Fitch Affirms Kennametal's Ratings at 'BBB'; Outlook Stable
CHICAGO -- August 28, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term
ratings for Kennametal Inc. (Kennametal) at 'BBB'. The Rating Outlook is
Stable. A full list of ratings follows at the end of this press release.
The ratings and Outlook reflect Fitch's expectations that Kennametal's
operating results will remain solid despite a still weak operating
environment. Lower costs from restructuring and stable commodity prices
resulted in double digit operating EBIT and record free cash flow (FCF) in
fiscal 2013, despite -9% organic revenue growth.
Order trends remain negative but appear to have bottomed and Kennametal is
anticipating gradual recovery in most end markets for fiscal 2014.
Kennametal's focus on expanding presence in faster growth developing markets
and increasing sales through distribution should augment low single digit
revenue growth for the year.
Kennametal is anticipating relative strength in transportation construction
and general engineering markets over the near-term, while mining activity
should remain weak and projects within energy markets choppy until at least
the second half of fiscal 2014. Nonetheless, long-term growth drivers remain
solid but cyclical in each of Kennametal's end markets.
Fitch expects operating EBIT will range from 10% to 15% through a normalized
cycle, driven by lower operating expense from past restructuring. Nonetheless,
Fitch anticipates the full reinstitution of incentive compensation and
incremental investments for expansion in developing economies will limit
Kennametal's ability to drive operating expenses meaningfully below 20% of
Fitch anticipates $100 million to $200 million of annual FCF, after the
company posted record FCF for fiscal 2013. Lower capital spending has
contributed to increasing FCF margins; however, previously deferred higher
capital spending in fiscal 2014 could offset growing profits.
With modest debt maturities and pension contributions over the next few years,
the company will use cash for acquisitions, or for a mix of share repurchases
and dividends. During fiscal 2013, Kennametal increased the share repurchase
program, under which there were 10.4 million shares available for repurchase
at June 30, 2013. The company has also increased dividends more than 10% in
each of the last three years.
Fitch expects solid mid-cycle credit protection measures for the ratings over
the longer term, given cyclicality of the business. Total debt to operating
EBITDA, which Fitch estimated was 1.8x for fiscal 2013, should remain below
2x, with free cash flow (FCF) to debt (20% for fiscal 2013) ranging from 10% -
20%. Nonetheless, Fitch expects acquisitions will be at least partially debt
funded, likely weakening credit protection measures over the short-term FCF
used to bring credit metrics back in line with long-term levels over the
subsequent 12 to 18 months.
Kennametal's pension plans were underfunded by approximately $95 million but a
substantial portion is related to unfunded plans outside the U.S. Kennametal
plans to contribute $12.2 million and $2.1 million to the pension and other
post-retirement benefit plans, respectively, in fiscal 2014.
KEY RATING DRIVERS
The ratings incorporate Kennametal's:
--Leading market positions due to solid product diversification and
--Positive FCF through the business cycle from solid profitability and
counter-cyclical working capital model; and
--Conservative financial policies.
Concern's center on Kennametal's:
--Exposure to business cycles, since the company derives much of its revenue
from consumable, short cycle products that can be sensitive to economic
--Volatile commodity prices, resulting in uneven gross profit margins; and
--Integration risks related to acquisitions.
Kennametal's liquidity at June 30, 2013 was sufficient and consisted of:
--Approximately $377 million of cash, the majority of which is located outside
--$595 million available under the company's $600 million bank revolving
credit facility expiring in 2018.
More than $100 million of annual FCF also supports liquidity. The company also
had uncommitted credit lines with various commercial banks of approximately
$90 million, translated into U.S. Dollars at June 30, 2013.
Total debt as of June 30, 2013 was approximately $748 million and primarily
--$400 million of senior notes due 2019; and
--$300 million of senior notes due in 2022.
Future developments that may individually or collectively lead to a positive
rating action include:
--Diversification into longer-cycle products that would reduce the company's
sensitivity to business cycles; and
--Structurally higher operating profit margin.
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Sustained operating margin pressure from a lower sales mix or inability to
pass through commodity price inflation; or
--Weak FCF from an inability or unwillingness to reduce inventory, moderate
capital spending, or ongoing robust annual dividend growth.
Fitch has affirmed Kennametal's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured bank facilities at 'BBB';
--Senior unsecured debt at 'BBB'.
Fitch's actions affect approximately $1.3 billion of total debt, including the
$600 million revolving credit facility expiring 2016.
Additional information is available at 'www.fitchratings.com'.
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Jason Pompeii, +1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Eric Ause, +1-312-606-2302
Craig Fraser, +1-212-908-0310
Brian Bertsch, +1-212-908-0549 (New York)
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