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Investing.com -- Moody’s Ratings has confirmed the A1 senior unsecured rating and P-1 short-term commercial paper rating of Illinois Tool Works Inc. (NYSE:ITW), and revised the company’s outlook to positive from stable.
The affirmation of ratings and upgraded outlook is a reflection of ITW’s consistently strong operational results, including industry-leading margins, robust cash flow, and modest financial leverage. Moody’s anticipates that ITW will sustain an EBITA margin of around 28% and debt/EBITDA below 2.0x over the next 12 to 18 months, despite potential pressures on organic growth.
ITW is projected to continue generating strong free cash flow between $1.25 billion and $1.5 billion, which is expected to be utilized for share buybacks or smaller acquisitions. The ratings affirmation also acknowledges ITW’s strong liquidity, bolstered by about $1 billion in cash and a $3 billion committed revolving credit facility, which was undrawn as of December 31, 2024.
The A1 senior unsecured rating given by Moody’s to ITW recognizes the company’s industry-leading EBITA margin of about 28% and a strong EBITA/interest coverage of about 15x. All seven of ITW’s diverse business segments contribute robust profit margins, demonstrating the company’s successful implementation of its business model.
Although ITW’s revenue is expected to decline slightly in 2025 due to regular product line simplification activities, earnings are projected to improve due to the removal of lower margin products. This supports Moody’s projection that ITW will keep debt/EBITDA below 2x in the coming years. ITW’s conservative financial strategy has been positively viewed and is reflected in its G-1 issuer profile score.
Despite exposure to cyclical industries, which can cause moderate volatility in revenue and margins, ITW is expected to maintain a moderate pace of acquisitions over the next two years, while also divesting lower-performing businesses. Proceeds from these divestitures are likely to be applied to acquisitions and/or share repurchases.
ITW’s liquidity remains robust with around $950 million in cash at the end of 2024 and an undrawn $3 billion committed revolving credit facility that expires in 2027. The company is expected to generate between $1.25 billion and $1.5 billion of free cash flow over the next 12 months, which will be used to fund share repurchases and opportunistic acquisitions.
ITW has no debt maturing in 2025 after extending the maturity of its Euro credit agreement and has $998 million outstanding of debt maturing in 2026. The company had $778 million of commercial paper outstanding at the end of 2024. The $3 billion revolving credit facility backs the company’s commercial paper program, and no amounts were outstanding under the facility as of December 31, 2024.
Ratings could be upgraded if ITW continues to demonstrate operational excellence with superior margins across all segments and maintains conservative financial policies around acquisitions while keeping debt/EBITDA below 2x and sustaining an EBITA margin above 25%. However, ratings could be downgraded if ITW changes its business strategy or financial policy to prioritize shareholder returns, or if debt/EBITDA remains above 2.5x along with EBITA margin eroding to below 20%.
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