Cleaver-Brooks Inc.

The stable outlook reflects our view that the company will generate positive free cash flow and maintain adequate liquidity over the next 12 months, despite our expectations for weak credit metrics and leverage near 7x. We could lower our rating if: Operating performance deteriorates to the extent that the company cannot generate sustained positive free operating cash flow (FOCF); Diminishing liquidity results in a greater reliance on its ABL facility to fund operations; or Margins contract and leverage weakens to the point we view the capital structure as unsustainable in the long term. We could raise our rating if cost reduction actions and investment in key initiatives cause margins to improve such that we believe leverage will remain below 6.5x.

...We expect leverage will remain elevated around 7x through fiscal 2021. We believe positive cash generation in fiscal 2021 will allow the company to pay down borrowings under its asset-based lending (ABL) facility. However, we anticipate Cleaver-Brooks will experience difficulties deleveraging further by increasing its EBITDA amid a challenging demand environment. In the first quarter of fiscal 2021, the pandemic disrupted higher-margin, short-lead time businesses such as aftermarket parts, services, and smaller commercial boilers and burners on account of lower orders and customers closing their job sites to routine service. The decline in aftermarket parts and services was offset by higher, lower-margin Industrial Watertube sales. We project S&P Global Ratings-adjusted EBTIDA margins will remain between 13%-14% and leverage near 7x in fiscal 2021 as the benefits from previous cost actions mitigate an unfavorable sales mix. We believe Cleaver-Brooks' order backlog will somewhat mitigate...

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