Fitch Affirms Kennametal's IDR at 'BBB'; Outlook Stable

  Fitch Affirms Kennametal's IDR at 'BBB'; Outlook Stable

Business Wire

CHICAGO -- September 17, 2013

Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) at 'BBB'
for Kennametal Inc. (Kennametal) following yesterday's announcement that the
company will acquire Allegheny Technologies' Tungsten Materials business for
$605 million. The Rating Outlook is Stable. A full list of ratings follows at
the end of this press release.

The acquisition increases Kennametal's exposure to aerospace and energy
markets, strengthens tooling, engineered components and surface capabilities,
and advances Kennametal's metallurgical strategy. The company now will control
a portion of its supply, resulting in lower cost for a portion of its powder
supply.

The acquisition adds roughly $340 million of annual sales and further
diversifies Kennametal's end market and geographic sales mix. Mid-20% adjusted
EBITDA margins also will strengthen Kennametal's profitability even before
projected annual cost synergies of $30 million to $40 million from
efficiencies and raw material cost benefits.

The acquisition will strengthen free cash flow (FCF) margins, mainly from
higher profitability. However, the acquired materials business includes
certain capabilities that will reduce planned capital spending by $30 million
to $40 million over the intermediate term. Finally, Kennametal will receive
$60 million to $70 million of cash tax benefits over a number of years related
to the acquisition's geographic sales mix.

Kennametal will fund the acquisition with a combination of cash on hand and
borrowings under the $600 million revolving credit facility (RCF). Cash at the
end of the fiscal year ended June 30, 2013 was $377 million, the majority of
which was located outside the U.S. Therefore, borrowings under the RCF are
likely to be in the $400 million to $500 million range.

Credit protection will weaken from currently solid levels. Fitch estimates
total debt to operating EBITDA will approach 2.5 times (x), pro forma for the
acquisition, up from 1.8x for the fiscal year ending June 30, 2013. Fitch
expects Kennametal will repay borrowings under the RCF over the near term with
FCF, as it has done historically, returning credit metrics to long-term target
levels.

The ratings and Outlook continue to reflect Fitch's expectations that
Kennametal's operating results will remain solid from restructuring and stable
commodity prices, despite a weak operating environment.

The acquisition, as well as Kennametal's expanding presence in faster growth
developing markets and increasing sales through distribution should augment
low single digit revenue growth for fiscal 2014. Fitch anticipates $100
million to $200 million of annual FCF from operating EBIT ranging from 10% to
15% through a normalized cycle.

Fitch expects Kennametal's share repurchase activity to slow, given the
company's use of domestic cash for the acquisition. During fiscal 2013,
Kennametal increased the share repurchase program, under which there were 10.4
million shares available for repurchase at June 30, 2013.

KEY RATING DRIVERS

The ratings incorporate Kennametal's:

--Leading market positions due to solid product diversification and
engineering leadership;

--Positive FCF through the business cycle from solid profitability and
counter-cyclical working capital model; and

--Conservative financial policies over the long-term.

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
conditions;

--Volatile commodity prices, resulting in uneven gross profit margins; and

--Integration risks related to the materials business acquisition.

Kennametal's liquidity at June 30, 2013 was sufficient and consisted of:

--Approximately $377 million of cash, the majority of which is located outside
the U.S.;

--$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
consisted of:

--$400 million of senior notes due 2019; and

--$300 million of senior notes due in 2022.

RATING SENSITIVITIES

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:

--The company's use of FCF for share repurchases rather than reducing
borrowings outstanding under the RCF; signaling a shift in financial policies;
or

--Sustained operating margin pressure from a lower sales mix or inability to
pass through commodity price inflation.

Fitch affirms Kennametal's ratings as follows:

--Issuer Default Rating (IDR) at 'BBB';

--Senior unsecured bank facilities at 'BBB';

--Senior unsecured debt at 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802270

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Contact:

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause
Senior Director
+1-312-606-2302
or
Committee Chairperson
Timothy Greening
Managing Director
+1-312-368-3205
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
 
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