could be downgraded if Eaton encounters a meaningful decline in revenue or 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 rising above the mid-3x level, or if EBITA margins are expected to decline to the low-teen percentage range.

Eaton Corporation (NYSE: ETN), headquartered in Ireland with offices in Cleveland, Ohio, is a diversified industrial company with LTM revenues of $21.7 billion as of June 2019. The company is focused on managing electrical, fluid and mechanical power and organizes its operations into six segments: Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace, Vehicle, and eMobility.

The following rating actions were taken by Moody's:

Affirmations:

..Issuer: Cooper US, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Eaton Capital Unlimited Company

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Eaton Corporation

....Commercial Paper, Affirmed P-2

....Senior Unsecured Shelf, Affirmed (P)Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Turlock Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: Cooper US, Inc.

....Outlook, Changed To Positive From Stable

..Issuer: Eaton Corporation

....Outlook, Changed To Positive From Stable

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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

No Related Data.
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