Fitch Ratings has affirmed
The Rating Outlook is Stable.
FBHS's 'BBB' rating reflects its leading market position with strong brand recognition in each of its product categories, solid credit metrics, and consistent FCF generation. The rating also reflects the company's sensitivity to general economic trends and commodity prices, exposure to the highly cyclical residential construction market and the risk associated with high customer concentration to home center retailers.
Key Rating Drivers
Stable Earnings Outlook: Fitch forecasts a relatively stable earnings outlook for FBHS in the intermediate term, supported by favorable residential housing and remodeling backlogs. Persistent raw material inflation and supply chain bottlenecks are risks to near-term performance, but Fitch currently forecasts margins to remain stable or expand slightly in 2022, due to successful product price increases, which have been supported by strong demand.
Fitch forecasts revenues to grow about 4% organically in 2022, and for growth to slow in 2023, as Fitch forecasts a normalization in housing and remodeling demand. Fitch expects EBITDA margins to be between 17.5% and 18.0% for fiscal 2021 through fiscal 2023.
Solid Credit Metrics: FBHS maintains strong credit metrics commensurate with a 'BBB' rating. Total debt to operating EBITDA has sustained below 2.5x for most of the company's history as a public company. Management is committed to a strong investment-grade rating and a net debt to EBITDA target of between 2.0x and 2.5x through the housing cycle. Fitch-measured total debt to operating EBITDA was 2.0x for the LTM ending
Leadership Position: FBHS has a leadership position in each of its business segments. The company is a leading manufacturer of residential kitchen and bath cabinets and faucets in
Opportunistic Capital Allocation: The company's capital-allocation priorities may include opportunistic elements, including strategic bolt-on acquisitions that supplement or enhance the company's existing portfolio of products, such as the
The company at times increases debt to fund M&A and share repurchases. FBHS deployed
FBHS maintained balance sheet strength during the more uncertain phase of the pandemic in 2020, as it lowered gross debt by
Consistent FCF Generation: FBHS has consistently generated FCF since becoming a public independent company in late 2011, with FCF margins after capex and dividends typically maintaining in the mid to high single-digit range, which is strong relative to some investment-grade building products peers. Fitch expects the company to generate FCF margins after dividends of 6.3% in 2021 and 5.0% in 2022, which is lower than the 8.9% margin the company generated in 2020.
Working capital investment and a step up in capex to increase production capacity across product categories will temporarily constrain FCF margins. Fitch expects the company's FCF margins to sustain in the 7.0%-8.0% range over the long term. Fitch forecasts FCF to be applied toward share repurchases absent M&A opportunities.
Cyclicality of End Markets: The majority (73% of 2020 sales) of FBHS's products are directed to
Derivation Summary
The company's total debt to operating EBITDA, fixed charge coverage metrics and FCF margins are comparable with other investment-grade building products companies, including
FBHS has a broader range of product offerings than MAS and JHX, and maintains leadership positions within its categories. The company's end-market diversification, including exposure to the less volatile repair and remodel segment, is roughly in line with its investment-grade peers.
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer
FBHS's total revenues improve 25% yoy (18% organically) in 2021 and by 4% in 2022;
EBITDA margins improve modestly in 2021 to 17.5% and sustain in the mid- to high-17.0% range thereafter;
FCF margins (after dividends) decline to the mid-single digits in 2021 and 2022 and then sustain in the 7%-8% range in 2023 and beyond;
FBHS deploys excess cash and FCF generation toward acquisitions and share repurchases during the rating horizon;
Total debt to operating EBITDA and FFO net leverage sustain in the low-2x range in the intermediate term.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation that total debt/operating EBITDA will be consistently below 2.0x on a long-term basis, supported by management lowering its net leverage target from its current level of 2.0x to 2.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sustained erosion in profits and cash flows that leads to total debt to operating EBITDA being consistently above 2.5x, FFO net leverage sustaining above 2.5x and FFO interest coverage falling below 4.0x.
Loss of key major customer resulting in substantially lower expected revenues and EBITDA.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Solid Liquidity Position: FBHS's liquidity is supported by the company's strong FCF generation, revolver borrowing capacity and well-laddered debt maturity schedule. As of
Issuer Profile
FBHS is a leading home and security products manufacturer with top market positions and brands across product categories, which include plumbing products, cabinetry, doors, decking, and security products.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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