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02 Oct 2002
MOODY'S DOWNGRADES GOODRICH RATINGS -- SENIOR UNSECURED TO Baa3. OUTLOOK STABLE
Approximately $1.2 billion of debt securities affected
New York, October 02, 2002 -- Moody's Investors Service downgraded the ratings of Goodrich Corporation's
(Goodrich) debt -- senior unsecured to Baa3 from Baa1. The
rating action reflects the completion of Goodrich's acquisition
of TRW's aeronautical business for approximately $1.5 billion
The downgrade takes into account our expectation of significantly higher
pro-forma indebtedness on Goodrich's already leveraged capital
structure, a substantial increase in Goodrich's exposure to
the commercial aerospace sector when that industry has yet to reach the
cyclical trough, and the record of modest free cash flow from the
core Goodrich aerospace business. These negatives are partially
offset by Moody's expectation that Goodrich will aggressively reduce
the acquisition debt over the near term from issuance of primary equity
and the sale of assets, deployment of cash on hand, and free
cash flow from operations over the next 12 months. Also,
we believe management has demonstrated experience in integrating large
The rating outlook is stable. The ratings could be pressured should
the company not be able to sell assets or issue equity within the near
term, or fail to generate free cash flow from operations over the
first year of operation. This rating action completes the review
of Goodrich's debt ratings opened June 19, 2002.
Ratings downgraded are:
Goodrich Corporation Senior unsecured, medium term notes,
bank credit facility and certain IRBs to Baa3 from Baa1; shelf registration,
senior unsecured to (P)Baa3 from (P)Baa1, and preferred stock to
(P)Ba2 from (P)Baa3.
B.F. Goodrich Capital Trust preferred stock to Ba1 from
Rohr, Inc. Senior notes to Ba1 from Baa2
Coltec Industries Inc. (subsidiary of EnPro Industries, Inc.)
Trust preferred stock to Ba1 from Baa2, which is guaranteed on a
subordinated basis by Goodrich
Moody's points out that the additional pro-forma debt from
this transaction will add to Goodrich's already leveraged capital
structure. Goodrich's moderately high reported level of debt
to total capital (of 53% at fiscal, 2001) can be explained,
in part, by the application of pooling accounting when Goodrich
acquired certain companies with negative net worth, but also,
in part, by the company's record of acquisitions. Moody's
notes, however, that the more robust measures of leverage
of comparing total obligations to cash flow indicates a high level of
leverage given the rating category. Retained Cash Flow to Debt
averaged only 9.8% over the last three years, using
financial reports restated for the discontinued operations but not adjusted
for unusual items or the costs associated with acquisitions. On
the same basis, EBIT to Interest was 3.2x for fiscal year
2001 (treating the QUIPS as debt). The rating action anticipates
meaningful improvement in these credit measures over the near term.
The ratings take into account the expectation that Goodrich will reduce
a very significant amount of the incremental acquisition debt from a combination
of new equity and the disposition of operating and non-operating
assets over the near term. The ratings also anticipate further
debt reduction from free cash flow within the first year of operation.
Goodrich has a record of returning cash to shareholders, although
the relatively high dividend policy and share repurchases were with a
lower level of indebtedness and the major share repurchase program was
in anticipation of a divestiture. The rating also reflects Moody's
expectation of conservative financial policies, including the 25%
reduction in dividends earlier this year and suspension of stock repurchases
for some time. The willingness of Goodrich to issue equity at this
time is a strong statement by the company of its willingness to address
debtholder concerns over leverage. Also factored into the rating
is Moody's expectation that acquisitions over the next 12 to 18
months will be modest in size and of businesses that are clearly additive
to existing operations. Nevertheless, Goodrich has been acquisitive,
and we expect the company to remain so over the intermediate term --
in order to grow and to continue to improve its competitive position.
When considering leverage, Moody's factors in the material
amount of the company's off-balance sheet obligations including
the accounts receivable sold, equipment leases, guaranty of
third-party debt and unfunded pension obligations along with certain
contingent obligations such as letters of credit. Moody's
also notes that the asbestos claims of a former subsidiary company appear
to be manageable and further separated from Goodrich with the Coltec spin-off,
although the structure has yet to be tested.
With the acquisition, the substantial portion of the company's
revenue is exposed to the activity level in commercial aviation --
both the original equipment and after-market sectors. Nearly
all of the commercial airlines in the U.S. (the world's
largest market for aircraft) and many international carriers have substantially
reduced and/or deferred new aircraft orders. Consequently,
purchases of Goodrich products from the airframe manufacturers are likely
to be down at least through 2003. More importantly, the reduced
passenger traffic has resulted in the airlines reducing capacity --
with low or no growth of aircraft in service, the revenue flow to
Goodrich from aircraft cycles (takeoff and landing) and replacement parts
could be lower in the near term as well. Longer term, commercial
aviation is expected to be a growth industry -- generally faster
than the overall economy. However, the cycle is not likely
to track the overall economy, and is likely to lag any recovery
overall, in Moody's view.
According to Moody's, with the acquisition about one-third
of Goodrich's revenue will be from direct sales to the aircraft OEMs --
a market which is still in a downward trend and could take several years
to recover. About 40% of revenue is driven by aircraft usage
and/or cycles -- revenue growth could be slower going forward as
growth in commercial passenger bookings have stalled over the last several
months and the airlines could take down some of their current capacity.
The remaining revenue is largely from government sponsored defense and
space programs -- which is a relatively solid sector with stable
margins and growth expected.
We believe the uncertain operating environment for commercial aerospace
lowers the predictability of Goodrich's cash flow. Of particular
note, due to the numerous special costs for mergers, inventory
adjustments and taxes, the free cash flow from Goodrich's
core aerospace operations has been modest over the last several years.
Goodrich generated cash from the operation and the disposition of its
Moody's notes that the acquisition of TRW's aeronautical business,
in conjunction with the earlier spin-off of the Engineered Products
Unit, is consistent with Goodrich's strategy of evolving into
a pure aerospace company. Management will be focused on aviation
and defense markets without the distraction of managing a commercial business
with its attendant business cycles and investment profile. The
businesses acquired are complementary to Goodrich's existing operations.
Certain of the units acquired will either solidify or add to Goodrich's
market position in several key product areas. As a result,
the acquisition will add scale and critical mass to the overall market
position and will position the company as an even more critical supplier
to a number of its key customers.
Moody's believes that the acquisition has relatively low integration
risk. This is because of Goodrich's considerable experience in
initiating and integrating a substantial number of acquisitions,
as well as Moody's view that the integration plan itself is conservative
and achievable. Management expects the modest merger synergies
to be achieved over several years. At the same time, Moody's
notes that the expected value in this transaction is not from cost reductions,
but from the company's expectations of profitable growth in the
separate TRW business. This profitable growth depends on continued
market penetration and continued growth in the aerospace product aftermarket,
Goodrich Corporation, headquartered in Charlotte, North Carolina,
is a leading aerospace company serving commercial, military,
regional and general aviation markets.
Michael J. Mulvaney
Moody's Investors Service
VP - Senior Credit Officer
Moody's Investors Service
No Related Data.
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