Fitch Affirms General Dynamics at 'A' on Announcement of Acquisitions

Business Wire, Dec 14, 2005

NEW YORK -- Fitch Ratings has affirmed all of the ratings for General Dynamics Corporation (GD) following the announcements of its plans to acquire Anteon International Corporation (ANT) and FC Business Systems (FCBS).

The ratings are as follows:

--Issuer default rating 'A';

--Senior unsecured notes 'A';

--Senior unsecured bank credit facility 'A';

--Commercial paper 'F1'.

The Rating Outlook is Stable. Approximately $3.3 billion of debt is covered by the ratings.

GD plans to purchase ANT for approximately $2.2 billion in cash, including the assumption of approximately $100 million in net debt. The transaction is subject to approval by Anteon's shareholders and government regulators. ANT, with latest 12 months (LTM) ended Sept. 30 revenues of approximately $1.5 billion, is a leading systems integrator that provides mission, operational, and information systems (IT) enterprise support to the U.S. government. ANT's expertise in Mission IT is expected to provide a bridge between GD's strengths in Enterprise IT Services and C4ISR. FCBS, with annual sales of approximately $150 million, is an engineering and IT services company that offers IT services to a wide variety of government customers. Terms of the transaction were not disclosed.

Fitch has concerns regarding the price being paid for ANT at more than 13 times (x) projected 2006 EBITDA, which is higher than other recent transactions in the defense industry, such as L-3 Communications Holdings' acquisition of The Titan Corporation and DRS Technologies, Inc. planned acquisition of Engineered Support Services, Inc. Partially mitigating this concern are ANT's high growth rates, its position within an area of the Dept. of Defense (DoD) budget which is expected to grow faster than the overall procurement budget, and its role in Homeland Security.

After the acquisitions, Fitch expects GD's credit metrics to be in line with similarly rated aerospace and defense companies. Fitch anticipates that GD will fund the acquisitions with existing cash balances, free cash flow generated prior to transaction close, and modest amounts of debt. Based on post-transaction free cash flow expectations, GD should be able to quickly repay the debt. However, GD's liquidity will be affected negatively, but Fitch expected GD to reduce its cash balances at some point. The company will still have access to its $2 billion revolving credit facility. In determining the rating, Fitch has also factored in GD's experienced management team's successful track record of acquisition integration.

The ratings also consider high levels of DoD spending; GD's diverse portfolio of military products; the company's growing capabilities in the area of information systems and technology that are in line with future DoD requirements and which are enhanced by the ANT acquisition; and the strong business-jet market. GD's ratings also reflect the company's fully funded pension plans and sizable and growing backlog. Fitch's concerns center on the effect that further large acquisitions could have on debt levels, the U.S. Navy's capital budget, the likelihood of a greater focus on returning capital to shareholders, and the effect of a potential loss in litigation with the DoD over the termination of the A-12 aircraft.

The Stable Rating Outlook is based on the favorable effect of DoD supplemental budgets and performance in the Aerospace segment, offset by: near-term concerns about uncertainty in the DoD budget related to overall spending pressures due to the federal budget deficit, the Quadrennial Defense Review (QDR), 'transformation,' recent contract restructurings, and continued performance issues on a contract for oil tankers.

Liquidity as of Oct. 2, 2005, was $3.2 billion, consisting of $1.8 billion of cash and $2 billion in revolving credit facilities, less $507 million in current maturities. GD's leverage utilizing Fitch's global definition of debt-to-operating EBITDA was 1.4x for the LTM ended Oct. 2, 2005, an improvement versus the 1.5x in 2004 and 2.4x in 2003. Interest coverage, using Fitch's global definition of operating EBITDA-to-interest, was 16.2x in the LTM, improving from 14.4x in 2004 and 15.9x in 2003.

Adjusting for pension expense, GD's leverage, as defined by debt-to-operating EBITDAP was 1.3x in the LTM and 1.4x and 2.3x in 2004 and 2003, respectively. Adjusting for operating leases (adjusted debt-to-operating EBITDAPR), the ratios were 1.8x, 1.9x, and 2.6x. Leverage has improved due to a combination of decreasing debt and improved operating income. Interest coverage utilizing EBITDAP to interest was 16.8x in the LTM, 15.2x in 2004, and 16.6x in 2003. Adjusting for operating leases (EBITDAPR-to-interest plus rents), resulted in coverage of 8.0x, 7.4x, and 8.6x for the same periods. Interest coverage improved in the LTM as a result of improved operating income and lower interest costs due to debt retired in 2004. Coverage in 2004 decline due to the full-year effect in 2004 to fund acquisitions made in 2003.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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. The issuer did not participate in the rating process other than through the medium of its public disclosure.