Fitch Upgrades Goodrich's Ratings to 'BBB+'; Outlook Stable

2008-08-07 19:44:03 -

- Fitch Ratings has upgraded the following credit ratings for Goodrich Corporation (NYSE:GR):

--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';

--Senior unsecured debt to 'BBB+' from 'BBB';

--Bank credit facility to 'BBB+' from 'BBB'.

The Rating Outlook is Stable. Approximately $1.6 billion of outstanding debt is covered by the ratings.

The upgrade is driven by significant margin expansion, sales growth, and improved cash generation over the past two years, as well as some recent debt reduction. These factors have strengthened GR's credit metrics to levels consistent with the new ratings, and Fitch believes GR has the ability to retain the new ratings if the aerospace environment weakens or if the company executes moderately sized acquisitions. Although Fitch expects GR to show improving cash flow and credit metric trends over the coming year, the Stable Outlook is appropriate given the general economic environment, as well as the potential for acquisition spending and the low likelihood of additional debt reduction.

The ratings reflect GR's competitive position in its markets, diversified customer base, balanced mix between original equipment manufacturer (OEM) and aftermarket sales, high defense spending levels, and strong operating margins. The company continues to benefit from large backlogs at Boeing and Airbus, rising global air traffic (although growth is slowing in some regions), and the aging of the Airbus and regional jet (RJ) fleets, which will benefit aftermarket sales. The company continues to achieve cost efficiencies while the backlog of business remains favorable.

Key concerns include the potential for debt-funded acquisitions, higher share repurchase spending, and macro issues affecting the commercial aerospace industry such as cyclicality, airline bankruptcies, and event risks (such as terrorism or disease). As aircraft retirements accelerate because of high fuel prices, GR could experience modest loss of aftermarket business, but the impact will likely be mitigated by the company's low content on older, inefficient aircraft models. There are some risks related to cash drains from delayed aircraft programs such the Boeing 787 and the Airbus A380, but Fitch considers these temporary issues which should reverse once the programs begin full production. Lesser concerns include asbestos liabilities and pension fund liabilities.

As of June 30, 2008, GR's liquidity consisted of $266 million in cash and $478 million in availability under a $500 million revolving credit facility, less $22 million in short-term debt and current maturities, for total liquidity of about $722 million. The company retired almost $200 million of debt in the first half of 2008, including $119 million of 7.5% notes in April 2008. GR has $130 million of 6.6% notes due in 2009, which Fitch expects to be refinanced. The underfunded global pension plans (88% funded, with a $417 million funding deficit as of Dec. 31, 2007) remain a modest concern, but Fitch considers this deficit to be manageable due to GR's financial position. The company expects to make plan contributions of between $50 million and $100 million in 2008.

GR continues to achieve solid financial performance. For the latest 12 months (LTM) ended June 30, 2008, operating EBITDA margin rose 180 basis points to 18.3% compared to the prior year period. LTM leverage, as defined by debt to operating EBITDA, was 1.3 times (x) versus 1.6x at fiscal year-end (FYE) 2007 and 2.1x at FYE 2006. Interest coverage as defined by operating EBITDA-to-interest expense rose to 9.8x for the LTM ended June 30, 2008, versus 8.4x for 2007 and 6.3x at FYE 2006. Sales grew almost 9% in 2007 and 15% in the first half of 2008.

The company generated $305 million of free cash flow (cash from operations less capital expenditures and dividends) for the LTM period ended June 30, 2008. Working capital needs and capital expenditures to fund new program investments and capacity expansion continue to be primary uses of cash. Capital expenditures are expected to remain above $300 million for 2008 before declining in 2009 onward. The company has indicated that it intends to utilize some excess cash for acquisitions; share repurchases (the 2006 $300 million, three-year program was recently increased to $600 million, and has about $346 million remaining); and discretionary pension contributions. 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, Fitch would review the Outlook or ratings for potential revision.

The large commercial aircraft (LCA) industry continues to perform well, despite a few program issues at the large aircraft makers Boeing and Airbus. Higher fuel prices in the first half of 2008 have raised the risk level in the industry, but Fitch still expects the industry to be stable or growing in 2008 and 2009 due to the large backlogs of orders at Boeing and Airbus (more than 7,300 aircraft) and the geographic diversity of the backlogs (less than 15% of the orders are to North American customers). This pipeline of orders for both Boeing and Airbus aircraft, new aircraft platforms, and growing GR content on new programs should continue to generate above-industry growth rates for the company's OE business.

Fitch expects GR's profitable aftermarket business is also poised for growth despite rising retirements and capacity reductions by airlines. Older aircraft in the fleet are being retired in favor of newer fuel-efficient models, and Fitch believes many of the older aircraft will be grounded permanently if fuel prices remain high. GR's exposure to fleet retirements is low because the company's content on out-of-production aircraft is limited.

High levels of U.S. defense spending should continue to support the GR's defense and space business (24% of sales). Excluding supplemental budgets, the core DoD fiscal 2009 budget request was up $515 billion or 7.5% from the enacted fiscal 2008 budget. Procurement spending is likely to remain strong for the next few years which should support GR's defense business.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Craig Fraser, +1-212-908-0310
Shawn Paydar, +1-212-908-0815
Media Relations:
Cindy Stoller, +1-212-908-0526