Fitch Ratings has affirmed
Fitch has also affirmed the Long-Term ratings on LHX's senior unsecured notes at 'BBB+', and Short-Term IDR and CP ratings at 'F1'. Fitch also is assigning a 'BBB+' Long-Term rating to the company's term loan, issued by LHX, to be used for the previously announced Viasat Tactical Data Link transaction. The Rating Outlook is revised to Negative from Stable.
The Negative Outlook reflects the elevated post-transaction leverage profile with pro forma initial EBITDA leverage around 4x. Fitch currently forecasts EBITDA leverage will likely remain outside of its current 2.5x negative sensitivity for around two years following the transaction. Integration risks are also heightened as AJRD has experienced moderate operational and supply chain constraints in recent quarters, and it may take LHX time to fully evaluate any manufacturing challenges that may arise due to the differences with its current portfolio. LHX is also in the process of closing a separate transaction, the
Fitch believes these concerns are somewhat offset by the positive effect the transaction has on LHX's business profile. The acquisition of AJRD further enhances and diversifies the company's offerings with high-demand space-related assets which are longer-cycle than many of LHX's current programs and offer revenue visibility and additional backlog (1.5x revenue at
Key Rating Drivers
Acquisition of
Leverage Above 2.5x through 2025: Fitch projects EBITDA leverage will likely remain well outside of LHX's 2.5x negative sensitivity at around 3.0x one-year post-transaction and in the mid-2x range by YE 2025. The company's highly diversified product portfolio and through-the-cycle FCF profile (Fitch estimates about
Fitch believes management will need to demonstrate commitment to a financial policy consistent with a 'BBB+' rating in order for Fitch to stabilize the rating. This would likely include limiting or pausing share repurchases and shifting capital deployment to debt repayment until EBITDA leverage returns to around 2.5x.
Substantial Product Diversification, Technology: Fitch considers LHX's portfolio highly diversified by product and program with differentiating and advanced technology. The company annually self-funds its R&D in order to innovate, which Fitch estimates at approximately 3% to 4% of sales. Exposure to material cost overruns is limited, particularly compared to some of its more concentrated peers. However, the company maintains a healthy mix between the original equipment manufacturer (OEM) and aftermarket sales which would likely mitigate the impact of an individual prime contract materially weighing on the company's financial performance.
Generally Supportive
RDTE, highly technological platforms, and classified spending should continue to grow over the next several years given the significant focus on modernization. A lesser degree of domestic spending on legacy platforms, O&M, and training could offset part of this growth. Fitch believes large, diversified prime contractors and their suppliers are well-positioned to compete over the long term given the large degree of research and development funding that will be required. This includes LHX, which operates as both a prime and a supplier, depending on the program, and offers a highly diversified product portfolio that spans several different areas of defense spending.
International Growth: LHX has opportunities to expand further into international channels. Many governments are facing pressure to increase defense spending in the face of heightened tensions in multiple theatres, including eastern
Derivation Summary
Fitch expects the LHX's profitability will remain stronger than similarly rated peers
Key Assumptions
Tactical Data Link acquisition is finalized in mid-2023 and
Flattish revenue growth in 2023; Low-to-mid single digit organic revenue growth beginning in 2024, driven by Space & Airborne Systems and munition demand;
High-teens EBITDA margins throughout the forecasted period, beginning with flattish margins in 2023, but improving steadily as supply chain issues and inflationary pressures dissipate;
Company shifts capital deployment strategy to debt repayment while integrating both acquisitions; Share repurchases are minimal beyond 2022 until EBITDA leverage gets below 3.0x;
Minimal integration issues or cost overruns with either of the announced acquisitions.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Public commitment to improving credit metrics and debt reduction to achieve debt to EBITDA approaching 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Financial metrics that could lead to a negative rating action include sustained debt/EBITDA above 2.5x;
Execution issues on key programs; significant debt-funded shareholder focused actions;
FCF margins below 5% absent a simultaneous improvement in leverage metrics.
Fitch could stabilize the ratings if management demonstrates commitment to a financial policy consistent with the 'BBB+' level. This would likely include limiting or pausing share repurchases and shifting capital deployment to debt repayment until EBITDA leverage returns to around 2.5x.
Fitch believes the EBITDA leverage sensitivities could widen following the transaction after integration risks dissipate given Fitch's view that the proforma cash flow risk profile will become incrementally more resilient via the more diversified, highly technological portfolio with industry leading margins and lower individual contract risk than competitors.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Fitch expects LHX will maintain robust liquidity in excess of
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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