Aug 13 - Overview
-- U.S.-based Kaman Corp. is acquiring Zeller Corp., an industrial
distribution company specializing in electrical, automation, and motion
-- 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.
On Aug. 13, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-'
corporate credit rating on Bloomfield, Conn.-based Kaman Corp. The outlook is
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 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.
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.
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
Corporate Credit Rating BBB-/Stable/--
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