KMT Ups Synergies from Allegheny Tungsten

A couple of days after announcing completion of the acquisition of Allegheny Technologies Incorporated’s (ATI) tungsten materials business, Kennametal Inc. (KMT) at its Analysts Day held on Nov 6, 2013 provided details on integration synergies expected out of the transaction.

Let us first get a quick look at the acquisition details provided earlier by Kennametal:

The agreement was announced by Kennametal on Sep 16, 2013. Allegheny Technologies’ tungsten materials business is a leading producer of tungsten metallurgical powders and also provides tooling technologies and components. The business has two divisions namely, ATI Firth Sterling and ATI Stellram. Annual revenue generation capacity of the business is $340 million and employs 1,175 people operating from 14 facilities worldwide.

The transaction value was fixed at $605 million, which Kennametal paid using its available cash and borrowings under its existing revolving credit facility. The company anticipates it will realize $30-$45 million in annual savings (versus $30-$40 million expected earlier) via consolidation of both the operations, reduction in administrative overhead costs and leveraging supply chain. Integration costs of $40-$50 million are anticipated to be incurred through fiscal 2016.

Also, the management of Kennametal provided a near-term outlook on the acquisition. Sales within $200-$220 million range with neutral earnings impact is anticipated for the eight months of fiscal 2014. Cash tax benefits of $60-$70 million are also expected to be realized during the period.  

This acquisition builds on Kennametal's Emura and Stellite acquisitions, while also increasing the company's presence in key growth sectors, including aerospace, energy and associated process industries. Further, it has also accelerated Kennametal’s plan for an advanced tungsten carbide facility. The company has lowered its capital spending plans in a big way, from $65 million to $35 million.

Besides the acquisition details, Kennametal at its Analysts Day also discussed its long-term targets/goals. The company anticipates achieving organic growth rate of 6%-10% (CAGR), EBIT % to be greater than equal to 15%, earnings per share to grow within 15%-20% (CAGR), capital expenditures to be 3%-4% of sales, and free cash flow to be greater than or equal to net income. By fiscal 2017, the company anticipates to double its base business to $5-$6 billion range.

The company also maintained its previously provided guidance for fiscal 2014. These include sales within $2.7-$2.8 billion range, organic growth within 4%-6% range, earnings per share within $2.90-$3.05 range, cash flow from operations within $330-$380 million range, capital expenditure within $130-$150 million range and free cash flow within $200-$230 million range.

Kennametal Inc. currently has a market capitalization of $3.6 billion. The stock carries a Zacks Rank #3 (Hold). Other stocks to watch out for in the industry are Xylem Inc. (XYL) with Zacks Rank #1 (Strong Buy) and Lincoln Electric Holdings Inc. (LECO) with a Zacks Rank #2 (Buy).


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