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19 Jun 2007
Moody's upgrades Goodrich's rating to Baa2
Approximately $3.0 billion in Debt Securities Affected
New York, June 19, 2007 -- Moody's Investors Service upgraded Goodrich Corporation's ("Goodrich")
long term rating to Baa2 from Baa3. The outlook is Stable.
The rating upgrade reflects a combination of strong market share across
a broad portfolio of products, modest but steady debt reduction
achieved by the company over the past several years, an increase
in retained cash flow, an improvement in debt and fixed charge coverage
metrics, and the prospect for continued positive improvement.
Offsetting these positive ratings characteristics is the continued modestly
high levels of debt and improving but limited free cash flow generation.
Goodrich's most recent operating results are supportive of a Baa2 rating
following several years of under performance. Strength is particularly
evident in the rebound of free cash flow from almost break even in 2006
to more than 10% expected for 2007 (last twelve months ending March
31, 2007 results returned a ratio of free cash flow to debt of approximately
8%). Leverage is expected to decline to below 3.0x.
These metrics have improved due to a reduction in debt and an increase
in earnings and cash flow. More specifically, debt has declined
to $2.6 bn (including approximately $900 million
in pension and lease adjustments) as of 12/31/06 from $3.4
bn (including approximately $800 million in pension and lease adjustments)
at the end of 2002. Over this same time period retained cash flow
increased to $766 million from $305 million on a fully adjusted
Moody's notes that free cash flow had been constrained by increased capital
spending on new products ($257 million in 2006) and a large use
of cash for working capital purposes in 2006 ($313 million).
High levels of capital spending can be expected at this point in the business
cycle as the company invests in new products and manufacturing capacity.
A modest increase in working capital is also typical as production increases,
although a considerable portion of the working capital increase in 2006
was unexpected and partially due to increased inventory arising from delays
in production of Airbus's A380 aircraft. Moody's anticipates that
this investment cycle has peaked and both capital spending and demands
on cash from working capital needs will moderate in 2007.
In the intermediate term the company is expected to produce higher earnings
and cash flow and a flat to declining debt profile. Operating margins
should increase as a result of efficiency efforts and declines in new
product development expenses and spending on the introduction of the A380
landing gear. Although some expenditure is expected as the company
competes for product positions on the A350XWB, large expenditures
associated with the B787 and capital spending on increased aftermarket
service and support capacity should see declines.
Goodrich has benefited from increasing utilization of its products on
passenger aircraft and aftermarket demand. High margin aftermarket
parts and services revenue are expected to increase driven by total global
aircraft usage and Goodrich's increased investment in its global
maintenance capacity. Although a large portion of its revenue base
is associated with the highly volatile commercial aerospace industry,
the company's growing aftermarket business mix is expected to provide
for some cash flow protection during declines in OEM production.
OEM sales are not expected to decline for at least the next two years.
But should they do so, margins could increase if aftermarket activities
remain unchanged. This result would moderate the impact of a decline
in revenues on overall cash flow. Key to this outcome is continued
growth in the company's installed base. In addition and helpful
to cash flow, is the expectation that large research and development
expenditures will tend to decline during periods of low demand for new
While this is the expected outcome of an industry downturn, a large
scale event that resulted in declining aircraft utilization (global economic
contraction or SARS for example) would negatively affect Goodrich's
revenues and margins, and subsequently cash flow. Free cash
flow could also be negatively affected by an unexpectedly large capital
expenditure for new products such as the Airbus A350XWB or an acceleration
of the development of a new single aisle aircraft.
Goodrich's defense and electronics businesses continue to benefit
from increasing demand. The company's products are extensively
used in helicopters for example and the current high rate of usage by
the military in Iraq and Afghanistan is expected to continue. After
the conflict ends, repair and replacement of aircraft should provide
a long term revenue stream.
..Issuer: Goodrich Corporation
....Multiple Seniority Shelf, Upgraded
to a range of (P)Ba1 to (P)Baa2 from a range of (P)Ba2 to (P)Baa3
....Senior Unsecured Medium-Term Note
Program, Upgraded to Baa2 from Baa3
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Baa2 from Baa3
....Multiple Supported Revenue Bonds,
Upgraded to Baa2 from Baa3
..Issuer: Goodrich Corporation
....Outlook, Changed To Stable From
Goodrich Corporation, headquartered in Charlotte, North Carolina,
is a leading aerospace company serving commercial, military,
regional and general aviation markets.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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