-- Precision Castparts plans to acquire Titanium Metals Corp.
for $3 billion, funded almost entirely with debt, which will result in a
significant deterioration in the firm's currently very strong credit protection
-- We are affirming our ratings on the aerospace supplier, including the
'A-' corporate credit rating and 'A-1' short-term rating.
-- The stable outlook reflects our expectations that the strong
commercial aerospace market and the company's solid history of integrating and
improving acquisitions should result in credit ratios consistent with the
rating over the next 12-18 months.
On Nov. 12, 2012, Standard & Poor's Ratings Services affirmed its ratings on
Precision Castparts Corp., including the 'A-' long-term corporate credit
rating and 'A-1' short-term corporate credit rating. The outlook is stable.
The ratings on Precision Castparts reflect our expectations that credit
ratios, which will decline materially from currently very strong levels
following the proposed acquisition, will return to levels more appropriate for
the ratings over the next 12-18 months. Precision Castparts recently announced
that it plans to acquire Titanium Metals Corp. (Timet; not rated) for
approximately $3 billion (including about $100 million in outstanding debt),
which we expect will be funded almost entirely with debt. Our current ratings
had incorporated the possibility of an acquisition of this magnitude. The
company has arranged for a $3 billion committed bridge facility but said it
expects that the acquisition will ultimately be funded through a combination
of cash on hand, commercial paper, bank debt, and proceeds from the sale of
notes and bonds. The company expects to complete the acquisition by the end of
The increased debt from the acquisition, the company's largest, will result in
credit ratios declining materially from currently very strong levels. We
believe that pro forma fiscal 2013 (ending March 31, 2013), assuming no
further acquisitions, debt to EBITDA will increase to about 1.3x from our
previous expectations of below 0.5x, debt to capital will increase to above
25% from 5%, and funds from operations (FFO) to debt will decline below 50%
from more than 250%. However, we expect that the strong commercial aerospace
market and the company's very successful history of integrating and improving
acquired operations should result in credit ratios returning to levels more
appropriate for the rating, notably FFO to debt above 60%, by the end of
fiscal 2014, supporting our "minimal" financial risk profile assessment.
Timet produces titanium and titanium alloys for commercial aerospace (63% of
2011 sales), industrial (17%), military (13%), and other markets (7%). Timet
is a key supplier to Precision Castparts (16% of 2011 sales were to Precision
Castparts). The acquisition will allow Precision Castparts to have more
control over its titanium supply and increases the company's exposure to the
strong commercial aerospace market. The acquisition will improve Precision
Castparts' competitive position modestly, but not enough to change our already
"satisfactory" business risk assessment. Timet's EBITDA margins are about 20%,
below Precision Castparts' close to 30% margins, but Precision Castparts has a
consistent history of improving margins at acquired operations, so it wouldn't
be surprising if they approach the current corporate average in a few years.
The acquisition increases the company's exposure to sometimes-volatile metal
prices, which could affect margins.
The short-term rating is 'A-1'. We believe Precision Castparts' liquidity will
remain "exceptional" pro forma for the proposed acquisition. We believe that
sources of liquidity will exceed uses by at least 2x in the next two years,
the minimum we require for the exceptional designation. We also expect that
sources would exceed uses even if EBITDA were to decline by 50%.
As of Sept. 30, 2012, cash and equivalents were $193 million. The company
often uses commercial paper (CP) to temporarily fund acquisitions and about
$444 million of CP was outstanding as of Sept. 30, 2012. The company generated
about $455 million of free cash flow in the first six months of fiscal 2013
and we believe free cash flow for the full year will exceed $1 billion, up
from $850 million in 2012, mainly as a result of higher earnings driven by the
strong commercial aerospace market and the contribution from acquisitions.
We expect the company to use its excess cash generation and borrowing capacity
for acquisitions. Precision Castparts made six acquisitions in the first half
of 2013 for a total of $1.4 billion. A $1 billion unsecured revolving credit
facility ($555 million available as of Sept. 30, 2012) maturing in November
2016 supplements Precision Castparts' internal liquidity and serves as backup
for any CP outstanding. The company has a substantial cushion under the
leverage covenant in the facility, which limits debt to capital, as defined,
to 65% (6.8% actual as of Sept. 30, 2012). We expect that the cushion will
likely be less, but still substantial, after the Timet acquisition.
Debt maturities are minimal in fiscal 2013, and a manageable $200 million is
due in fiscal 2014. The company has not stated what the permanent financing
for the Timet acquisition will be, but we expect debt maturities to remain
manageable. The company pays a small dividend and has historically not
The outlook is stable. Although credit ratios will be depressed following the
proposed transaction, we believe substantial free cash flow, solid demand from
the strong commercial aerospace market, and the company's demonstrated ability
to successfully integrate acquisitions should enable it to restore credit
measures to levels more appropriate for the rating in the next 12-18 months.
However, the transaction reduces the room in the current rating for further
large debt-financed acquisitions. We could lower the rating if further large
debt-financed acquisitions, a material deterioration in the commercial
aerospace market, or integration problems result in FFO to debt that we expect
to remain below 55% at the end of fiscal 2014. We could lower the short-term
rating to 'A-2' if large acquisitions cause us to revise our assessment of
liquidity to "strong." We are unlikely to raise the ratings following the
recent transaction because of the likelihood of further acquisitions and the
cyclical nature of the markets the company serves.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Standard & Poor's Standardizes Liquidity Descriptors for Global
Corporate Issuers, July 2, 2010
-- Key Credit Factors: Methodology And Assumptions On Risks In The
Aerospace And Defense Industries, June 24, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Precision Castparts Corp.
Corporate Credit Rating A-/Stable/A-1
Senior Unsecured A-
Commercial Paper A-1
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left