News Column

Fitch Affirms General Dynamics' Ratings at 'A'; Outlook Stable

August 1, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A' long-term and 'F1' short-term Issuer Default Ratings (IDRs) and debt ratings for General Dynamics Corporation (GD). The Rating Outlook is Stable. Approximately $3.9 billion of outstanding debt is covered by these ratings. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Key factors that support the ratings include GD's solid credit metrics, strong free cash flow (FCF; cash from operations less capital expenditures and dividends), financial flexibility and strong liquidity position, competitive position in business jets and defense, and large backlog. Another positive factor is the level of diversity in GD's portfolio of products and services, both domestically and internationally, including marine, ground combat systems and business jet businesses.

GD has a conservative balance sheet and disciplined operating strategy. The company maintained a strong credit profile through the recent downturn in the business jet sector and sizable reductions in U.S. military spending. The company steadily increased its cash balance from approximately $2.6 billion in 2011 to $5.3 billion as of December 31, 2013 to address uncertainty in its end markets. However, cash declined through the first half of 2014 due to large share repurchases, although cash levels are still healthy at $3.8 billion, roughly equal to outstanding debt. The company's leverage fluctuated in the 0.7x - 1.1x range over the past several years, and Fitch expects leverage to remain within the 0.9x - 1.1x range in the near future.

GD continues to reduce its exposure to the U.S. government by increasing international and commercial sales to 38% in 2013, up from 34% reported in 2012. The increasing commercial sales are fueled by the recovering business jet market, mitigating U.S. budgetary pressures and the expected decline in military spending. Fitch expects GD will increase its international and commercial sales in the next year.

Fitch notes a significant increase in the backlog of the company's Combat Systems segment due to a $10 billion international contract signed in the first quarter. Additionally, GD won the competition for the next generation Ground Mobility Vehicle bolstering the unit's future sales.

Fitch is concerned by declining revenues and corresponding declines in cash generation, which are expected to remain under pressure due to the impact of sequestration and the uncertainty of the timing of international orders. GD is exposed to declines in core U.S. defense spending in fiscal 2016 and beyond. A dramatic unexpected change in U.S. defense spending policies would be a key driver of GD's credit profile, although Fitch believes that modest declines in defense spending would not necessarily lead to negative rating actions given GD's current credit metrics, liquidity position, and diversified product portfolio.

Additionally, GD has a sizable pension deficit somewhat mitigated by GD's strong cash generation. Fitch expects pension contributions to remain a sizable part of GD's cash deployment strategy. At the end of 2013, GD's defined benefit pension plans were $2.5 billion underfunded (77% funded), down significantly from $4.9 billion (60% funded) at the end of 2012. The company's pension benefit obligation totaled $11.0 billion at the end of 2013, down from $12.1 billion at the end of 2012. GD contributed $600 million to its pension plans in 2012, of which $250 million was discretionary. The company plans to contribute approximately $550 million to its plans in 2014.

GD generated $2.1 billion of FCF (cash from operations less capital expenditures and dividends) in 2013, up from $1.3 billion in 2012, driven by improvements in operations and lower expenditures to fund working capital. The higher FCF in 2013 was partially bolstered by the pull forward of approximately $175 million of 2013 dividends which were paid in 2012. During the first half of 2014, GD generated $721 million FCF, slightly up from $717 million generated during the same period in 2013. Fitch expects GD will generate annual FCF in the range of $1.5 billion to $1.9 billion in the near future.

Acquisitions, share repurchases and dividend payments have been the focus of the company's cash-deployment strategy over the past several years, though the company moderated its share repurchases and acquisition activities in 2012 and 2013 before accelerating cash deployment this year. GD repurchased approximately $740 million worth of shares (gross) and did not make any acquisitions in 2013. Through the first half of 2014 GD repurchased $ 2.7 billion worth of shares, up from $485 million spent during the same period in the prior year and had not completed any acquisitions. Fitch expects the share repurchase activity will moderate for the second half of the year and will be in the range of $1.5 to $2.0 billion in 2015 and 2016. Fitch's ratings and outlook incorporate expectations of approximately $500 million of acquisitions annually and meaningful cash deployment toward shareholders via share repurchases and dividends. Fitch expects GD will continue steadily increasing dividend payments which are estimated to fluctuate in the range of $800 million to $860 million over the next two years.

INDUSTRY OVERVIEW

U.S. government spending trends are key drivers of GD's financial performance as the company generates approximately 62% of its revenues from the U.S. government, mostly from the Department of Defense (DoD).

U.S. defense spending is projected to remain stable during fiscal 2014 and 2015 at the fiscal 2013 level driven by the Bipartisan Budget Act of 2013 which became law in late 2013.

Despite stabilization of the U.S. military spending budget, Fitch expects 2014 to be another challenging year for U.S. defense contractors. The sequestration cuts implemented in 2013 should have a negative effect on most defense contractors for the next several years because of the lag between appropriations and outlays and Fitch expects revenues of most defense companies will decline in fiscal 2014.

GD's exposure to DoD spending is mitigated by strong margins, solid FCF, good diversification within DoD's programs, strong and growing international and commercial sales at a combined 38% of total revenues in 2013, good liquidity and large backlog. Additionally, some of the concerns are mitigated by the recent awards of a $10 billion international contract, block four Virginia class submarines and another Arleigh Burke-class destroyer.

GD derived approximately 26% of 2013 revenues from business jet sector, the highest percentage of sales historically. The segment accounted for approximately 38% of the company's operating income, also the highest since the Gulfstream acquisition. Parts of the business jet market have not yet recovered from the recession; however, the sector showed significant improvement during the first half of 2014. The market is split between larger jets (which are doing well) and mid-size and small jets (which are still under pressure). The business jet sector remains weak overall compared to its peak, and despite a slight increase in deliveries in 2013 and during the first quarter of 2014, it is at risk in the event of an economic downturn, with small jets most at risk in Fitch's view.

In 2013, a total of 678 business jets were delivered compared to 672 deliveries in the prior year marking the first increase in deliveries since 2008, when an historic high 1,313 aircraft were delivered. Billings reflected the strength of the large and midsize segments, increasing 19.4% compared to only a 1% increase in deliveries.

According to the General Aviation Manufacturers Association, worldwide business jet deliveries increased by 12.4% during the first half of 2014. Fitch expects deliveries in 2014 will increase in the high single digits, but revenues should outpace deliveries driven by an increasing mix of large and midsize jets.

GD is one of the industry's leaders in large jets. Through the downturn GD maintained profitability and continued developing the G280 and G650 programs, both of which received type certificates in 2012. GD also delivered the first fully outfitted G280 and G650 aircraft to customers in 2012. During the first half of 2014, GD's outfitted deliveries increased from 65 units to 77 units compared to the same period in 2013. The company's green delivers also increased from 65 units to 68 units during the first half of 2014.

RATING SENSITIVITIES

Fitch would consider a negative rating action if the company's leverage (debt / EBITDA) or FFO adjusted leverage deteriorate and remain within the ranges of 1.3x - 1.5x and 2.1x - 2.3x, respectively, driven by a cancelation of a key program, significant downturn in the business jet sector, unsuccessful attempts to reduce costs in line with revenue reductions, or more aggressive debt funded cash deployment actions.

Fitch does not an anticipate an upgrade in GD's ratings because of the current uncertainty in the defense spending outlook and Fitch's expectation that the company's liquidity will decline due to cash deployment to shareholders.

Fitch affirms GD's ratings as follows:

--IDR at 'A';

--Senior unsecured debt at 'A';

--Credit facilities at 'A';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843894

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

David Petu, CFA, +1 212-908-0280

Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Craig Fraser, +1 212-908-0310

Managing Director

or

Committee Chairperson

Bill Densmore, +1 312-368-3125

Senior Director

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters