Fitch Ratings has affirmed the Issuer Default Rating (IDR) at 'A' for
United Technologies Corporation (UTC; NYSE: UTX). Fitch has also
affirmed UTC's long-term and short-term debt ratings at 'A'/'F1'. The
Rating Outlook is Stable. A detailed list of rating actions follows at
the end of this release.
KEY RATING DRIVERS
The ratings for UTC incorporate the company's product and geographic
diversification, relatively stable operating performance through
economic cycles, technological capabilities that support strong
competitive positions, solid free cash flow (FCF) and financial
flexibility. Significant aftermarket revenue generates favorable margins
that mitigate the impact of cyclicality in UTC's aerospace and building
markets. The company has attractive positions on commercial and military
aerospace programs and is well positioned to benefit from rising
production of commercial aircraft.
UTC announced in March 2015 it would consider divesting Sikorsky through
a spin-off or other means. Fitch views the possible divestiture as
neutral to the ratings. The immediate impact on debt/EBITDA and other
credit metrics could be negative due to the loss of earnings and cash
flow from Sikorsky which accounted for 6.5% of UTC's segment profit in
2014 before special items and eliminations. However, Fitch believes
growth in UTC's financial results would enable UTC to strengthen its
credit measures to current levels within 18-24 months. UTC would lose
some diversification, but the reduction would be minimal due to UTC's
large size and a good balance between aerospace and commercial
businesses. Also, a divestiture would reduce platform development risks.
The impact on UTC's credit profile will partly depend on the amount of
any cash proceeds realized from a transaction. The timing of a possible
transaction in 2015 could support a favorable valuation due to contract
wins at Sikorsky that have contributed to a substantial backlog.
Credit metrics have improved as UTC pays down debt related to the
Goodrich acquisition. However, debt reduction of approximately $450
million in 2014 was less than the $1 billion amount anticipated by
Fitch, and debt/EBITDA of 1.86x at the end of 2014 remained above some
other similarly rated peers. This concern is mitigated by UTC's
operating stability, financial flexibility and consistent FCF which
reduce its sensitivity to economic cycles and provide the capacity to
reduce debt at the company's discretion.
Fitch estimates FCF in 2015 will increase slightly from $3.6 billion in
2014 as modest growth in sales and earnings is offset by the negative
impact of foreign currency. FCF includes the impact of capital
expenditures are likely to remain at a higher-than-normal level while
UTC prepares to increase production for a number of aerospace programs.
Fitch estimates FCF/total adjusted debt could eventually return to a
level approaching 20% or higher as UTC moves past the current investment
cycle in aerospace. Historically, UTC maintained the ratio well above
20%, but the ratio is currently in the mid-teens due to higher debt
levels and to increased development spending for aerospace programs.
FCF includes the impact of pension contributions. UTC expects to
contribute $350 million to global pension plans in 2015 compared to $517
million in 2014. UTC estimated its U.S. plans were approximately 88%
funded as of Dec. 31, 2014, which was down from 98% one year earlier due
to a lower discount rate and unfavorable changes in assumptions
underlining mortality rates. Globally, pension plans were underfunded by
$5.1 billion at the end of 2014 compared to $1.7 billion at the end of
2013.
Cash deployment includes $3 billion of share repurchases planned in
2015, including an accelerated share repurchase program implemented in
March 2015. The amount is higher than usual and reflects limited
acquisition activity. It also allows UTC to offset the impact of shares
that could be issued this year under a remarketing process for
outstanding equity units. The units, which were issued to help fund the
Goodrich acquisition, include equity purchase contracts paired with $1.1
billion of junior subordinated notes. The notes do not receive equity
credit from Fitch.
Rating concerns include defense spending uncertainty in the U.S., a slow
recovery in global construction markets outside the U.S., 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 Joint
Strike Fighter (JSF) and CH-53K heavy-lift helicopter.
Another concern includes risks related to developing new aerospace
programs. Programs often involve substantial costs and long development
periods, and are focused on attractive but highly competitive markets.
UTC mitigates the risk through joint ventures, and its aerospace systems
and engine businesses have exposure to multiple customer platforms. Risk
can be more concentrated in Sikorsky's platform business. In 2014,
Sikorsky recognized a $430 million charge against earnings related to
the CH-148 helicopter program for the Canadian government. The program
has encountered significant delays and cost overruns and may not
generate positive margins until 2018.
P&W's large backlog for the geared turbofan (GTF) engine should reverse
a long term decline in legacy engines and support future aftermarket
revenue and profitability. Margins will be pressured in the next several
years by the expected increase in engine sales which typically generate
negative margins before related aftermarket revenue eventually
increases, leading to profitability over the life-cycle of the engines.
Risks associated with the GTF include the magnitude of the production
ramp-up and long term performance of the engines.
The revenue mix between UTC's Aerospace and Building & Industrial
Systems (BIS) businesses is well balanced, with Aerospace representing
55% of sales. Segment profit is slightly skewed toward BIS, partly due
to margins at Sikorsky that are lower than UTC's other segments.
Sikorsky's margins reflect its reliance on military sales, its
production of aircraft platforms compared to sales of systems, and a
lower proportion of higher-margin aftermarket revenue.
At Dec. 31, 2014, UTC's liquidity included $5.2 billion of cash and
equivalents, of which more than 80% was located outside the U.S., and
$4.35 billion of committed bank facilities that mature in 2019. UTC
generally has access to foreign cash, and while much of it would be
subject to taxes, Fitch believes UTC has considerable flexibility
regarding repatriation. Liquidity was offset by $1.9 billion of debt due
within one year. Fitch expects UTC will generally refinance scheduled
debt maturities. UTC's outstanding debt totaled nearly $20 billion at
the end of 2014.
Fitch rates Goodrich's debt at the same level as UTC due to UTC's
implied support for Goodrich. UTC did not assume or guarantee Goodrich's
debt, but Goodrich is important to UTC's aerospace strategy and has been
integrated into UTC's Aerospace Systems segment. As of Dec. 31, 2014,
UTC had repaid approximately $2.2 billion principal amount of $2.9
billion of Goodrich debt assumed with the acquisition.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Financial results are flat to slightly better in 2015 as internal
growth is offset by the negative impact of foreign currency;
--Aerospace businesses benefit from high industry production of new
aircraft during the next several years;
--UTC's development spending in the aerospace businesses remains
elevated through 2015;
--Cash deployment is directed toward $3 billion of planned share
repurchases, with no material debt reduction anticipated;
--Restructuring and integration support modest operating margin
improvement;
--A divestiture of Sikorsky, if it occurs, would be structured to
minimize the impact on UTC's capital structure and credit metrics.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a
negative rating action include:
--Weak operating results or FCF that prevents an eventual increase in
FCF/total adjusted debt to a level near 20% or above;
--Sustained shareholder-focused cash deployment that results in
permanently higher leverage, including total adjusted debt/EBITDAR above
2.0x compared to 2.1x at the end of 2014;
--Negative events in UTC's commercial aerospace markets that could
reduce airline profitability and limit demand for large commercial
aircraft;
--Slower global economic growth that impairs construction activity in
UTC's commercial businesses.
Fitch views an upgrade to UTC's ratings as unlikely in the near term due
to near term spending on share repurchases. However, future developments
that may, individually or collectively, lead to a positive rating action
include:
--Consistently stronger credit metrics including debt/EBITDA near 1.0x,
funds from operations (FFO) adjusted leverage below 1.5x and FCF/total
adjusted debt approaching 30%;
--Significant, sustained long term market share gains or higher
aftermarket revenue at Otis, particularly in China and developing
regions;
--Materially higher margins resulting from the realignment in the
Business & Industrial Systems businesses;
--Successful long term execution on aerospace development projects such
as the GTF, CH-53K heavy-lift helicopter and F135 engines on the JSF.
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' (May 2014);
--'Parent and Subsidiary Rating Linkage' (May 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis' (November 2014).
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=749393
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982980
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
Copyright Business Wire 2015