Fitch Affirms Boeing's Ratings at 'A/F1'; Outlook Stable

Fitch Ratings has affirmed the 'A' long-term and 'F1' short-term Issuer Default Ratings (IDRs) for The Boeing Company (BA). Fitch has also affirmed the 'A' long-term IDR for Boeing Capital Corporation (BCC), and has withdrawn BCC's short-term IDR, commercial paper program rating, and credit facilities ratings. The BCC rating withdrawals reflect the reorganization of BCC as a result of its voluntary suspension of separate reporting with the SEC last year and the subsequent termination of the funding facilities mentioned above.

The Rating Outlook is Stable. The ratings cover approximately $9.6 billion of debt ($7.0 billion at BA and $2.6 billion at BCC). A full list of ratings is included at the end of this release.

Boeing's credit profile continued to strengthen in 2013. Higher commercial airplane deliveries, strong commercial orders, and further progress on the 787 program were representative of the strong commercial aerospace environment and solid execution within Boeing. The company's defense unit successfully weathered the onset of sequestration in the U.S. Strong free cash flow (FCF), debt reduction, and pension contributions improved the company's credit metrics and liquidity position. Resolving the key issues from the 787 grounding and executing new labor contracts with both the machinists and engineers unions now puts the focus on continued execution, margin enhancement, and cash deployment.

The Stable Outlook reflects Boeing's financial flexibility, liquidity, and backlog. A Positive Outlook could be driven by continued improvement in Boeing's credit profile from higher commercial aircraft deliveries, further progress on 787 program risk retirement, U.S. defense spending stabilization, debt reduction, and pension contributions. Several initiatives to boost margins, if successful, also could drive positive rating actions. However, more aggressive cash deployment to shareholders, defense spending uncertainty, and the need to bring down 787 costs make an outlook revision unwarranted at this time.

Boeing's debt ratings are supported by its balanced business portfolio (commercial aerospace/defense), competitive positions in its main business lines, financial flexibility, liquidity position, access to capital markets, high barriers to entry in its key businesses, and large backlog. Debt reduction also supports the ratings, with Boeing paying down nearly $2 billion of debt in 2012 and an estimated $800 million in 2013.

Rating concerns include low margin levels 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; some remaining risks with the 787 program; 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. Longer-term concerns include new competitors at the lower end of the narrow-body aircraft market.

KEY RATING DRIVERS

Boeing Commercial Airplane (BCA) Outlook and Deliveries Forecast

The Large Commercial Aircraft (LCA) market is in the middle of a strong upturn which will drive higher revenues and cash generation at BCA. A large order book, overbooked delivery slots, new airplane model deliveries, delivery acceleration requests, and geographic diversity support this outlook. BCA's performance in the next few years should drive the anticipated improvement in Boeing's financial profile.

Despite several commercial airplane production rate increases in the past two years, Fitch believes pressure to raise rates persists because of the large backlog and strong orders in 2013, which reached 1,531 aircraft (1,355 net of cancellations), the largest total in Boeing's history. BCA's backlog continues to grow, reaching 5,080 aircraft at the end of 2013. This is the largest backlog in Boeing's history and represents approximately seven years of production at estimated 2014 production rates, although this coverage varies greatly by program. At the end of September 2013, the commercial airplane backlog was $345 billion.

BCA successfully executed higher production rates in 2013, lifting LCA deliveries by 8% to 648 aircraft, following a 26% increase in 2012. Fitch preliminarily projects Boeing will deliver 725 aircraft in 2014 and 755 in 2015. These forecasts are based on announced production rate changes and Fitch's analysis.

While execution of deliveries of the large backlog is BCA's key focus this year, development activities still account for much of the segment's activity. BCA currently has five programs at various stages of development: 737MAX, 787-9, 787-10, 777X, and the U.S. Air Force's KC-46A tanker (which is based on the 767 and mainly built by BCA).

The 787 program remains a key driver of Boeing's growth and competitive position. While many risks have been retired, Fitch still has concerns about the program's profitability and large inventory level. Achievements in 2013 included resolving battery issues, initial flight of the 787-9, and the launch of the 787-10. Deliveries rose to 65 aircraft in 2013 from 46 in 2012, and deliveries should reach triple digits in 2014. Healthy net orders of 182 aircraft in 2013 indicate continued customer support of the program, and the order backlog rose to 916 planes. Achieving a production rate of 10/month is a key positive development that should mitigate some concerns.

Liquidity and Cash Flow

While FCF was volatile between 2008 and 2011, Boeing returned to its typical cash generation profile in 2012 and 2013, and Fitch estimates this will continue for the next several years. Latest 12 month (LTM) FCF (cash from operations, less capex and dividends) through September 2013 was $7.6 billion, but Fitch expects it will be below this level for 2013. Boeing's FCF was $4.5 billion in 2012, up from $1.1 billion in 2011. Fitch expects FCF will continue to be solid in 2014 despite higher dividends and continued working capital build up. These estimates include discretionary pension contributions, including $1.5 billion in 2013.

As of Sept. 30, 2013, Boeing had a strong consolidated liquidity position of $20.5 billion. This consisted of $15.9 billion in cash and investments, and complete availability under $4.6 billion of bank facilities. Consolidated debt at the end of September 2013 was $9.6 billion.

Metrics

For the LTM ending Sept. 30, 2013, Boeing's consolidated leverage (gross debt to EBITDA) was approximately 1.1x compared to 1.3x in 2012 and 1.6x in 2011. Fitch estimates leverage based on core debt (manufacturing operations excluding BCC) was 1.0x for the LTM compared to 1.0x in 2012 and 1.2x in 2011. Fitch forecasts consolidated leverage will be 1.0x-1.1x for 2013 and core leverage will be approximately 0.9x, with further improvements expected in 2014. The preceding calculations exclude non-cash charges, but include the impact of non-cash pension expense which is estimated at $3.2 billion in 2013. Funds from operations (FFO) adjusted leverage was 0.7x for the LTM period.

Cash Deployment

Fitch expects debt reduction and pension contributions should continue, but the company will prioritize cash deployment in the favor of shareholders as it looks to meet its target of returning 80% of FCF to shareholders. It recently announced a new $10 billion share repurchase program and a 50% dividend increase, which should bring annual dividends above the $2 billion level.

Fitch expects the bulk of cash deployment actions should be discretionary, highlighting the financial flexibility that is a key credit positive. Substantial increases in share repurchases and dividends are incorporated into Fitch's ratings. Fitch expects Boeing's cash deployment for share repurchases could exceed its FCF generation in the next several years, modestly reducing its liquidity position. Boeing has a pattern of turning off share repurchases in times of potential liquidity pressures, then resuming repurchases when the environment stabilizes.

Share repurchases through the third quarter of 2013 were $1.8 billion. These were partly offset by options proceeds of $871 million, and Fitch expects continued healthy options proceeds given the rise in Boeing's stock price. Fitch expects share repurchases could exceed $3.5 billion-$4 billion in both 2014 and 2015.

Pension

Boeing has one of the largest pensions in corporate America. Fitch expects discretionary pension contributions will continue during the next several years, but at a lower rate than in 2013. On a GAAP basis, Boeing's pension was underfunded by $19.7 billion at the end of 2012. The funding percentage on a FAS basis was 74%, but close to fully funded on an ERISA basis. Fitch expects the GAAP underfunded position could improve by up to 50% at the end of 2013 as a result of a higher discount rate, contributions, and healthy investment returns. The new machinists' contract could also eventually help the funding position, as the union's pensions will be frozen in several years and switched to defined contribution plans.

Margins

Boeing's margins remain low for an 'A' rated company, and success in its margin enhancement initiatives could strengthen Boeing's credit profile. Fitch estimates that Boeing's EBITDA margins were flat in 2013 compared to 2012, when margins fell by a percentage point to 10% because of the dilutive impact of 787 and 747-8 deliveries, fleet support costs for the introduction of these new aircraft, and the increase in non-cash pension expense. The approximately $850 million increase in of non-cash pension expense created a full percentage point of margin headwind in 2012, and this will repeat in 2013. However, even backing out the pension impact, Boeing's margins are low relative to similarly rated companies.

Fitch expects margins through 2015 to rise only modestly as the impact of higher aircraft deliveries is offset by defense weakness, continued increases in non-cash pension expense, and higher R&D as several commercial programs such as the 737 MAX, 787-10, and 777X move through development.

Boeing Defense, Space, and Security (BDS) Outlook

The U.S. defense spending environment is currently uncertain and under pressure, and BDS faces challenges 2014 because of that spending environment, including the sequester which was implemented in March 2013. BDS generates approximately 70% of its revenues from the U.S. Department of Defense, so the U.S. spending environment is a key concern. Fitch conservatively forecasts declining revenues at the segment the next few years. The recent budget deal covering two fiscal years provides some near-term spending relief, but longer-term concerns persist. Cost reduction opportunities and international contracts could offset some of the impact from lower U.S. spending.

Defense Programs

Fitch considers BDS' portfolio to be of mixed quality, with some programs having favorable demand outlooks (Air Force Tanker, missile defense) and others experiencing low backlogs (C-17, F/A-18). Total backlog at Sept. 30, 2013 was $70 billion, down modestly from year-end 2012. Boeing received sizable orders for P-8A maritime aircraft, Chinook helicopters, and V-22 aircraft in 2013. Fitch has increasing concerns about the outlook for the F-18 program in light of a recent international contract decision by Brazil. A decision by South Korea went against Boeing's F-15 offering, but that program still has solid backlog for several years in Fitch's opinion.

BCC

Fitch believes that BCC is a core subsidiary of BA, reflecting its role arranging, structuring, and providing financing to assist in the sale of BA's products. The ratings also supported by the high level of management and operational integration between the two entities, as well as BA's track record of support for BCC, reflecting the fungibility of funding between the two entities.

In addition, BA has provided a full and unconditional guarantee for the due and punctual payment and performance of all of BCC's outstanding publicly-issued debt. Fitch views the parent guarantee as the strongest form of parental support, which in Fitch's view, further enhances the rating linkages between the parent and subsidiary. Still, BCC's ratings also reflect its sound operating performance, stable asset quality and sufficient liquidity profile on a standalone basis.

BCC's operating performance is consistent with the company's operating strategy and focuses on minimizing the use of its own balance sheet in support of BA aircraft sales. Revenues have trended down in recent years due to a smaller portfolio, run-offs and aircraft sales; however, the company has remained solidly profitable. Asset quality has remained relatively stable over the years, as the company worked through a number of issues with domestic airline carriers and exposed itself to less risk as a result of the decrease in customer financing. Fitch believes that loss reserves, direct BA support, and current sector conditions provide sufficient support relative to potential losses on receivables.

RATING SENSITIVITIES

Positive rating actions could be driven by an improvement in Boeing's credit profile from higher commercial aircraft deliveries, debt reduction, and pension contributions. Several initiatives to boost margins, if successful, also could drive positive rating actions.

There could be a negative rating action if there are material negative developments with the 787 program or other aircraft programs leading to delivery delays, order cancellations, large additional costs, or inventory write-downs. Large acquisitions, although not anticipated, also could negatively affect the ratings, as could share repurchases that consistently exceed FCF. Sustained FFO adjusted leverage approaching 2.0x could lead to a negative action.

BCC's ratings and Rating Outlook are linked to those of its parent. Positive rating actions would be limited by Fitch's view of BA's credit profile. Fitch cannot envisage a scenario where the captive would be rated higher than its parent. Conversely, negative rating actions could result from a change in BA's ratings or from a change in the perceived relationship between BCC and BA, including the early termination of the parent guarantee prior to the repayment of BCC's outstanding publicly issued debt.

Fitch's ratings for BA and BCC are as follows:

Boeing:

--Long-term IDR affirmed at 'A';

--Senior unsecured debt affirmed at 'A';

--Bank facilities affirmed at 'A';

--Short-term IDR affirmed at 'F1';

--Commercial paper programs affirmed 'F1'.

Boeing Capital Corporation:

--Long-term IDR affirmed at 'A;

--Short-term IDR withdrawn 'WD';

--Senior unsecured notes affirmed at 'A';

--Bank credit facility withdrawn 'WD';

--Commercial paper withdrawn 'WD'.

The Rating Outlook is Stable.

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

Applicable criteria and related research

--'2014 Outlook: Global Aerospace and Defense' (Dec. 12, 2013);

--'The Boeing Company' full rating report (Nov. 4, 2013);

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'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:

2014 Outlook: Global Aerospace and Defense (Commercial Aerospace Flies Higher, Defense in a Stalemate)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726328

The Boeing Company (Boeing Capital Corporation)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721344

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

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

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815153

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Fitch Ratings
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