TEXT-S&P affirms Kaman Corp 'BBB-' rating on Zeller acquisition

Mon Aug 13, 2012 2:12pm EDT

Aug 13 - Overview
     -- U.S.-based Kaman Corp. is acquiring Zeller Corp., an industrial 
distribution company specializing in electrical, automation, and motion 
control products. 
     -- This acquisition will cause credit metrics to weaken over the near 
term, but we expect contributions from this and earlier acquisitions, and 
management's commitment to maintaining the rating to result in an improvement 
in credit metrics over the next few quarters. 
     -- We are affirming our 'BBB-' corporate credit rating on Kaman.
     -- The stable outlook reflects our expectation that the company will 
manage its acquisition program in such a way as to restore reported credit 
metrics to the level we expect for the rating.

Rating Action
On Aug. 13, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' 
corporate credit rating on Bloomfield, Conn.-based Kaman Corp. The outlook is 
stable.

Rationale
The affirmation follows the company's announcement that it is acquiring Zeller 
Corp. (not rated) for an undisclosed amount. The acquired company will bolster 
the company's distribution business by expanding its product capabilities in 
the electrical, automation, and motion control segment of industrial 
distribution. The acquisition will also cause debt to increase. Debt has 
already increased in recent quarters as a result of several late 2011 
acquisitions and an increase in unfunded post-retirement obligations. As a 
result, credit metrics are currently below the levels we expect for the 
rating. However, we expect them to return to more appropriate levels for the 
rating over the coming year as earnings and cash flow from recent acquisitions 
get added to reported results. We also expect modest organic growth. Our 
expectation for the rating is that funds from operation (FFO) to debt will 
remain in the low-30% area and that debt to capital will average in the 
low-40% area. These measures stood at about 29% and 48%, respectively, as of 
June 30, 2012. Management has stated that it is committed to maintaining the 
current rating, and we expect it to manage its acquisition program in such a 
way as to restore and maintain credit metrics near the levels we expect for 
the rating. 

The ratings on Kaman reflect its moderate financial policies, its significant 
position in industrial distribution, and its solid niche positions in certain 
aerospace and defense markets. The company's exposure to the cyclical 
commercial aerospace and industrial distribution markets offsets these 
factors. Under our criteria, we classify Kaman's business risk profile as 
"fair" and its financial risk profile as "intermediate." Although Kaman 
remains vulnerable to potential Defense Department budget cutbacks, we believe 
the company's business mix, which includes significant nondefense revenues and 
earnings, somewhat mitigates its exposure.  

Liquidity
We characterize Kaman's liquidity as "adequate," even after factoring in the 
pending acquisition. We believe that sources of liquidity will exceed uses by 
at least 1.2x over the next two years, the minimum coverage under our criteria 
for an adequate designation. We also believe the company would stay in 
compliance with covenants under its credit agreement, even if EBITDA fell by 
15%. Financial covenants include senior debt to EBITDA of no greater than 
3.5x, total debt to EBITDA of no greater than 4x, and fixed charge coverage of 
no less than 4x. (Our calculations of debt and EBITDA are different from those 
in the credit agreements because we adjust for operating leases and unfunded 
post-retirement obligations.) The company was in compliance with these 
covenants as of June 30, 2012, and we expect it to remain in compliance. Kaman 
has a $275 million revolving credit facility, which expires in 2014. 

As of June 30, 2012, the company had $15 million of cash and about $174 
million available for borrowing under its credit agreement. About $11 million 
of letters of credit was outstanding under the agreement as of June 30, 2012. 
Near-term debt maturities are modest. The company recently stated that it 
expects to generate $30 million to $35 million in free cash flow this year.

Outlook
The outlook is stable. Credit protection measures are currently somewhat below 
our expectations for the rating, in large part because only a partial year of 
contributions from late 2011 acquisitions are included in reported numbers. 
With a full year of contributions from acquisitions factored in, credit 
metrics are close to our expectations for the rating. We expect that over the 
next few quarters the company will restore reported credit metrics to the 
levels we expect.  

Should leverage increase further as a result of acquisitions or if operating 
performance were to deteriorate unexpectedly, resulting in sustained FFO to 
debt of less than 25%, we could lower the rating. Given current debt levels, 
uncertainties related to the pace of the economic recovery in the U.S., and 
Department of Defense budget cuts, we do not believe an upgrade is likely over 
the next two years. However, if the company were to moderate its acquisition 
spending, commit to maintaining a stronger credit profile, and FFO to debt 
increased to 50%, we could raise the rating. 

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors for Global 
Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Methodology And Assumptions On Risks In The 
Aerospace And Defense Industries, June 24, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed

Kaman Corp.
 Corporate Credit Rating                BBB-/Stable/--     

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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