Aug 29 - Fitch Ratings has affirmed the Issuer Default Rating
(IDR) and long-term ratings for Kennametal Inc. at 'BBB'. The Rating Outlook is
Stable. A full rating list follows at the end of this press release.
Kennametal's ratings incorporate the company's leading market positions,
geographic diversification, conservative financial policies and low leverage.
The company's solid operating results reflect demand in the company's industrial
and infrastructure segments and an improved cost structure associated with
previous restructuring. Debt/EBITDA at June 30, 2012 was 1.09x which Fitch views
as strong for the ratings. The company used a material increase in debt during
fiscal 2012 to help fund the acquisition of Deloro Stellite (Stellite) in March
for $383 million. The acquisition increased Kennametal's product and geographic
diversification, and should quickly support profitability and free cash flow.
Kennametal generated $143 million of free cash flow after dividends in fiscal
2012 compared to $107 million in 2011. Fitch estimates free cash flow could
increase in fiscal 2013 to at least $175 million - $200 million including the
impact of Stellite. Given Kennametal's low leverage, the company has the
capacity to make modest debt-funded acquisitions or deploy cash for share
repurchases without affecting the ratings. Cash requirements are modest,
including pension contributions. Kennametal's pension plans were underfunded by
$174 million at June 30, 2012, but a substantial portion is related to unfunded
plans outside the U.S. Kennametal estimates it will contribute $10 million in
2013, similar to 2012.
Kennametal's exposure to business cycles remains a key credit concern. The
company derives much of its revenue from consumable, short cycle products that
can be sensitive to economic conditions. Credit metrics can deteriorate
materially. Currently, the company's end-markets are mixed. A slowing pace of
orders reflects weakness in certain energy, power generation, and construction
markets, offset by steady demand in automotive and aerospace markets. Europe is
likely to remain weak. In the event of a downturn, Fitch believes the company's
credit metrics would be negatively affected, but the impact could be less than
previous downturns due to the company's operating improvements and the absence
of a solid recovery in certain markets such as construction.
Kennametal's results could become more stable as it broadens its product line
and customer base and increases the flexibility of its cost structure.
Mitigating concerns about the impact of a downturn are Kennametal's demonstrated
ability to generate positive free cash flow through a downturn; ability to
manage commodity prices through product pricing, and effective new product
development that supports the company's competitive position. Other rating
concerns include volatile commodity prices and normal integration risks related
Kennametal's liquidity at June 30, 2012 included $116 million of cash plus
approximately $388 million of availability under a $600 million bank revolver
that matures in 2016. Liquidity was offset by $34 million of short-term debt and
current maturities. Aside from outstanding balances under the revolver, the
company's only substantial debt consists of $300 million of notes due in 2022.
WHAT COULD TRIGGER A RATING ACTION
Positive: 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;
--Additional margin improvement;
--Sustained low leverage, which would support Kennametal's financial
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
--Margin pressure or weak FCF resulting from weak demand, high commodity prices,
or unexpected operating challenges;
--Aggressive cash deployment for share repurchases or other shareholder-friendly
actions that could increase debt/EBITDA materially toward 2.0x or higher.
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'.
Approximately $566 million of debt was outstanding at June 30, 2012.