Fitch Ratings has affirmed the Issuer Default Rating (IDR) for United
Technologies Corporation's (UTC; NYSE: UTX) at 'A'. The Rating Outlook
has been revised to Stable from Negative. A detailed rating list follows
at the end of this press release.
KEY RATING DRIVERS
The revision of the Rating Outlook to Stable reflects UTC's significant
debt reduction in 2013 that totaled $3 billion, combined with the
ongoing integrations of Goodrich and IAE that enhance UTC's position on
aerospace programs and future aftermarket revenue. Previous concerns
about temporarily weak credit metrics have been largely resolved as
leverage continues to decline and free cash flow (FCF) remains strong.
UTC plans to reduce debt by another $1 billion in 2014 which would
further strengthen its balance sheet. As a result, debt/EBITDA could
decline to around 1.75x by the end of 2014 compared to 2.0x at the end
of 2013 and a peak level well above 2.5x in late 2012. Debt/EBITDA of
1.75x would still be weak in Fitch's view, but other credit measures are
solid including FCF, liquidity and overall financial flexibility. Fitch
anticipates credit metrics will continue to improve after 2014 due to
ongoing operating improvements and the strong aerospace cycle.
Fitch views UTC's financial flexibility and operating stability as key
rating strengths. Cash balances have remained at solid levels even as
UTC pays down debt and maintains high spending for R&D and capital
expenditures to support its aerospace businesses.
UTC's ratings also incorporate the company's competitive market
positions, product and geographic diversification (62% of sales are
international including exports), and solid FCF. Significant aftermarket
revenue at favorable margins mitigates the impact of cyclicality in
UTC's aerospace and building markets. The company has attractive
positions on several commercial and military aerospace programs and is
well positioned to benefit from rising production of commercial
aircraft. UTC's financial results should improve as it completes the
integration of Goodrich and IAE into UTC's aerospace business and
continues to realign the Building & Industrial Systems group.
The realignment of UTC's business portfolio over the past two to three
years, including significant acquisitions and divestitures, has
increased the company's already strong presence in commercial and
military aerospace markets and focused the commercial businesses on
higher-margin revenue. The commercial businesses represented 46% of
total revenue in 2013 and nearly 54% of segment profit, partly
reflecting a substantial share of services revenue (40%) at the
commercial businesses. P&W's large backlog for the geared turbofan
engine should help reverse a long-term decline in large commercial
engine production. UTC expects to incur restructuring charges of
approximately $375 million across all of its businesses in 2014,
compared to $481 million in 2013.
Fitch estimates FCF in 2014 will increase to a range of $3.5 billion-$4
billion from $3.3 billion in 2013. The increase reflects operating
improvements related to integration and restructuring, and the absence
of negative cash flow from discontinued operations in 2013. These items
will be partly offset by expected increases in capital expenditures,
dividends and working capital requirements.
FCF/total adjusted debt could eventually return to a level approaching
20% or higher as UTC moves past the current investment cycle in
aerospace and realizes benefits from restructuring. Historically, UTC
maintained the ratio well above 20%, but the ratio is currently in the
mid-teens due to peak spending for R&D and capital expenditures on
aerospace development programs and to related working capital
requirements.
FCF includes the impact of pension contributions which Fitch views as
manageable, reflecting an improvement in the funded status over several
years. UTC estimated U.S. plans were approximately 95% funded as of
March 31, 2014. The company plans to contribute $275 million to global
pension plans in 2014 compared to $108 million in 2013. Other cash
deployment includes acquisitions and share repurchases which UTC has
budgeted at $1 billion each in 2014, subject to acquisition
opportunities and other cash uses.
Rating concerns include lower defense spending in the U.S., a slow
recovery in global construction markets, and contingent obligations
including financing commitments and litigation. Concerns about military
spending are mitigated by UTC's position as a key supplier on several
military programs for which production is expected to remain stable or
ramp up over several years, including the H-60 helicopter, Joint Strike
Fighter (JSF), and CH-53K heavy-lift helicopter. Risks related to
financing commitments are centered on commercial aerospace markets where
revenue is growing. Commitments extend over several years, however, and
concerns about potential funding needs are mitigated by the availability
of alternative financing to customers and by minimum requirements for
terms of financing.
Another concern includes risks related to developing new aerospace
program. Sikorsky's CH-148 helicopter program for the Canadian
government has encountered significant delays and cost overruns.
Sikorsky is close to resolving final terms of the contract, but
profitability over the life of the roughly $4 billion program will be
reduced as a result of the additional costs.
At March 31, 2014, UTC's liquidity included $4.5 billion of cash and
equivalents, most of which is located outside the U.S., and $4 billion
of committed bank facilities that mature in 2016. UTC generally has
access to foreign cash, and while much of it would be subject to taxes,
Fitch believes UTC has considerable flexibility regarding any
repatriation.
Liquidity was offset by $304 million of debt due within one year. UTC's
outstanding debt totaled $20 billion, including $1.1 billion of junior
subordinated notes that are part of equity units issued to help fund the
Goodrich acquisition. The notes do not receive equity credit from Fitch,
since at least some of the notes could remain outstanding until maturity
in 2022.
Fitch rates Goodrich's debt at the same level as UTC due to UTC's
implied support for Goodrich. UTC has not assumed or guaranteed
Goodrich's debt, but Goodrich is important to UTC's aerospace strategy
and has been integrated into UTC's Aerospace Systems segment. As of
March 31, 2014, UTC had repaid approximately $1.9 billion principal
amount of $2.9 billion of Goodrich debt assumed with the acquisition,
excluding the impact of acquired cash.
RATING SENSITIVITIES
A positive rating action is unlikely in the near term while UTC
continues to reduce debt and rebuild credit metrics toward stronger
levels. However, future developments that may, individually or
collectively, lead to a positive rating action include:
--Significant, sustained long term market share gains at Otis,
particularly in China which is the most important global market for new
elevator equipment and where the share of service revenue is relatively
low;
--Materially higher margins resulting from the realignment in the
commercial businesses that is expected to produce both revenue and cost
synergies;
--Successful long term execution on aerospace development projects such
as the CH-53K heavy-lift helicopter and F135 engines on the JSF.
Future developments that may, individually or collectively, lead to a
negative rating action include:
--Negative events in UTC's commercial aerospace markets that could
reduce airline profitability and limit demand for large commercial
aircraft;
--Significant delays or cancellations on military programs at P&W and
Sikorsky including the H-60 family of helicopters and the JSF;
--Slower global economic growth that impairs construction activity in
UTC's commercial businesses;
--Unexpected challenges in fully realizing anticipated synergies from
ongoing integration and restructuring related to Goodrich and the
commercial businesses.
Fitch has affirmed the following ratings:
United Technologies Corporation
--IDR at A';
--Senior unsecured bank credit facilities at 'A';
--Senior unsecured notes at 'A';
--Junior unsecured subordinated debt at 'BBB+';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
Goodrich Corporation:
--IDR at 'A';
--Senior unsecured notes at 'A'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis' (Dec. 23, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities
within a Corporate Group Structure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831508
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