Good day, ladies and gentlemen. Welcome to the Genuine Parts Company's conference call to discuss today's announcement. Today's call is being recorded. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. At this time, I'd like to turn the conference over to Sid Jones, Senior Vice President, Investor Relations. Please go ahead, sir.
Good morning, and thank you for joining our call to discuss the Motion Industries acquisition of Kaman Distribution Group or KDG, announced earlier today. As a reminder, today's conference call and webcast include an investor deck, which is posted in the investors section of our website. Today's call may involve forward-looking statements regarding the company, our Motion business, and its acquisition of Kaman Distribution Group. Actual results could differ materially from any forward-looking statement due to several important factors described in, first, the company's latest SEC filings, second, this morning's press release, and third, the investor deck which management will be referring to during today's call. The company assumes no obligation to update any such forward-looking statements.
On the call today are Paul Donahue, our Chairman and Chief Executive Officer, Will Stengel, our President, Carol Yancey, our Executive Vice President and Chief Financial Officer, and Randy Breaux, President of Motion Industries. Now I'll turn the call over to Paul for his remarks.
Thanks, Sid, and good morning, everyone. We appreciate you joining us on the call today. We're pleased to host this call and discuss our announced plans to acquire Kaman Distribution Group. This acquisition represents a key strategic investment in our core industrial business. We thought it would be helpful to share a few details on the value created with this highly synergistic combination of Motion Industries and KDG, two leading industrial distribution companies which together create a premier leader in industrial solutions. The Motion and KDG businesses are quite complementary. KDG is a leading U.S. industrial distributor and solutions provider that has grown to more than $1 billion in annual revenues.
Its margin profile is comparable to Motion's, although we expect to improve on our profitability as a larger and stronger combined entity with pro forma 2022 revenues of nearly $8 billion and an approximate 10.5% EBITDA margin. Randy will share more on KDG later, but we're extremely excited for this acquisition for several reasons. It's highly strategic and highly synergistic business combination. It significantly enhances our scale and strengthens our market-leading positions in the industry, and it creates opportunities for accelerated organic growth and margin expansion. To summarize the transaction, GPC's wholly owned subsidiary, Motion Industries, will acquire Kaman Distribution for $1.3 billion in cash. The waiting period under the Hart-Scott-Rodino Act has expired, and we expect to close in the first quarter of 2022, subject to customary closing conditions.
We also expect the combination of these two businesses to generate approximately $50 million in annual run rate synergies achieved over three years. Finally, we are confident that the addition of KDG will be accretive to adjusted earnings per share beginning in 2022, excluding transaction amortization and non-recurring costs. We're fortunate to have found a strong partner in KDG to further build on our industrial footprint and the products and solutions we provide our customers today. Now I'll turn it over to Will for his remarks. Will?
Thank you, Paul, and good morning, everyone. To build on Paul's comments, this transaction is a great strategic fit for GPC and Motion. First, the acquisition aligns with GPC's capital allocation strategy to invest in our core business. Core organic, and in this case, inorganic investments extend our competitive positioning, add scale, infuse capabilities, and create shareholder value. For Motion, the KDG acquisition strengthens its market-leading position in a large fragmented market, a market that enjoys compelling near and long-term industry fundamentals, where we win with talent and technical expertise, scale, and service excellence. Motion and KDG enjoy many common characteristics that we can leverage as a combined organization. We share common and diverse end markets.
We offer complementary products, services, and engineered solutions. We serve a broad range of small, medium, and national customers across North America. We share similar go-to-market sales strategies and operating models that facilitate an efficient integration and clear path to value creation. We have similar strategic growth and productivity initiatives. Most importantly, we're excited to welcome the KDG teammates to the GPC and Motion family. We acquire businesses that share our core values and bring added talent to the company. Similar to Motion, KDG has enjoyed success over the years based on its hardworking teammates, technical expertise, and passion for serving the customer. In this regard, KDG is a perfect fit with the Motion team.
Because of the compelling fit, the combined organization is well-positioned to create value and deliver exciting long-term growth, operating productivity, and cash flow. The teams will create value as we, one, accelerate profitable growth by selling more to existing customers, cross-sell services and solutions, and acquire new customers through both traditional and digital channels. Two, optimize the branch and distribution network to create local market density and a best-in-class service and delivery experience. Three, expand our product breadth and harmonize supplier partnerships via complementary existing and new supplier relationships. Lastly, we can optimize business support costs. In total, we estimate the annualized run rate EBITDA synergy impact to be approximately $50 million to be captured over the next three years.
The teams have established dedicated cross-functional resources to lead the integration execution with a disciplined operating cadence. The transaction also aligns with our disciplined M&A evaluation approach. Not only does the transaction align with our strategic evaluation framework, it also meets our internal financial considerations as we work to execute strategic M&A that creates shareholder value. As you can tell from our comments, we're excited about the transaction fit, and we look forward to extending our lead in the industry as a stronger combined organization. With that, I'll now turn it over to Randy to share more about KDG. Randy?
Thank you, Will, and good morning. KDG was founded in 1971 and today is a leading national distributor of highly engineered products with 1,700 employees and 220 locations across the U.S. and Puerto Rico. KDG is an industrial solutions provider of electromechanical products, bearings, power transmission, motion control, and electrical and fluid power components to the MRO and OEM customers. This broad product offering, as well as value-added services in areas such as automation, engineering, and integration, complement Motion's products and services, adding to the scale of the combined organization. In addition, we share many of the same strategic suppliers and serve the same end markets, so a variety of similarities in our business. KDG operates through three key segments, with Kaman Industrial Technologies (KIT) representing the largest segment at 60% of the total revenue.
KIT is most comparable to our core power transmission and bearings business, and provides for additional logistics coverage and customer proximity across our existing network. As we move forward together, we will utilize the combined DCs and branch infrastructure to determine the most efficient and productive operations for best-in-class customer service. Kaman Automation and Kaman Fluid Power represent KDG's other two segments, with each representing 20% of the total revenues. The automation group expands our existing volume in engineering and integration services by 50%, and likewise, we will have 2x the current scale in fluid power, which reflects complete engineering design, build, installation, and integrations for electromechanical and pneumatic applications.
The combination of KDG is significantly incremental to our current offering in these key growth areas and provides value-add services and solutions for our customers, as well as new wallet share opportunities for our sales organizations. We are confident that KDG is a natural fit for Motion, and we are excited for the accelerated growth opportunities we feel this combination presents. For perspective, the combined Motion and KDG will still represent only 4% share in a highly fragmented $220 billion total addressable market, which also presents additional and compelling bolt-on opportunities and long-term growth fundamentals. With that, thank you, and I'll turn it over to Carol.
Thank you, Randy. Today's announcement represents months of hard work across the GPC, Motion, and KDG teams, and we wanna thank everyone involved for their commitment to this new partnership and a value-creating transaction. Upon closing in the first quarter of 2022, we expect to pay $1.3 billion in cash for 100% interest in Kaman Distribution Group. While we intend to use our revolving credit facility and cash from our accounts receivable sales agreement to fund the purchase at closing, we will subsequently repay the revolver with $1 billion in new debt. Today's cost of funding remains compelling, and financing the majority of this purchase allows us to maintain our targeted liquidity of $2 billion, which we believe is prudent in ensuring financial flexibility.
When our permanent financing is in place, we expect our capital structure to include approximately $3.5 billion in total debt, representing approximately 2x adjusted EBITDA and within our targeted levels. We intend to maintain our investment-grade rating with this financing, and we'll use our strong cash flows to pay down the incremental borrowings over time. We would also add that our capital allocation strategy remains unchanged. As we look ahead, we remain committed to the reinvestment in our businesses via capital expenditures, the dividend, which we have increased for 65 consecutive years, share repurchases, and ongoing M&A. We believe that our strong cash flow and healthy balance sheet effectively support these key priorities and ultimately serve to maximize shareholder value.
We believe in the long-term value creation of this business combination, and we're very excited to partner with such a fine organization to further strengthen our industrial operations. We are optimistic for enhanced profitability as we look ahead, and we expect the addition of KDG to be accretive to adjusted EPS in 2022, excluding one-time costs and intangible amortization. Importantly, we also expect significant earnings growth in years two and three, as synergies are achieved with positive diluted and adjusted EPS beginning in year 2023 or year two. You can look for us to update our full year 2022 financial outlook for GPC, including KDG, when we announce our year-end earnings on February 17, 2022. That's our financial summary for today. We thank you for your time, and at this point, I'll turn it back to Paul.
Thank you, Carol. This acquisition is an excellent fit for both companies, and we are very excited for the future of our industrial business. In closing, let me reiterate the compelling benefits of this important investment. This is a strategic and highly synergistic business combination. It significantly enhances our scale and strengthens our market-leading positions in the industry, and most importantly, bringing together two great companies like Motion and KDG creates opportunities for accelerated organic growth and margin expansion. That sums up our comments, and now we'll be happy to take any questions that you may have.
Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question at this time, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Chris Horvers with JP Morgan. Please proceed with your question.
Thanks. Good morning, everybody, and congratulations on the deal. My first question is, if you look back at the time that Kaman Corporation sold this segment, you know, basically it looks like, you know, sales are flat relative to the 2018 period on your, sort of, 2022 projected. Can you talk about like was that sort of the industry that drove that? Was it, did they divest certain businesses? It looks like they have the same amount of locations and, you know, just talk about also over that time, what's happened to the profitability of that business as we try to think about, you know, what you sort of paid for this on a TTM sales and EBITDA basis.
Okay. Well, first off, good morning, Chris, and thanks for joining us on short notice. I'm gonna let Randy tackle the specific industrial question, and kind of what's transpired on the revenue front over the last couple of years. As you know, Chris, our Motion business is having a rock-solid year. We're very pleased. We think there's great upside on the industrial business. Randy, maybe you want to weigh in a little bit on Chris's first question.
Excuse me. I think that the biggest answer there is strictly the pandemic and what we went through with the global downturn in business. When you look at KDG's revenues over the last couple of years there, they pretty much followed a similar track to Motion's. We pulled out of the pandemic recession a little bit quicker than KDG did, but they're certainly showing similar progress in the second half of this year. We look forward to that continuing.
Chris, it's Will. I would just say, you know, in terms of, I think you alluded to the multiple, I think the LTM multiple, given what Randy just described, is not the way that we thought about the transaction. Obviously, you can see the synergy potential and the recovery, and the margin profile of the business coming out of the COVID period. As we look forward to 2022, and then you add in the synergy potential, that's probably the better way to think about it.
Got it. At the time of the acquisition, it looked like that segment had about a 6% EBITDA margin. I'm sorry, what did you say in terms of what that business' EBITDA margin looks like currently?
Well, for illustrative purposes in our deck, we showed an 8% margin when we look at 2022 for the KDG business, and that's what we've given you for illustrative purposes. To Randy's point, the pandemic and the recovery on the top line, they've done a pretty darn good job on the operating side. As we look at their 8% margin, and again, for illustrative purposes, combined with Motion's 10% estimated margin for 2022, you're looking at 10.5% with the full synergies in there. Again, highly synergistic, and that gets us to the 9x multiple number that we've presented.
Understood. Then, two follow-up questions. First, you know, what is sort of the allocatable D&A to the Motion segment overall? Just trying to reconcile the EBIT to the EBITDA. Then on the synergy front, you know, you've made a lot of acquisitions over time, and I know you tend to be conservative in sort of the outlook. As you think about, you know, this as one of your larger acquisitions, what have you actually experienced when all is said and done from a synergy perspective? You know, it's about, you know, 4%, I think, of Kaman's total revenues. You know, what have you ultimately been able to extract, you know, in terms of trying to understand, put that 4% in perspective?
Then, sorry, one more. You know, within that, you know, how much of that 4% is sort of straight cost synergies, whether that's vendor buying or opportunities to optimize the business versus expected, you know, revenue synergies that are more uncertain?
Yeah, Chris. On the depreciation, if you look at our segment operating profit, the only add back, if you will, is about $30 million of depreciation f or Motion, for the industrial group. That would get you to the number that we presented about $30 million on an annual basis for depreciation. Amortization is already excluded from our segment operating profit.
Chris, I would just maybe take your second question, which is kind of how does the 4% of target revenue from a synergy perspective align to how we think about value creation in some of our other deals. It's pretty consistent with our bolt-on acquisition. I'd say we feel comfortable in our ability and the magnitude of the execution. As we talked about on the slide that walked through growth and cost synergies, as you could probably appreciate, you know, the branch overlap and kind of the synergies of the teams and kind of working together, I think those are probably more of an opportunity relative to sales synergies, if you will, if you had to calibrate on a relative basis. We feel good about all of the buckets.
We know the business, and we've got a good line of sight. We've done a lot of work to what that potential is. We feel good that we're gonna go out and execute and over-deliver.
Chris, I would just add one additional comment. In terms of the sales opportunities, as Randy mentioned, I think during his comments, a couple of their key product categories, fluid power and automation are big opportunities for us. Both of those are areas we've been focused on in recent years. We think there's big upside in both of those product segments, and we're truly excited to add that business to Motion.
Got it. I'll jump out and jump back in in the queue to let others join. Thank you.
Okay. Thanks, Chris.
Our next question is from the line of Bret Jordan with Jefferies. Please proceed with your question.
Hey, good morning, guys.
Morning, Bret.
Morning, Bret.
I guess it looks like a pretty diversified customer mix. Is there any real concentration with an individual customers? I mean, the product is pretty diversified, but I didn't see anything as far as customer concentration.
Hey, Bret, this is Randy. No, there's really nothing that would stand out there. No one customer represents more than 10% of their business, and we're very familiar with the customer base that they do have. There is a little overlap in customers, but the nice thing is that they serve a lot of medium and small customers that we currently don't sell to. That would be a synergistic opportunity for us, no doubt. We also bring some products that they don't sell to those customers today, so another opportunity for us to expand wallet share with the existing customers they have, and also some new customers as well.
Okay. On the synergy, it seems like there is a lot of customer overlap. Is the synergy sort of simple, you know, sharing supply chain, distribution infrastructure, or is it more of a cross-sell or leveraging either pricing on inbound or outbound side, just given your scale now? When you sort of bucket the synergies, is there like a top one or two?
You know, it's really all of the above that you just mentioned. You know, I don't think we need to break it down into each different bucket today, but we certainly have a variety of opportunities in everything you just mentioned, and we plan to take advantage of those, ASAP.
Okay, great. Thank you.
Thank you, Bret.
Our next question is from the line of Daniel Imbro with Stephens. Please proceed with your questions.
Yep. Hey, good morning, guys, and congrats on the deal.
Thank you, Daniel.
Thanks.
Randy, I wanted to start on the automation business. You mentioned how you guys have been growing that internally, and now you're kind of doubling, I think you said, the size of the business, the automation. Will you plan to run these brands alongside of KDG with Motion, or will you fold them into the Motion brand? Just trying to think about strategically how you move forward with this business with two pretty equally sized businesses.
Yeah. You know, KDG got a jump-start in the automation business a number of years ago with a couple of acquisitions, and they've continued to grow that business. We've built our automation business at Motion similarly through acquisition. Now we've pulled the Motion businesses together under one brand, this will give us an opportunity to harmonize the two businesses very nicely in the coming years. There'll be great synergy opportunities between the two businesses. It will bring us some new customers on both sides. It will also bring us some new product opportunities on both sides. When you look at it, this really fit into Motion's strategy all along to expand our automation business.
Rather than going out and buying several smaller businesses and combine them and integrate them, now we have one opportunity to integrate one business that's basically equal to the size of the current automation business we have, therefore doubling our scale in automation.
Hey, Randy, I'd add one other element to it, Daniel, and thanks for your question. They got a really talented team at KDG, and we're excited to combine the talent that will be coming on board from Kaman, along with our very, very talented team, automation team that we have currently at Motion. Lots of upside and a lot of excitement here around all things automation.
Thanks, Paul. Thanks, Randy. I actually wanted to ask on the teams. That's a good dovetail. I think looking through the filings, it looks like the headcount has been reduced pretty meaningfully, call it over 20% in the last few years at KDG. I'd be curious, as you look at the team today, you know, is there any internal infrastructure that needs to be built in that business before you can scale it? Just trying to think about maybe all the front-end loading of investment, if needed, to position that business for the growth you're planning as a pro forma company.
Absolutely not. The last couple of years, they have really done a nice job of building that business to the size and scale that it needs to be to continue to grow. This is just a great add-on for us. I don't think we need to have any additional infrastructure. We'll be able to take advantage of what they've already invested in, and further expand our growth opportunities and our investments that we've already made in the last few years as well. It's a great synergistic opportunity for our company to grow.
Great. Carol, just a quick clarifier. Did I hear you correctly to Chris's question that KDG has $30 million in annual depreciation in 2022, just as we work backwards from that $94 million of EBITDA on the slides?
No, that was for the Motion group. That was to sort of reconcile the EBITDA number for Motion. It's $30 million for the Motion group. KDG is roughly $8 million-$10 million. It's less than that.
Okay. That makes more sense. Thanks so much.
Hey, thanks, Daniel.
Thank you. Our final question comes from the line of Greg Melich with Evercore. Please proceed with your questions.
Hi. Thanks. I just wanted to understand a little bit more of the timing of the synergies and what's in that slide. If I got the last answer correct, it looks like you're paying about 11x EBITDA for KDG, and then once you include the synergies, it's around 9x. Did I get that right?
It's 9x after you count the $50 million of synergies, which we will achieve by the end of year three. Obviously, we'll update you more, as we go along, update you at the February meeting. The team feels good about the ability to execute on those. Honestly, we're early in the process. We haven't even closed yet, and so we think we'll be in good shape certainly to deliver those at the end of year three, and we're certainly gonna move as fast as we can.
It would be fair to say that it's sort of a straight line appreciation of the synergies? Is there any reason that it would clip at a certain point in those three years?
Yeah, I mean, Greg, again, we're early in the process. You may not be, you know, as straight line in year three, if you will. We would hope to have a bigger chunk of those done by the end of two years. But again, we're a bit early in this process. We'll update you more as we have our call in February.
Got it. I guess the last that goes back to the synergies, but it sounds like they're mainly costs, right, that you're not baking in revenue. Could you just help us understand a little bit more about the potential revenue synergies of taking, whether it's product overlap or customer overlap of where, you know, could you accelerate growth by 50 basis points or 100 basis points? Is that reasonable?
Yeah, Greg, I won't get into the basis point adjustments we would expect, but I will tell you that there are great opportunities for product synergies here. We offer products that you know the Kaman Group doesn't currently have, particularly in the industrial and safety category, but also they offer products to us on the fluid power and the automation side that the Motion team currently doesn't have. When we look at it, there's certainly wallet share opportunities with customers. There are certainly synergy opportunities for both sales forces as we move forward. Then there's one big aspect here that the Motion team offers, and that's repair services. We'll be able to bring that to the KDG customers immediately, and that's a great synergy opportunity from the sales side.
We think that while there are other synergies, in the structure, there's also great synergies on the sales side, and we're looking forward to executing on those very quickly.
That's great. Well, good luck and congrats.
Thanks a lot, Greg.
Thank you.
Our final question today is from the line of Carolina Jolly with Gabelli. Please proceed with your question.
Hi, guys. Thanks for taking my question. Just quickly, can you kind of review the decision, kind of the timeline into the decision? What makes this transaction better today than back in, you know, 2018, 2019?
Well, first off, good morning, Carolina. Glad you could join us. It's a great question and certainly one that we anticipated. You know, if you go back a few years ago, when Kaman first came on the market, quite frankly, we at GPC weren't in a position at that time. We weren't prepared. We were in the full integration of our European business, automotive business, Alliance Automotive Group. We are in the very early days, which was the largest acquisition that we had ever stepped into. Quite frankly, we had a new management team here at Motion. Randy had just really stepped into his role, was building his team. It really comes down to timing, Carolina.
We've been an admirer of the KDG business and the leadership team for some time. Again, it really just came down to timing. We could not be more excited at the timing now, to bring them into the GPC fold and bring them into the Motion fold. We're excited about 2022 and the opportunities ahead.
Okay, great. Thank you.
Thank you.
Thank you. At this time, we've reached the end of our question and answer session. I'll hand the floor back to management for closing remarks.
We'd like to thank all of you for joining us today. We're excited about this tremendous opportunity with KDG. We look forward to updating you in February with our year-end earnings and 2022 outlook. Thank you all for your support.
Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.