Fitch Affirms Boeing's Ratings at 'A/F1'; Outlook Stable
NEW YORK -- January 17, 2013
Fitch Ratings has affirmed the 'A' long-term and 'F1' short-term Issuer
Default Ratings (IDRs) for The Boeing Company (BA) and Boeing Capital
Corporation (BCC). A full list of ratings is included at the end of this
release. The Rating Outlook is Stable. The ratings cover approximately $10.5
billion of debt ($7.9 billion at BA and $2.6 billion at BCC).
The Stable Outlook reflects BA's substantial liquidity, debt reduction,
financial flexibility, and non-787 commercial backlog, all of which offset the
substantial risks in the 787 program, which is Fitch's main concern.
The grounding of the 787 fleet will hurt BA's profitability and cash flow, but
the company has the financial strength to withstand negative developments in
the program. The timing of the resolution of the 787 fleet grounding is
Fitch's key watch item, and a disruption to the program beyond several months
could lead to a Negative Outlook.
Recent developments with the 787 program include last night's announcement by
the FAA of an emergency airworthiness directive addressing potential battery
fire risk, temporarily grounding U.S. registered 787s. This follows the
grounding of 787s by two Japanese airlines and last week's announcement by the
FAA of a comprehensive review of the 787 program. Other countries and regions
have followed the FAA's lead and grounded the 787 fleet worldwide.
The program remains a key driver of BA's growth and competitive position, and
further material setbacks would likely lead to a review of the Rating Outlook,
or possibly the ratings, given the amount of 787 inventory (nearly $25
billion) on BA's balance sheet. The program currently accounts for a
relatively small amount of BA's revenues, estimated by Fitch at 5%-7% of 2012
revenues and 9%-12% of projected 2013 revenues.
At this point, it is not possible to determine whether the aircraft's
performance issues are typical growing pains for a new aircraft program or
indications of systemic problems. Indications that the 787 was becoming a
material credit issue would include significant delivery delays, large order
cancellations, inventory write-offs, financing difficulties, and/or
Boeing made progress on the 787 program during 2012 by improving the quality
of the production process, raising production rates to five per month,
delivering 46 aircraft (vs. three in 2011), and initiating deliveries at the
North Charleston facility. However, the 787 program remains a source of
several risks including the challenging plan to raise production rates to 10
per month by the end of 2013, the large amount of inventory on BA's balance
sheet, profitability pressures, and the string of operational issues in
delivered aircraft mentioned above.
Fitch is also monitoring the progress on introducing the 787-9, the potential
launch of the 787-10X, and the program's ETOPS certification.
2012 Performance and Credit Profile
BA's performance in 2012 supported the company's 'A' ratings. The company
successfully increased commercial deliveries 26% and took in the second
largest commercial order total in its history. Boeing's defense operations
performed better than Fitch expected, paying down nearly $2 billion of debt,
and contributed $1.5 billion to its pensions while improving its already
strong liquidity position (now $15.8 billion). Additional strengthening of
BA's credit profile is possible in 2013 from debt reduction and the
opportunities in its large backlog.
BA's debt ratings are supported by the company's balanced business portfolio
(commercial aerospace/defense), competitive positions in both of its main
business lines, liquidity position, financial flexibility, access to the
capital markets, and large backlog.
Rating concerns include margin levels that are weak for the rating category;
the outlook for U.S. defense spending; the aging of some of Boeing's defense
programs; the size of the company's pension deficit; and the susceptibility of
the commercial aerospace industry to shocks such as terrorism and disease. The
ongoing production ramp-up of commercial airplane deliveries, including
potential pressure on the supply chain, is also a concern, although this risk
is lower than a year ago. The contract negotiations with the engineers union
(SPEEA) is a near-term concern. Longer-term concerns include new competitors
at the lower end of the narrow-body aircraft market.
Liquidity and Credit Metrics
As of Sept. 30, 2012, BA had a strong consolidated liquidity position totaling
approximately $15.8 billion, consisting of $11.2 billion in cash and
investments and complete availability under $4.6 billion of bank facilities.
Consolidated debt at the end of September was $11.2 billion ($8.6 billion at
BA, $2.6 billion at BCC), and based on the retirement of a $750 million
maturity in the fourth quarter, Fitch estimates that BA ended 2012 in a solid
net cash position which should grow in 2013.
For the latest 12 months (LTM) ending Sept. 30, 2012, BA's consolidated
leverage (gross debt to EBITDA) was approximately 1.3x compared to 1.6x in
2011. Fitch estimates leverage based on core debt (manufacturing operations
excluding BCC) was 1.1x for the LTM period compared to 1.2x in 2011. Fitch
forecasts consolidated leverage will be 1.0x-1.1x for 2013 and core leverage
will be approximately 0.9x. The preceding calculations exclude non-cash
charges, but include the impact of non-cash pension expense.
BA's EBITDA margins remain low for the rating, and are trending down because
of the dilutive impact of 787 and 747-8 deliveries, fleet support costs, and
the increase in non-cash pension expense. Fitch estimates that BA's
consolidated EBITDA margins in 2012 were 9.5% to 10%, down from 11% in 2011,
and margins in 2013 should be flat to up modestly. Non-cash pension expense
created a full percentage point of margin headwind in 2012, and this will
likely increase in 2013.
Free Cash Flow and Cash Deployment
Fitch estimates BA's free cash flow (FCF; cash from operations less capital
expenditures and dividends) was greater than $2 billion in 2012, up from $1.1
billion in 2011. Fitch expects FCF will grow in 2013 and 2014 as commercial
deliveries continue to rise and working capital build decelerates. These
estimates include discretionary pension contributions, including $1.5 billion
in 2012. Extended disruption to the 787 program could change this forecast to
the downside, but Fitch expects BA would still generate positive FCF.
Boeing's cash deployment will likely increase in 2013, but Fitch expects the
bulk of the actions should be discretionary, highlighting the financial
flexibility that is a key credit positive for the company. Fitch anticipates
that BA will continue its focus on debt reduction and pension contributions in
2013, but BA has also announced it will resume share repurchases, in addition
to raising dividends, all of which is incorporated into Fitch's ratings. Fitch
expects BA's cash deployment will stay within the limits of its FCF
generation, allowing the company to maintain or build on its already
substantial liquidity position.
Fitch believes that the FAA's 787 review and the on-going SPEEA union
negotiations could delay some cash deployment actions beyond the first
Commercial Airplane Segment
In the commercial airplane segment (BCA) during the past year, the company
successfully executed higher production rates, lifting LCA deliveries by 26%
to 601 aircraft compared to 477 in 2011. Fitch projects BA will deliver 650
planes in 2013 and 730 planes in 2014. Orders in 2012 reached 1,339 aircraft
(1,203 net of cancellations), the second largest total in BA's history. BCA's
backlog continued to grow in 2012, reaching 4,373 aircraft, which represents
more than 6.5 years of production at 2013 production rates. Given the size of
the backlog, Fitch expects orders will decline in the next few years.
Defense and Security Segment
Boeing's Defense, Space, and Security (BDS) segment performed better than
Fitch expected in 2012, but it faces challenges in 2013 because of the
uncertain U.S. defense spending environment, including the pending Sequester
in March. Fitch estimates BDS accounted for 40% of BA's consolidated revenues
in 2012, and it generates as much as 75% of its revenues from the U.S.
government. Fitch conservatively forecasts declining revenues at the segment
over the next few years. Fitch considers BDS' portfolio to be of mixed
quality, with some programs having favorable demand outlooks (e.g. F-15, Air
Force Tanker) and others experiencing low backlogs (e.g. C-17). Cost reduction
opportunities and international contracts are factors that could offset some
or all of the impact from the U.S. defense environment.
The size of BA's pension deficit is a concern, and Fitch expects pension
contributions will be a cash deployment priority for the next several years.
At the end of 2011 BA's pension obligations totaled $67.7 billion, and the
deficit was $16.6 billion, for a funded percentage of 75%. However, on an
ERISA funding basis the plan was close to fully funded. Required cash
contributions are modest, but the company regularly makes discretionary
contributions, including $1.5 billion in 2012.
What Could Trigger a Rating Action
There could be a negative rating action if the current issues with the 787
program are not resolved in a timely manner or if the problems lead to
material negative developments with the 787 program leading to delivery
delays, order cancellations, large additional costs, or inventory write-downs.
Large acquisitions, although not anticipated, could also negatively affect the
ratings, as could a shift in the cash deployment strategy away from debt
reduction. Given the risks with the 787 program, a positive rating action is
not likely in 2013.
Fitch affirms the ratings for BA and BCC as follows:
--Long-term IDR at 'A';
--Senior unsecured debt at 'A';
--Bank facilities at 'A';
--Short-term IDR at 'F1';
--Commercial paper programs at 'F1'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable criteria and related research
--'2013 Outlook: Global Aerospace and Defense' (Dec. 21, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012).
Applicable Criteria and Related Research:
Rating FI Subsidiaries and Holding Companies
Finance and Leasing Companies Criteria
Global Financial Institutions Rating Criteria
Corporate Rating Methodology
2013 Outlook: Global Aerospace and Defense
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Boeing Company Contact:
Craig Fraser, +1-212-908-0310
One State Street Plaza
New York, NY 10004
David Petu, +1-212-908-0280
Jason Pompeii, +1-312-368-3210
Boeing Capital Contact:
Johann Juan, +1-312-368-3339
70 West Madison Street
Chicago, IL 60602
Katherine Hughes, +1-312-368-3123
Meghan Neenan, CFA, +1-212-908-9121
Brian Bertsch, New York, +1-212-908-0549
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