CORPORATES

RATING Rating Methodology

METHODOLOGY
10 September 2021 Manufacturing
TABLE OF CONTENTS
Scope 1 This rating methodology replaces the Manufacturing Methodology published in March 2020.
Rating approach 2 We have reordered and have made editorial updates to various sections of the methodology,
Manufacturing scorecard 3 and we have changed the presentation of the scorecard. These updates do not change our
Discussion of the scorecard factors 5 methodological approach.
Other considerations 8
Using the scorecard to arrive at a
scorecard-indicated outcome 13
Assigning issuer-level and
Scope
instrument-level ratings 14 This methodology applies to companies globally that are primarily* engaged in the
Key rating assumptions 14 manufacturing of product components, finished products or capital goods. These companies
Limitations 14 develop and produce a wide breadth of products, including ball bearings, electrical
Moody’s related publications 16 installation products, vacuum pumps and rail cars, to name only a few examples. Products
range from commoditized components to highly engineered parts used in complex
industries.
Analyst Contacts
David Berge, CFA +1.212.553.1039 The manufacturing companies rated under this methodology serve a variety of end-markets,
Senior Vice President such as energy, medical, agriculture and construction. They may also provide related services.
david.berge@moodys.com
For example, some companies may provide services to the aerospace and defense or
Gigi Adamo +1.212.553.2977 automotive end-markets; however, these end-markets do not represent the preponderance
VP-Senior Analyst
jadijhe.adamo@moodys.com
of business risk for the manufacturing companies rated under this methodology.

Dean Enjo +81.3.5408.4234 Companies that are primarily engaged in the manufacturing of automobiles or automotive
VP-Senior Analyst parts, in the manufacturing of consumer durables, and in providing aerospace and defense
dean.enjo@moodys.com
products and services are covered under our methodologies for automobile manufacturers,
Martin Fujerik +49.69.70730.909 automotive suppliers, consumer durables, and aerospace and defense companies,
VP-Senior Analyst
martin.fujerik@moodys.com respectively.1 Makers of metal, glass and plastic packaging, and medical products and device
makers are also covered under separate methodologies.
Daniel Harlid +46. 8.5179.1271
VP-Senior Analyst
daniel.harlid@moodys.com
Ryohei Nishio, CFA +81.3.5408.4157
Analyst
ryohei.nishio@moodys.com
» Analyst Contacts continued on last page

*The determination of a company’s primary business is generally based on the preponderance of the company’s business
risks, which are usually proportionate to the company’s revenues, earnings and cash flows.
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Rating approach
In this rating methodology, we explain our general approach to assessing credit risk of issuers in the manufacturing industry globally,
including the qualitative and quantitative factors that are likely to affect rating outcomes in this sector. We seek to incorporate all
material credit considerations in ratings and to take the most forward-looking perspective that visibility into these risks and mitigants
permits.

The following schematic illustrates our general framework for the analysis of manufacturing companies, which includes the use of a
scorecard.2 The scorecard-indicated outcome is not expected to match the actual rating for each company. For more information, see
the “Other considerations” and “Limitations” sections.

Exhibit 1
Illustration of the manufacturing methodology framework

* This factor has no sub-factors.

† Some of the methodological considerations described in one or more cross-sector rating methodologies may be relevant to ratings in this sector. A link to a list of our sector and cross-
sector methodologies can be found in the “Moody’s related publications” section.
Source: Moody's Investors Service

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Manufacturing scorecard
For general information about how we use the scorecard and for a discussion of scorecard mechanics, please see the “Using the scorecard to arrive at a scorecard-indicated outcome”
section. The scorecard does not include or address every factor that a rating committee may consider in assigning ratings in this sector. Please see the “Other considerations” and
“Limitations” sections.

Exhibit 2
Manufacturing scorecard
BUSINESS PROFITABILITY LEVERAGE and FINANCIAL
SCALE PROFILE and EFFICIENCY COVERAGE POLICY
(20%) (25%) (5%) (35%) (15%)

Revenue EBITA Margin Debt / RCF / EBITA / Interest

(USD Billion)[1] Business Profile (EBITA / Revenue)[2] EBITDA[3] Net Debt[4] FCF / Debt[5] Expense[6] Financial Policy
(20%) (25%) (5%) (10%) (10%) (5%) (10%) (15%)
Expected to have extremely conservative financial
Unassailable market positions across essentially all of its
policies (including risk and liquidity management);
business segments globally and extremely stable revenue and
very stable metrics; essentially no event risk that
Aaa ≥ $50 margins, supported by extremely stable end-markets; a highly ≥ 35% ≤ 0.5x ≥ 60% ≥ 25% ≥ 20x
would cause a rating transition; and public
diverse portfolio of products in multiple business segments;
commitment to a very strong credit profile over the
and entire cost structure is extremely efficient and effective.
long term.
Commanding and defensible market positions across most of Expected to have very conservative financial
its business segments globally and highly stable revenue and policies (including risk and liquidity management);
Aa $30 - $50 margins, supported by highly stable end-markets; a highly 25% - 35% 0.5x - 1x 45% - 60% 20% - 25% 15x - 20x stable metrics; minimal event risk that would cause
diverse portfolio of products in multiple business segments; a rating transition; and public commitment to a
and a highly efficient and effective cost structure. strong credit profile over the long term.
Expected to have predictable financial policies
Extremely strong and defensible market positions across its
(including risk and liquidity management) that
core business segments and stable revenue and margins,
preserve creditor interests; although modest event
A $15 - $30 supported by mostly stable end-markets; a diverse portfolio of 17% - 25% 1x - 1.75x 35% - 45% 15% - 20% 10x - 15x
risk exists, the effect on leverage is likely to be
products in multiple business segments; an efficient and
small and temporary; strong commitment to a solid
effective cost structure.
credit profile.
Strong and defensible market positions in most of its core
business segments and moderately stable revenue and Expected to have financial policies (including risk
margins, supported by end-markets that are characterized by and liquidity management) that balance the
Baa $5 - $15 solid long-term demand but subject to short-term volatility; a 12% - 17% 1.75x - 3.25x 25% - 35% 10% - 15% 7x - 10x interests of creditors and shareholders; some risk
diverse portfolio of products in only one or two business that debt-funded acquisitions or shareholder
segments; some volatility in input costs, but cost management distributions could lead to a weaker credit profile.
that substantially mitigates the margin impact.
Operates in one or few business segments with leading market
Expected to have financial policies (including risk
positions that are defensible in the near term but are subject to
and liquidity management) that tend to favor
long-term competitive threats and revenue and margin
shareholders over creditors; above-average
Ba $1.5 - $5 volatility due to end-markets that are characterized by 7% - 12% 3.25x - 4.75x 15% - 25% 5% - 10% 4x - 7x
financial risk resulting from shareholder
moderate short-term volatility; a somewhat concentrated
distributions, acquisitions or other significant
portfolio of products; input costs that are volatile and cost
capital structure changes.
management that only partially mitigates the margin impact.

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BUSINESS PROFITABILITY LEVERAGE and FINANCIAL

SCALE PROFILE and EFFICIENCY COVERAGE POLICY
(20%) (25%) (5%) (35%) (15%)

Revenue EBITA Margin Debt / RCF / EBITA / Interest

(USD Billion)[1] Business Profile (EBITA / Revenue)[2] EBITDA[3] Net Debt[4] FCF / Debt[5] Expense[6] Financial Policy
(20%) (25%) (5%) (10%) (10%) (5%) (10%) (15%)
Operates in a highly competitive and fragmented market with a
moderate ability to defend its position and is subject to high Expected to have financial policies (including risk
revenue and margin volatility due to end-markets that are and liquidity management) that favor shareholders
B $0.5 - $1.5 characterized by high short-term volatility; 2.5% - 7% 4.75x - 6.25x 7.5% - 15% 0% - 5% 1.5x - 4x over creditors; high financial risk resulting from
a concentrated portfolio of products; input costs that are shareholder distributions, acquisitions or other
volatile and the company has little ability to mitigate the margin significant capital structure changes.
impact.
Operates in a highly competitive and fragmented market
characterized by product substitution and is subject to Expected to have financial policies (including risk
extremely high and unpredictable revenue and margin volatility and liquidity management) that create elevated
Caa $0.25 - $0.5 0% - 2.5% 6.25x - 7.75x 0% - 7.5% (5)% - 0% 0.75x - 1.5x
due to weak and highly volatile end-markets; offers one or few risk of debt restructuring in varied economic
products; input costs are volatile and the company essentially environments.
has no ability to mitigate the margin impact.
Expected to have financial policies (including risk
Operates in an intensely competitive market that is and liquidity management) that create elevated
Ca < $0.25 < 0% > 7.75x < 0% < (5)% < 0.75x
approaching obsolescence. risk of debt restructuring even in healthy economic
environments.
[1] For the linear scoring scale, the Aaa endpoint value is $75 billion. A value of $75 billion or better equates to a numeric score of 0.5. The Ca endpoint value is zero. A value of zero or worse equates to a numeric score of 20.5.
[2] For the linear scoring scale, the Aaa endpoint value is 50%. A value of 50% or better equates to a numeric score of 0.5. The Ca endpoint value is (5)%. A value of (5)% or worse equates to a numeric score of 20.5.
[3] For the linear scoring scale, the Aaa endpoint value is 0x. A value of 0x or better equates to a numeric score of 0.5. The Ca endpoint value is 12x. A value of 12x or worse equates to a numeric score of 20.5, as does a negative Debt/EBITDA value.
[4] For the linear scoring scale, when net debt is positive, the Aaa endpoint value is 80%. A value of 80% or better equates to a numeric score of 0.5. The Ca endpoint value is (5)%. A value of (5)% or worse equates to a numeric score of 20.5. When net
debt is negative and RCF is positive, the numeric score is 0.5. When net debt is negative and RCF is negative or zero, the numeric score is 19.5.
[5] For the linear scoring scale, the Aaa endpoint value is 35%. A value of 35% or better equates to a numeric score of 0.5. The Ca endpoint value is (10)%. A value of (10)% or worse equates to a numeric score of 20.5.
[6] For the linear scoring scale, the Aaa endpoint value is 30x. A value of 30x or better equates to a numeric score of 0.5. The Ca endpoint value is 0x. A value of 0x or worse equates to a numeric score of 20.5.
Source: Moody's Investors Service

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Discussion of the scorecard factors

In this section, we explain our general approach for scoring each scorecard factor or sub-factor, and we describe why they are
meaningful as credit indicators.

Factor: Scale (20% weight)

Why it matters
Scale is an important indicator of the overall depth of a company’s business and its success in attracting a variety of customers, as well
as its resilience to shocks, such as sudden shifts in demand or rapid cost increases.

Larger manufacturing companies typically attract a greater breadth of customers and can better withstand cyclicality resulting from
economic conditions and product cycles. A larger revenue base also generally leads to important economies of scale in raw material
purchases and corporate functions, particularly important given the need for global supply chain management to control costs for most
manufacturing companies. Larger manufacturers also tend to generate higher cash flow for capital reinvestment and debt reduction. In
addition, they generally have greater access to the capital markets, which can reduce the cost of capital.
How we assess it for the scorecard
Scale is measured (or estimated in the case of forward-looking expectations) using total reported revenue in billions of US dollars.

Factor: Business Profile (25% weight)

Why it matters
The business profile of a manufacturing company is important because it greatly influences its ability to generate sustainable earnings
and operating cash flows. Core aspects of a manufacturing company’s business profile are its market position, the breadth and stability
of the end-markets it serves, the diversity of its product offerings, as well as the effectiveness of the company’s cost structure. These
aspects of the business profile typically have a considerable impact on the stability of a manufacturing company’s revenue and margins.

A company’s market position is a meaningful indicator of its resilience to economic downturns and intensifying competition. A leading
market position may indicate that a company’s investments in manufacturing capacity, technology and R&D are translating into
competitive advantages and may provide insight into the extent of the differentiation of its products and services. Companies with
leading market positions are also generally more able to pass on increases in input costs to customers and have stronger negotiating
power, which may allow them to achieve more favorable payment terms from customers. For example, advance payments from
customers can reduce working capital needs and bolster liquidity. A leading position may also indicate high barriers to entry, which
further reinforces a company’s market position.

Manufacturers that provide diverse products and services to a broad range of end-markets can typically achieve more stable revenue
and margins and therefore more stable cash flow, because different end-markets and products may follow different economic and
product cycles. Companies with a high proportion of recurring revenue relative to total revenue, for example from long-term contracts,
also typically benefit from lower volatility and greater predictability of cash flow. Revenue that is spread across a mix of more stable,
predictable end-markets as well as more volatile end-markets allows a company to benefit from growth in more volatile businesses
while mitigating fluctuations in cash flow if revenue from that business declines. For example, rising sales to the longer-cycle medical
industry can offset declining sales in shorter-cycle industries such as the oil and gas sector when oil prices fall. Diversity across product
and service offerings and end-markets also typically goes hand in hand with customer diversity, limiting a company’s vulnerability to
the potential loss of any one customer or set of customers. Geographic diversity also supports stability because economic trends can
affect regions differently; a manufacturer with sales in different countries and regions can typically withstand weakness in one region
better than a company with a more limited geographic presence.

A manufacturer’s cost structure and its ability to control costs are also important indicators of its ability to withstand the cyclicality
inherent in the manufacturing sector. A company with more effective cost controls has greater flexibility to quickly adjust its expense
base, resulting in more stable margins through varied economic conditions than a company with little ability to mitigate the impact of
higher costs on margins. Manufacturers with strong supply chain management and a broad geographic footprint can typically cushion
the impact of fluctuations in input costs, including labor and raw materials, by sourcing lower-cost materials and shifting production
to lower-cost locations, which may lead to more stable margins. Given the typically global sales and production of the manufacturing

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sector, a company with a broad geographic footprint of manufacturing plants can typically control costs better than a company with
more limited options.
How we assess it for the scorecard
Scoring for this factor is based on a qualitative assessment of a manufacturer’s market position across segments, the stability of its
end-markets, and its cost control. We also consider historical and projected trends in revenue and margin, typically indicated by EBIT,
operating and EBITA margins.

We generally assess a company’s market position relative to its competitors and the overall competitiveness of the market. We
may consider market share, which we generally estimate based on information provided by third parties and company financial
disclosures, and we may also use non-public information. We may also consider whether barriers to entry are meaningful and reduce
potential competition from new entrants. We assess market position across a company’s business segments, typically where a segment
comprises a suite of products and services generally oriented to serving a set of customers. Core segments are those that represent key
competencies of the company and a material portion of the company’s revenue and cash flow.

In our qualitative assessment of end-market stability, we typically consider the different industries or sectors of the manufacturer’s
customer base. For example, a manufacturer with a significant concentration of sales to a single volatile sector (such as oil and gas or
automotive) would typically score lower on this factor than a company with customers diversified across multiple industries that are
likely to be affected by different business or economic trends. We also assess diversity of the manufacturer’s offering by considering the
breadth of products and services across its segments, and we may also consider the contribution of revenue from each key segment, as
well as geographic diversity (typically based on revenue from different regions or countries). We may also assess whether the company
benefits from long-term agreements, which provide revenue visibility and stability.

We typically assess cost control based on historical and projected margin trends and may also consider the portion of fixed costs
relative to variable costs and margins of a company’s key business segments. We typically consider the effectiveness of a company’s
supply chain management, including its geographic footprint of plants, its access to suppliers and its ability to source key inputs at
stable prices. Delayed deliveries, revenue shortfalls relative to forecasts, and margin deterioration may be indicators of poor supply
chain management and volatile costs for key inputs. We may also consider plant utilization.

Generally, we do not expect a given company’s business profile to exactly match each of the attributes listed for a given scoring
category. We typically assign the factor score based on the alpha category for which the company has the greatest number of
characteristics. However, there may be cases in which one characteristic is sufficiently important to a particular company’s credit
profile that it has a large influence on the factor score. For example, a concentration in volatile end-markets, such as truck or railcar
manufacturing, may limit a company’s score to Ba or lower even if the company has a strong market position and good cost control.

Factor: Profitability and Efficiency (5% weight)

Why it matters
Profits matter because they are needed to generate sustainable cash flow and maintain a competitive position, which includes an
ability to invest in marketing, research, factories and personnel. High profitability sustained over time is generally an indicator of
operating efficiency and competitive advantage.

Earnings before interest, taxes and amortization (EBITA), which incorporates depreciation expenses, as a percentage of revenue is
a useful measure of profitability for manufacturing companies, which reinvest in property, plant and equipment to maintain their
competitiveness.
How we assess it for the scorecard
EBITA MARGIN:

We use EBITA Margin, which is the ratio of earnings before interest, taxes and amortization (EBITA) to revenue.

Factor: Leverage and Coverage (35% weight)

Why it matters
Leverage and cash flow coverage measures provide important indications of a company’s financial flexibility and ability to sustain its
competitive position, as well as how much financial risk a manufacturer is willing to undertake.

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A manufacturer with strong financial flexibility is better able to invest in product innovation and adapt to changing customer
preferences and competitive challenges than a manufacturer with a constrained capital structure. The capital intensity of the
manufacturing sector also makes financial flexibility critical to absorbing unexpected costs and withstanding industry cyclicality.

This factor comprises four quantitative sub-factors:

Debt / EBITDA

The ratio of total debt to earnings before interest, taxes, depreciation and amortization (Debt/EBITDA) is an indicator of debt
serviceability and financial leverage. The ratio is commonly used in this sector as a proxy for comparative financial strength.

RCF / Net Debt

The ratio of retained cash flow to net debt (RCF/Net Debt) is an indicator of a company’s cash generation (before working capital
movements and capital expenditures, and after dividend payments) relative to its net debt (total debt minus cash and cash
equivalents).

FCF / Debt

The ratio of free cash flow to debt (FCF/Debt) provides a different view of a company’s ability to pay its debt, compared with the Debt/
EBITDA and RCF/Net Debt ratios, because it compares cash flow generation after working capital movements, capital expenditures and
dividends to total debt.

EBITA / Interest Expense

The ratio of earnings before interest, taxes and amortization to interest expense (EBITA/Interest Expense) is an indicator of a company’s
ability to meet its interest obligations.
How we assess it for the scorecard
Scoring for this factor is based on four sub-factors: Debt/EBITDA; RCF/Net Debt; FCF/Debt; and EBITA/Interest Expense.

DEBT / EBITDA:

The numerator is total debt, and the denominator is EBITDA.

RCF / NET DEBT:

The numerator is retained cash flow, and the denominator is net debt (total debt minus cash and cash equivalents).

FCF / DEBT:

The numerator is free cash flow, and the denominator is total debt.

EBITA / INTEREST EXPENSE:

The numerator is EBITA, and the denominator is interest expense.

Factor: Financial Policy (15% weight)

Why it matters
Financial policy encompasses management and board tolerance for financial risk and commitment to a strong credit profile. It is an
important rating determinant because it directly affects debt levels, credit quality, the future direction for the company and the risk of
adverse changes in financing and capital structure.

Financial risk tolerance serves as a guidepost to investment and capital allocation. An expectation that management will be committed
to sustaining an improved credit profile is often necessary to support an upgrade. For example, we may not upgrade the ratings of
a company that has built flexibility within its rating category if we believe the company will use that flexibility to fund a strategic
acquisition, cash distribution to shareholders, spin-off, or other leveraging transaction. Conversely, a company’s credit rating may
be better able to withstand a moderate leveraging event if management places a high priority on returning credit metrics to pre-

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transaction levels and has consistently demonstrated the commitment to do so through prior actions. Liquidity management3 is an
important aspect of overall risk management and can provide insight into risk tolerance.

Many manufacturing companies have historically used mergers and acquisitions to spur revenue growth, expand business lines,
consolidate market positions, advance cost synergies or seek access to new technology. Companies have also undertaken significant
divestitures of business units as an important component of their portfolio balancing strategies, with a goal of shedding lower
performing businesses or those that no longer align with evolving strategic objectives. In such cases, we typically weigh the loss of
earnings and cash flow from divested assets against the potential for improved margins and streamlining of the company’s remaining
portfolio of businesses.
How we assess it for the scorecard
We assess the issuer’s desired capital structure or targeted credit profile, its history of prior actions, including its track record of risk
and liquidity management, and its adherence to its commitments. Attention is paid to management’s operating performance and use
of cash flow through different phases of economic and industry cycles. Also of interest is the way in which management responds to
key events, such as changes in credit markets and liquidity environment, legal actions, competitive challenges or regulatory pressures.
Considerations include a company’s public commitments in this area, its track record for adhering to commitments and our views on
the ability of the company to achieve its target.

When considering event risk in the context of scoring financial policy, we assess the likelihood and potential negative impact of M&A
or other types of balance-sheet-transforming events. Management’s appetite for M&A activity is assessed, with a focus on the types
of transactions (i.e., core competency or new business) and funding decisions. Frequency and materiality of acquisitions and previous
financing choices are evaluated. A history of debt-financed or credit-transforming acquisitions will generally result in a lower score for
this factor. We may also consider negative repercussions caused by shareholder willingness to sell the company.

We also consider a company’s and its owners’ past record of balancing shareholder returns and debtholder interests. A track record of
favoring shareholder returns at the expense of debtholders is likely to be viewed negatively in scoring this factor.

Other considerations
Ratings may reflect consideration of additional factors that are not in the scorecard, usually because the factor’s credit importance
varies widely among the companies in the sector or because the factor may be important only under certain circumstances or for a
subset of companies. Such factors include financial controls and the quality of financial reporting; corporate legal structure; the quality
and experience of management; assessments of corporate governance, as well as environmental and social considerations; exposure to
uncertain licensing regimes; and possible government interference in some countries. Regulatory, litigation, liquidity, technology and
reputational risk, as well as changes to consumer and business spending patterns, competitor strategies and macroeconomic trends,
also affect ratings.

Following are some examples of additional considerations that may be reflected in our ratings and that may cause ratings to be
different from scorecard-indicated outcomes.

Captive Finance Subsidiaries

Some manufacturers have captive finance subsidiaries that provide inventory financing for customers. Ownership of a captive finance
subsidiary can be helpful during economic downturns because the captive finance subsidiary can be used to provide subsidies to
customers that might otherwise curtail equipment purchases, which in turn helps the manufacturer maintain revenue.

Captive finance subsidiaries can also constrain a manufacturer’s financial flexibility. This stress can result from the finance operation’s
need for supplementary equity capital and liquidity, which may be formalized in a support agreement.4 We typically consider the
likelihood and cost of the support that the company may extend to its captive finance subsidiary. For more details on how we assess
the credit impact of a captive finance subsidiary on a manufacturing company, please see our methodology for rating captive finance
subsidiaries of non-financial corporations.5

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Advance Payments in Working Capital

Manufacturing companies that require custom-made machinery or turn-key plants to produce goods for specific customers tend to
receive advance payments from those customers to contribute to the funding of working capital and mitigate some of the contract
risk (e.g., cancellation or non-payment). Advance and progress payments often exceed a manufacturer’s working capital requirements
for a project, resulting in excess cash, although this typically reverses to positive net working capital. The cash balance sourced from
prepayments may result in stronger net leverage ratios and a stronger liquidity position, even though the cash is dedicated to contract
completion and therefore not available either to pay back the manufacturer’s debt or to meet other liquidity needs.

We typically consider advance and progress payments part of working capital and not as explicit financial obligations because the
payments, or customer credits, are provided by business partners to fund working capital. However, a sharp fall-off in new orders may
precipitate a fast run-off of advance payments, exceeding cash releases from project completion and effectively creating new funding
needs, for which most companies hold extra cash. An analysis of cash requirements and sources through the various stages of a cycle is
an important consideration.

Guarantees, Letters of Credit and Bonding Lines

Manufacturers that supply equipment to construction projects typically provide letters of credit or bank guarantees for many kinds
of commitments, such as firm bids and completion and performance guarantees, and warranty obligations. Access to sufficient
committed credit or bonding lines for this purpose may therefore be an important consideration for some companies. The aggregate
amount that would be sufficient would reflect the company’s business growth, order cycle times, and the possibility that some bank
guarantees may not be returned by the customer immediately upon fulfillment.

We do not normally add unfunded letters of credit, bank guarantees or performance bonds (typically reported in the notes to financial
statements) to a manufacturing company’s total debt because the underlying commitment will only become an obligation contingent
upon triggering events, such as non-performance. The timing, likelihood and amount of any such obligations is often difficult to predict.
As long as the manufacturer maintains a track record of reasonably on-time and on-budget delivery and incurs only modest warranty
payments, we generally expect that drawings under letters of credit, bank guarantees or performance bonds will remain limited or
unlikely.
Regulatory Considerations
Companies in the manufacturing sector are subject to varying degrees of regulatory oversight. Effects of these regulations may entail
limitations on operations, higher costs, and higher potential for technology disruptions and demand substitution. Regional differences
in regulation, implementation or enforcement may advantage or disadvantage particular issuers.

Our view of future regulations plays an important role in our expectations of future financial metrics as well as our confidence level
in the ability of an issuer to generate sufficient cash flows relative to its debt burden over the medium and longer term. Regulatory
considerations may also play a role in our assessment of a company’s business profile, to the extent these affect its cost structure or
competitive position. In some circumstances, regulatory considerations may also be a rating factor outside the scorecard, for instance
when regulatory change is swift.
Environmental, Social and Governance Considerations
Environmental, social and governance (ESG) considerations may affect the ratings of companies in the manufacturing sector. For
information about our approach to assessing ESG issues, please see our methodology that describes our general principles for assessing
these risks.6

Manufacturing is a broad sector, and the credit impact of environmental risks, including air, soil and water pollution, as well as the
resulting costs of clean-up, may be higher in certain sub-sectors than in others. However, in most developed markets, clear regulation
and compliance by companies may reduce the risk of unexpected costs. Manufacturers with operations in countries with less rigorous
standards may face lower regulatory costs but possibly higher clean-up risks. The impact of these risks typically varies based on a
manufacturer’s business mix. Some manufacturers with asbestos exposure face cash payment requirements related to lawsuits or
regulatory requirements. Companies that sell primarily high-value-add products and services, such as medical devices, communications
equipment, and aerospace and defense products and services, can generally pass on to customers cost increases related to regulations,

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whereas companies that sell more commoditized products typically have to absorb cost increases. Manufacturers with exposure to
the auto manufacturing end-market may face greater environmental risk because of the challenge of meeting regional emissions
requirements. Demand trends for renewable products and innovations in energy technology may affect the competitive landscape,
which in turn may advantage some companies and disadvantage others.

Social considerations relevant to manufacturers relate primarily to labor and product safety. A shrinking pool of more highly skilled
workers, such as engineers, may pose a risk for some companies as they seek to keep pace with technological change. Workers in
certain hazardous industries may face potential health and safety risks. Product recalls or redesigns may affect a manufacturer’s supply
chain. Most manufacturers sell to other businesses, rather than to consumers, but companies with a significant presence in auto
manufacturing may have exposure to changing consumer preferences, given increasing awareness of the potential environmental
damage from emissions, as well as a trend toward ride-sharing and autonomous vehicles.

Environmental and social issues may play a role in our assessment of a company’s business profile, due to the potential impact of these
issues on a manufacturer’s competitive position and cost management.
Financial Controls
We rely on the accuracy of audited financial statements to assign and monitor ratings in this sector. The quality of financial statements
may be influenced by internal controls, including the proper tone at the top, centralized operations, and consistency in accounting
policies and procedures. Auditors’ reports on the effectiveness of internal controls, auditors’ comments in financial reports and unusual
restatements of financial statements or delays in regulatory filings may indicate weaknesses in internal controls.
Management Strategy
The quality of management is an important factor supporting a company’s credit strength. Assessing the execution of business plans
over time can be helpful in assessing management’s business strategies, policies and philosophies and in evaluating management
performance relative to performance of competitors and our projections. Management’s track record of adhering to stated plans,
commitments and guidelines provides insight into management’s likely future performance, including in stressed situations.
Excess Cash Balances
Some companies in this sector may maintain cash balances (meaning liquid short-term investments as well as cash) that are far
in excess of their operating needs. This excess cash can be an important credit consideration; however, the underlying policy and
motivations of the issuer in holding high cash balances are often as or more important in our analysis than the level of cash held.
We have observed significant variation in company behavior based on differences in financial philosophy, investment opportunities,
availability of committed revolving credit facilities and shareholder pressures.

Most issuers need to retain some level of cash in their business for operational purposes. The level of cash required to run a business
can vary based on the region(s) of operation and the specific sub-sectors in which the issuer operates. Some issuers have very
predictable cash needs and others have much broader intra-period swings, for instance related to mark-to-market collateral
requirements under hedging instruments. Some companies may hold large levels of cash at times because they operate without
committed, long-term bank borrowing facilities. Some companies may hold cash on the balance sheet to meet long-term contractual
liabilities, whereas other companies with the same types of liabilities have deposited cash into trust accounts that are off-balance-
sheet. The level of cash that issuers are willing to hold can also vary over time based on the cost of borrowing and macroeconomic
conditions. The same issuer may place a high value on cash holdings in a major recession or financial crisis but seek to pare cash when
inflation is high. As a result, cash on the balance sheet is most often considered qualitatively by assessing the issuer’s track record and
financial and liquidity policies, rather than by measuring how a point-in-time cash balance would affect a specific metric.

Across all corporate sectors, an important shareholder-focused motivation for cash holdings, sometimes over very long periods, is cash
for acquisitions. In these cases, we do not typically consider that netting cash against the issuer’s current level of debt is analytically
meaningful; however, the cash may be a material mitigant in our scenario analyses of potential acquisitions, share buybacks or
special dividends. Tax minimization strategies have at times been another primary motivation for holding large cash balances. Given
shareholder pressures to return excess cash holdings, when these motivations for holding excess cash are eliminated, we generally
expect that a large portion of excess cash will be used for dividends and share repurchases.

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By contrast, some companies maintain large cash holdings for long periods of time in excess of their operating and liquidity needs
solely due to conservative financial policies, which provides a stronger indication of an enduring approach that will benefit creditors.
For instance, some companies have a policy to routinely pre-fund upcoming required debt payments well in advance of the stated
maturity. Such companies may also have clearly stated financial targets based on net debt metrics and a track record of maintaining
their financial profile within those targets.

While the scorecard in this methodology uses certain leverage and coverage ratios with total (or gross) debt (including Debt/
EBITDA and FCF/Debt), we do consider excess cash holdings in our rating analysis, including in our assessment of the financial and
liquidity policy. For issuers where we have clarity into the extent to which cash will remain on the balance sheet and/or be used for
creditor-friendly purposes, excess cash may be considered in a more quantitative manner. While we consider excess cash in our credit
assessment for ratings, we do not typically adjust the balance sheet debt for any specific amount because this implies greater precision
than we think is appropriate for the uncertain future uses of cash. However, when cash holdings are unusually large relative to debt, we
may refer to debt net of cash, or net of a portion of cash, in our credit analysis and press releases in order to provide additional insight
into our qualitative assessment of the credit benefit. Alternatively, creditor-friendly use of cash may be factored into our forward view
of metrics, for instance when the cash is expected to be used for debt repayment. We may also cite rating threshold levels for certain
issuers based on net debt ratios, particularly when these issuers have publicly stated financial targets based on net debt metrics. In
cases where we believe that cash on the balance sheet does not confer meaningful credit support, we are more likely to cite gross debt
ratios in our credit analysis, press releases and rating threshold levels.

Even when the eventual use for excess cash is likely to be for purposes that do not benefit debtholders, large holdings provide some
beneficial cushion against credit deterioration, and cash balances are often considered in our analysis of near-term liquidity sources and
uses. Such downside protection is usually more important for low rated companies than for highly rated companies due to differences
in credit stability and the typically shorter distance from potential default for issuers at the lower end of the ratings spectrum.
Liquidity
Liquidity is an important rating consideration for all manufacturing companies, although it may not have a substantial impact in
discriminating between two issuers with a similar credit profile. Liquidity can be particularly important for companies in highly seasonal
operating environments where working capital needs must be considered, and ratings can be heavily affected by extremely weak
liquidity. We form an opinion on likely near-term liquidity requirements from the perspective of both sources and uses of cash. For
more details on our approach, please see our liquidity cross-sector methodology.7
Additional Metrics
he metrics included in the scorecard are those that are generally most important in assigning ratings to companies in this industry;
however, we may use additional metrics to inform our analysis of specific companies. These additional metrics may be important to
our forward view of metrics that are in the scorecard or other rating factors.

For example, free cash flow is not always an important differentiator of credit profiles. Strong companies with excellent investment
opportunities may demonstrate multi-year periods of negative free cash flow while retaining solid access to capital and credit because
these investments will yield stable cash flows in future years. Weaker companies with limited access to credit may have positive
free cash flow for a period of time because they have curtailed the investments necessary to maintain their assets and future cash-
generating prospects. However, in some cases, free cash flow can be an important driver of the future liquidity profile of an issuer,
which, as noted above, can have a meaningful impact on ratings.
Non-wholly Owned Subsidiaries
Some companies in the manufacturing sector choose to dilute their equity stake in certain material subsidiaries, for example through
an initial public offering, which may in some cases negatively impact future financial flexibility. While improving cash holdings on a
one-off basis, selling minority interests in subsidiaries may have a negative impact on cash flows available to the parent company
that may not be fully reflected in consolidated financial statements. The parent’s share of dividend flows from a non-wholly owned
subsidiary is reduced, and minority stakes can increase structural subordination, since dividend flows to minority interest holders are
made before the cash flows are available to service debt at the parent company. While less frequent, sale of a minority stake may be
accompanied by policies protective of the subsidiary that further limit the parent’s financial flexibility; for instance restrictions on cash
pooling with other members of the corporate family, limitations on dividends and distributions, or arms-length business requirements.

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Minority stakeholders may have seats on the board of the subsidiary. In many cases, we consider the impact of non-wholly owned
subsidiaries qualitatively. However, in some cases we may find that an additional view of financial results, such as analyzing cash flows
on a proportional consolidation basis, may be very useful to augment our analysis based on consolidated financial statements.8 When
equity dilution or structural subordination arising from non-wholly owned subsidiaries is material and negative, the credit impact is
captured in ratings but may not be fully reflected in scorecard-indicated outcomes.

For companies that hold material minority interest stakes, consolidated funds from operations typically includes the dividends received
from the minority subsidiary, while none of its debt is consolidated. When such dividends are material to the company’s cash flows,
these cash flows may be subject to interruption if they are required for the minority subsidiary’s debt service, capital expenditures
or other cash needs. When minority interest dividends are material, we may also find that proportional consolidation or another
additional view of financial results is useful to augment our analysis of consolidated financials. We would generally also consider
structural subordination in these cases.9 When these credit considerations are material, their impact is captured in ratings but may not
be fully reflected in scorecard-indicated outcomes.
Event Risk
We also recognize the possibility that an unexpected event could cause a sudden and sharp decline in an issuer's fundamental
creditworthiness, which may cause actual ratings to be lower than the scorecard-indicated outcome. Event risks — which are varied and
can range from leveraged recapitalizations to sudden regulatory changes or liabilities from an accident — can overwhelm even a stable,
well-capitalized firm. Some other types of event risks include M&A, asset sales, spin-offs, litigation, pandemics, significant cyber-crime
events and shareholder distributions.
Parental Support
Ownership can provide ratings lift for a particular company in the manufacturing sector if it is owned by a highly rated owner(s) and
is viewed to be of strategic importance to those owners. In our analysis of parental support, we consider whether the parent has the
financial capacity and strategic incentives to provide support to the issuer in times of stress or financial need (e.g., a major capital
investment or advantaged operating agreement), or it has already done so in the past. Conversely, if the parent puts a high dividend
burden on the issuer, which in turn reduces its financial flexibility, the ratings would reflect this risk.

Government-related issuers may receive ratings uplift due to expected government support. However, for certain issuers, government
ownership can have a negative impact on the underlying Baseline Credit Assessment.10 For example, price controls, onerous taxation
and high distributions can have a negative effect on an issuer’s underlying credit profile.
Other Institutional Support
In some countries, large corporate issuers have received government or banking support in the event of financial difficulties because
of their overall importance to the functioning of the economy. In Japan, our corporate ratings consider the support that has operated
there for large and systemically important organizations. Over the years, this has resulted in lower levels of default than might
otherwise have occurred. Our approach considers whether the presence of group and banking relationships may provide support when
systemically important companies encounter significant financial stress.
Seasonality
Seasonality is an important driver of customer demand and can cause swings in cash balances and working capital positions for issuers.
Higher volatility creates less room for errors in meeting customer demand or operational execution.
Cyclical Sectors
Scorecard-indicated outcomes in cyclical sectors may be higher than the rating at the top of the economic cycle and lower than the
rating at the bottom of the cycle. While using annual financials in the scorecard typically provides very useful insights into recent or
near-term results, ratings may also reflect our expectations for the progression of yearly results over a longer period that may include a
full economic cycle. However, cyclicality itself poses many different types of risks to companies, and cycles do not reverse themselves
with predictable regularity. A cyclical sector may also be affected by a secular decline or expansion. These considerations may be
incorporated qualitatively in ratings.

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Using the scorecard to arrive at a scorecard-indicated outcome

1. Measurement or estimation of factors in the scorecard
In the “Discussion of the scorecard factors” section, we explain our analytical approach for scoring each scorecard factor or sub-factor,11
and we describe why they are meaningful as credit indicators.

The information used in assessing the sub-factors is generally found in or calculated from information in the company’s financial
statements or regulatory filings, derived from other observations or estimated by Moody’s analysts. We may also incorporate non-
public information.

Our ratings are forward-looking and reflect our expectations for future financial and operating performance. However, historical results
are helpful in understanding patterns and trends of a company’s performance as well as for peer comparisons. Financial ratios,12 unless
otherwise indicated, are typically calculated based on an annual or 12-month period. However, the factors in the scorecard can be
assessed using various time periods. For example, rating committees may find it analytically useful to examine both historical and
expected future performance for periods of several years or more.

All of the quantitative credit metrics incorporate our standard adjustments13 to income statement, cash flow statement and
balance sheet amounts for items such as underfunded pension obligations and operating leases. We may also make other analytical
adjustments that are specific to a particular company.

2. Mapping scorecard factors to a numeric score

After estimating or calculating each factor or sub-factor, each outcomes is mapped to a broad Moody’s rating category (Aaa, Aa, A,
Baa, Ba, B, Caa or Ca, also called alpha categories) and to a numeric score.

Qualitative factors are scored based on the description by broad rating category in the scorecard. The numeric value of each alpha
score is based on the scale below.

Exhibit 3

Source: Moody's Investors Service

Quantitative factors are scored on a linear continuum. For each metric, the scorecard shows the range by alpha category. We use the
scale below and linear interpolation to convert the metric, based on its placement within the scorecard range, to a numeric score,
which may be a fraction. As a purely theoretical example, if there were a ratio of revenue to interest for which the Baa range was 50x
to 100x, then the numeric score for an issuer with revenue/interest of 99x, relatively strong within this range, would score closer to 7.5,
and an issuer with revenue/interest of 51x, relatively weak within this range, would score closer to 10.5. In the text or table footnotes,
we define the endpoints of the line (i.e., the value of the metric that constitutes the lowest possible numeric score, and the value that
constitutes the highest possible numeric score).

Exhibit 4

Source: Moody's Investors Service

3. Determining the overall scorecard-indicated outcome

The numeric score for each sub-factor (or each factor, when the factor has no sub-factors) is multiplied by the weight for that sub-
factor (or factor), with the results then summed to produce an aggregate numeric score. The aggregate numeric score is then mapped
back to a scorecard-indicated outcome based on the ranges in the table below.

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Exhibit 5
Scorecard-indicated outcome

Source: Moody's Investors Service

For example, an issuer with an aggregate numeric score of 11.7 would have a Ba2 scorecard-indicated outcome.

In general, the scorecard-indicated outcome is oriented to the corporate family rating (CFR) for speculative-grade issuers and to the
senior unsecured rating for investment-grade issuers. For issuers that benefit from rating uplift from parental support, government
ownership or other institutional support, we consider the underlying credit strength or Baseline Credit Assessment for comparison to
the scorecard-indicated outcome. For an explanation of the Baseline Credit Assessment, please refer to Rating Symbols and Definitions
and to our cross-sector methodology for government-related issuers.14

Assigning issuer-level and instrument-level ratings

After considering the scorecard-indicated outcome, other considerations and relevant cross-sector methodologies, we typically assign
a CFR to speculative-grade issuers or a senior unsecured rating for investment-grade issuers. For issuers that benefit from rating uplift
from government ownership, we may assign a Baseline Credit Assessment.15

Individual debt instrument ratings may be notched up or down from the CFR or the senior unsecured rating to reflect our assessment
of differences in expected loss related to an instrument’s seniority level and collateral. The documents that provide broad guidance
for such notching decisions are the rating methodology on loss given default for speculative-grade non-financial companies, the
methodology for notching corporate instrument ratings based on differences in security and priority of claim, and the methodology for
assigning short-term ratings.16

Key rating assumptions

For information about key rating assumptions that apply to methodologies generally, please see Rating Symbols and Definitions.17

Limitations
In the preceding sections, we have discussed the scorecard factors and many of the other considerations that may be important in
assigning ratings. In this section, we discuss limitations that pertain to the scorecard and to the overall rating methodology.

Limitations of the scorecard

There are various reasons why scorecard-indicated outcomes may not map closely to actual ratings.

The scorecard in this rating methodology is a relatively simple tool that can be used in most cases to approximate credit profiles of
companies in this sector and to explain, in summary form, many of the factors that are generally most important in assigning ratings
to these companies. Credit loss and recovery considerations, which are typically more important as an issuer gets closer to default,

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may not be fully captured in the scorecard. The scorecard is also limited by its upper and lower bounds, causing scorecard-indicated
outcomes to be less likely to align with ratings for issuers at the upper and lower ends of the rating scale.

The weights for each factor and sub-factor in the scorecard represent an approximation of their importance for rating decisions across
the sector, but the actual importance of a particular factor may vary substantially based on an individual company’s circumstances.

Factors that are outside the scorecard, including those discussed above in the “Other considerations” section, may be important
for ratings, and their relative importance may also vary from company to company. In addition, certain broad methodological
considerations described in one or more cross-sector rating methodologies may be relevant to ratings in this sector.18 Examples of such
considerations include the following: how sovereign credit quality affects non-sovereign issuers, the assessment of credit support from
other entities, the relative ranking of different classes of debt and hybrid securities, and the assignment of short-term ratings.

We may use the scorecard over various historical or forward-looking time periods. Furthermore, in our ratings we often incorporate
directional views of risks and mitigants in a qualitative way.

General limitations of the methodology

This methodology document does not include an exhaustive description of all factors that we may consider in assigning ratings in this
sector. Companies in the sector may face new risks or new combinations of risks, and they may develop new strategies to mitigate risk.
We seek to incorporate all material credit considerations in ratings and to take the most forward-looking perspective that visibility into
these risks and mitigants permits.

Ratings reflect our expectations for an issuer’s future performance; however, as the forward horizon lengthens, uncertainty increases
and the utility of precise estimates, as scorecard inputs or in other considerations, typically diminishes. Our forward-looking opinions
are based on assumptions that may prove, in hindsight, to have been incorrect. Reasons for this could include unanticipated changes
in any of the following: the macroeconomic environment, general financial market conditions, industry competition, disruptive
technology, or regulatory and legal actions. In any case, predicting the future is subject to substantial uncertainty.

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Moody’s related publications

Credit ratings are primarily determined through the application of sector credit rating methodologies. Certain broad methodological
considerations (described in one or more cross-sector rating methodologies) may also be relevant to the determination of credit
ratings of issuers and instruments. A list of sector and cross-sector credit rating methodologies can be found here.

For data summarizing the historical robustness and predictive power of credit ratings, please click here.

For further information, please refer to Rating Symbols and Definitions, which is available here.

Moody’s Basic Definitions for Credit Statistics (User’s Guide) can be found here.

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Authors:

Karen Berckmann

David Berge

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Endnotes
1 A link to a list of our sector and cross-sector methodologies can be found in the “Moody’s related publications” section.
2 In our methodologies and research, the terms “scorecard” and “grid” are used interchangeably.
3 Liquidity management is distinct from the level of liquidity, which is discussed in the “Other considerations” section.
4 Where present, formal support agreements are typically granted by the manufacturer for the benefit of the finance company and its creditors. In some
cases, we may expect that support will be provided in the absence of a formal agreement.
5 A link to a list of our sector and cross-sector methodologies can be found in the “Moody’s related publications” section.
6 A link to a list of our sector and cross-sector methodologies can be found in the “Moody’s related publications” section.
7 A link to a list of our cross-sector methodologies can be found in the “Moody’s related publications” section.
8 For example, in the case of an equity stake reduction in a subsidiary down to 75%, in the parent’s financial statements, all revenue and EBITDA of the
subsidiary would typically still be consolidated at the group level.
9 Proportional consolidation brings a portion of the minority subsidiary’s debt onto the balance sheet, but this debt is structurally senior to debt at the
parent company, because it is closer to the assets and cash flows of the minority subsidiary.
10 For an explanation of the Baseline Credit Assessment, please refer to Rating Symbols and Definitions and to our cross-sector methodology for government-
related issuers. A link to a list of our sector and cross-sector methodologies and a link to Rating Symbols and Definitions can be found in the “Moody’s
related publications” section.
11 When a factor comprises sub-factors, we score at the sub-factor level. Some factors do not have sub-factors, in which case we score at the factor level.
12 For definitions of our most common ratio terms, please see Moody’s Basic Definitions for Credit Statistics (User’s Guide). A link can be found in the “Moody’s
related publications” section.
13 For an explanation of our standard adjustments, please see the cross-sector methodology that describes our financial statement adjustments in the
analysis of non-financial corporations.
14 A link to a list of our sector and cross-sector methodologies and a link to Rating Symbols and Definitions can be found in the “Moody’s related publications”
section.
15 For an explanation of the Baseline Credit Assessment, please refer to Rating Symbols and Definitions and to our cross-sector methodology for government-
related issuers. A link to a list of our sector and cross-sector methodologies and a link to Rating Symbols and Definitions can be found in the “Moody’s
related publications” section.
16 A link to a list of our sector and cross-sector rating methodologies can be found in the “Moody’s related publications” section.
17 A link to Rating Symbols and Definitions can be found in the “Moody’s related publications” section.
18 A link to a list of our sector and cross-sector methodologies can be found in the “Moody’s related publications” section.

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REPORT NUMBER 1287885

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Analyst Contacts CLIENT SERVICES

Jessica Gladstone, CFA +1.212.553.2988 Christian Hendker, CFA +49.69.70730.735 Americas 1-212-553-1653
Associate Managing Associate Managing
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Director Director
jessica.gladstone@moodys.com christian.hendker@moodys.com Japan 81-3-5408-4100
Mihoko Manabe, CFA +81.3.5408.4033 EMEA 44-20-7772-5454
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Director
mihoko.manabe@moodys.com

20 10 September 2021 Rating Methodology: Manufacturing