TEXT - Fitch affirms Rockwell Collins ratings

Tue Jan 8, 2013 12:57pm EST

Jan 8 - Fitch Ratings has affirmed Rockwell Collins, Inc.'s (COL)
Issuer Default Ratings and debt ratings at 'A' and its short-term ratings at
'F1'. The Rating Outlook is Stable. Approximately $750 million of outstanding 
debt is covered by these ratings. The ratings are detailed at the end of this 
release.

COL's ratings are supported by solid credit metrics, strong cash flow from 
operations and free cash flow (FCF: cash from operations less capital 
expenditures and dividends), a balanced portfolio within aerospace and defense 
markets, a strong liquidity position, high defense spending levels, and 
conservative financial policies.

Fitch's concerns include COL's cash deployment strategy, which includes a focus 
on share repurchases and dividend increases, as well as its large pension plan 
deficit. Additionally, Fitch is concerned with risks to core defense spending 
during and after fiscal 2013, including sequestration, and potential cash 
deployment actions towards acquisitions.

COL's leverage has ranged from 0.52x to 0.75x over the past five years. On Nov. 
16, 2011, COL issued $250 million of senior unsecured notes increasing its 
leverage to 0.74x at the time of the issuance. At the end of fiscal 2012, COL's 
financial metrics were solid for the ratings with leverage of 0.70x. COL 
actively accessed the commercial paper (CP) market during fiscal 2012 with the 
maximum outstanding of $330 million. Fitch expects COL to remain active issuing 
CP throughout fiscal 2013. COL's leverage would increase to approximately 0.9x 
should it be adjusted for the expected average outstanding short-term borrowings
throughout 2013. Fitch projects COL's leverage will remain relatively flat over 
the next couple of years.

COL's liquidity declined during fiscal 2012 due to cash deployment towards 
shareholders. At Sept. 30, 2012, COL's liquidity of approximately $1.2 billion 
consisted of $335 million in cash and full availability under its $850 million 
revolver. COL's liquidity decreased by approximately $200 million in fiscal 
2012. COL's $200 million 4.75% senior unsecured notes become due Dec. 1, 2013, 
which Fitch expects the company to refinance. Fitch expects COL to maintain a 
solid liquidity position in fiscal 2013.

COL generated $534 million of cash flow from operating activities (CFO) during 
2012, down from $657 million in 2011, and $711 million in 2010. Lower CFO was 
due to a significant increase in income tax payments, a decline in cash receipts
from customers due to lower sales volume, a write-off of accounts receivables 
driven by Hawker Beechcraft's bankruptcy filing, and an increase in payments for
employee incentive plans. FCF totaled $239 million in fiscal 2012, down from 
$357 million in 2011, and $451 million in 2010. Free cash was lower due to the 
decrease in CFO. Fitch expects FCF generation to range from $300 million to $400
million over the next several years. 

COL's cash deployment focuses on share repurchases, dividends, pension 
contributions and capital expenditures. In fiscal 2012, COL spent approximately 
$157 million, $126 million, and $138 million on dividends, pension contributions
and capital expenditures which were in line with the averages of $152 million, 
$122 million and $138 million over the past four years, respectively. 

The company repurchased a total of $723 million of common stock in fiscal 2012 
of which $250 million were purchased from the proceeds of $250 million unsecured
senior notes issued on Nov. 16, 2011.  Fitch expects COL to continue significant
share repurchase activity in fiscal 2013, which should remain COL's largest cash
distribution focus over the next several years. Fitch does not anticipate 
additional long-term debt-funded share repurchases and expects COL's other cash 
outlays to remain within historical levels. 

As of Sept. 30, 2012, COL's pension funding deficit was $1.47 billion (63% 
funded), up $59 million from $1.41 billion in 2011. The increase was driven 
primarily by the change in the discount rate which decreased from 4.43% to 3.56%
offset by $126 million of contributions to qualified U.S., international and 
non-qualified U.S. plans. In October 2012, COL made a $55 million contribution 
to its pension plans and plans to contribute a total of $110 million in fiscal 
2013. 

COL's underfunded status of its OPEB at Sept. 30, 2011 was $242 million, a $3 
million decrease from the same period in 2011 mainly due to improved actuarial 
gains. OPEB contributions in fiscal 2013 are expected to total $23 million 
compared to contribution of $17 million in fiscal 2012. 

COL is exposed to three business sectors: defense, commercial airplane original 
equipment (OE), and commercial aerospace aftermarket. 

Approximately 55% of COL's revenues were derived from the defense industry in 
fiscal 2012. High levels of defense spending currently support COL's ratings, 
but the Department of Defense (DoD) budget environment is highly uncertain after
fiscal 2013 because of large U.S. government budget deficits and the potential 
for large, automatic spending cuts beginning in fiscal 2013.

Fitch expects 2013 to be a challenging year for the U.S. defense contractors. 
However, it does not anticipate a significant deterioration in COL's credit 
profile. Sequestration continues to be a large threat in the near term, but 
Fitch's base case is that it will be avoided. However, DoD spending reductions 
are likely to be a part of any deal that avoids sequestration.  The spending 
environment will likely continue to be uncertain through 2013. Also, most of the
proposed spending 'cuts' are from projected budget growth and come off of the 
existing high spending levels - inflation-adjusted spending will likely decline,
but modestly, over 10 years. A key risk in the sector remains cash deployment to
offset the impact on earnings from lower revenues.

COL's exposure to DoD spending is mitigated by its strengthening positions in 
certain faster-growing areas of the defense electronics and communications 
markets, specifically networked communications, open systems architecture, and 
next generation global positioning systems (GPS) solutions. The percentage of 
COL's defense sales from non-U.S. markets also continues to rise. 

Fitch considers the conditions within the air transport industry to be 
supportive of the rating. Commercial aerospace markets have improved over the 
past year with increased production by major OE manufacturer's and strong 
aftermarket activity. The industry's long-term health is supported by a growing 
global demand for air travel, and increasing demand for fuel efficient and 
lighter-weight modern planes. Higher product deliveries to Boeing across 
multiple platforms, including the 787 and 737, as well as increased deliveries 
for the Airbus A320 drove a 15 % gain in COL's OEM revenue during fiscal 2012. 
Fitch expects COL to continue benefiting from the expected growth in aircraft 
deliveries in 2013.

Aftermarket sales should continue to be strong for the foreseeable future, 
benefiting from the growing global demand for air travel. Aftermarket sales 
should also experience some gain from various new platforms expected to come on 
the market over the course of the next decade. The aftermarket provided some of 
the most robust growth in 2012 as a result of discretionary activity that was 
built up over the last few years. COL's commercial aftermarket sales grew by 
more than 10% during fiscal 2012 with discretionary activity providing the bulk 
of the gain. Fitch expects COL to have another solid year in aftermarket sales 
driven by the growth in the industry.

What Could Trigger a Rating Action

Fitch does not anticipate a positive rating action in the near future given 
COL's current ratings and financial metrics. A negative rating action may be 
considered should the company's leverage (debt to EBITDA) increase to above 
approximately 1.15-1.2x; or if defense spending cuts have a more significant 
impact on the company's earnings and FCF than currently anticipated. 

Fitch has affirmed the following ratings:
--Long-term IDR at 'A';
--Short-term IDR at 'F1'; 
--Senior unsecured bank facility at 'A';
--Senior unsecured debt at 'A';
--Commercial paper (CP) at 'F1'. 
Rating Outlook is Stable.
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.