GR’s Issuer Default Rating (IDR) and existing unsecured debt ratings are ‘BBB+’. Approximately $1.87 billion of debt is covered by the ratings, including the new notes. The Rating Outlook is Stable.
The ratings reflect GR’s competitive position in its markets, a diversified customer base, a balanced mix between original equipment manufacturer (OEM) and aftermarket sales, high defense spending levels, and strong operating margins. Despite the current challenges in the marketplace, GR could benefit from increased deliveries at Boeing and Airbus in 2009, although other segments in the commercial aerospace industry are weakening.
Key concerns include the potential for debt-funded acquisitions, pension underfunding, share repurchase spending, and macro issues affecting the commercial aerospace industry such as cyclicality, airline bankruptcies, and event risks (such as terrorism or disease). Asbestos liabilities are a lesser concern. Weakness in some parts of the commercial aerospace industry is also a concern, and as aircraft retirements accelerate because of reduced global air traffic, GR could experience a modest loss of aftermarket business. However, the impact could be mitigated by the company’s low content on older aircraft models.
As of Dec. 31, 2008, GR’s liquidity consisted of $370 million in cash and $464 million in availability under a $500 million revolving credit facility, less $159 million in short-term debt and current maturities, for total liquidity of about $675 million. The underfunded global pension plans ($985 million funding deficit as of Dec. 31, 2008 versus $417 million a year earlier) remain a concern and a use of cash. The company contributed $227 million to its pension plans in 2008, and expects to make plan contributions of $150 million-$200 million in 2009. The company’s U.S. pension plans are 69% funded on a GAAP basis.
GR’s operating performance was solid in 2008. Leverage (debt to EBITDA) for 2008 was 1.2 times (x) compared to 1.6x in 2007. Operating margins improved 110 basis points to 17.2%. The company generated $388 million of free cash flow (cash from operations less capital expenditures and dividends) in 2009. Working capital needs and capital expenditures to fund new program investments and capacity expansion continue to be primary uses of cash. Capital expenditures for 2009 have been reduced to a range of $230 million-$270 million (versus the previous target of $275 million-$300 million). Fitch estimates that GR has adequate financial flexibility and cash flow to execute transactions of at least several hundred million dollars. However, if larger debt-funded acquisitions were accomplished or additional demands on cash arise, Fitch would review the Outlook or ratings for potential revision.