May 22 - Fitch Ratings has removed United Technologies Corporation (UTC;
NYSE: UTX) from Rating Watch Negative and downgraded the company's
Issuer Default Rating (IDR) to 'A' from 'A+'. The Rating Outlook is Stable.
Fitch has also affirmed UTC's short-term IDR at 'F1'. A detailed rating
list follows at the end of this press release.
The rating actions incorporate the pending acquisition of Goodrich Corporation
for $18.4 billion, which is expected to occur in the middle of 2012. UTC plans
to issue approximately $9 billion - $11 billion of debt, including mandatory
convertible debt, to help fund the acquisition. UTC will also assume
approximately $1.9 billion of Goodrich debt, net of cash, and divestiture
proceeds and cash flow will cover the rest of the purchase price.
The downgrade of UTC's long-term ratings reflects an increase in the company's
debt and leverage associated with the Goodrich acquisition. The acquisition is
expected to close in mid-2012 and is still subject to regulatory approval, which
Fitch expects will be granted, although the timing is still uncertain. Fitch
estimates UTC's debt/EBITDA could peak at nearly 3.0 times (x) on a pro forma
basis at completion of the Goodrich acquisition. Fitch estimates debt/EBITDA
will decline below 2.5x by the end of 2012 and below 2.0x before the end of
2013, which would still be weak for the rating. At March 31, 2012, debt/EBITDA
Leverage could decline more quickly if the global economy continues to recover
and demand in UTC's aerospace markets enables the company to realize expected
benefits from its acquisition of Goodrich. UTC intends to reduce leverage toward
stronger levels by the end of 2014 using excess cash balances, higher earnings
and cash flow, and net cash proceeds of approximately $3 billion from planned
divestitures during the remainder of 2012.
Fitch believes UTC's leverage reduction goals are achievable, but the timing
could be affected by potential concerns related to demand in UTC's end markets,
margin performance, and the pace of debt reduction. UTC plans to raise
approximately $3 billion or more of net cash proceeds during the remainder of
2012 which would reduce high debt levels resulting from the Goodrich acquisition
and minimize UTC's use of equity. Planned divestitures include Hamilton
Sundstrand's (HS) industrial businesses, Pratt & Whitney's (P&W) Rocketdyne
business, and Clipper Windpower.
The Stable Outlook reflects UTC's financial flexibility and the current outlook
in the company's key markets, especially commercial aerospace. UTC's ratings or
Outlook could be negatively affected if leverage is not reduced to a level well
below 2.0x within 12-18 months. Risks that could impair free cash flow and delay
a reduction in leverage include concerns surrounding Europe, slower growth in
China, challenges integrating Goodrich, event risk in UTC's aerospace markets,
unexpected problems with P&W's Geared Turbofan (GTF) engine, low demand for
military programs at P&W and Sikorsky, and large net pension obligations.
Fitch believes the Goodrich acquisition will improve UTC's competitive position
and offers opportunities to realize cost synergies as operations are integrated.
Aside from normal integration risks, Fitch has few concerns about the operating
performance of the combined businesses. Goodrich has a solid operating profile,
and its acquisition by UTC is not expected to require material restructuring
aside from modest actions to mesh the two organizations and realize cost
synergies. Goodrich complements Hamilton Sundstrand's solid position as a
supplier of aerospace and defense equipment and services, and there is only
modest overlap between the companies' product lines. Goodrich has a large
commercial aftermarket business and is well positioned on commercial aircraft
programs and in certain areas with the Department of Defense.
Fitch estimates free cash flow after dividends could be near $4 billion in 2012,
similar to $4 billion of free cash flow in 2011. Free cash flow in 2012 includes
the impact of lower pension contributions. Currently, UTC estimates it will
contribute $100 million to foreign plans and has not indicated it will
contribute to U.S. plans. In 2011, UTC contributed $1 billion to its plans,
including $551 million of cash, down from $1.5 billion in 2010 which included
$1.3 billion of cash. At the end of 2011, pension plans were underfunded by $3.6
billion (87% funded) compared to $2.1 billion at the end of 2010. The
deterioration in the funded status largely resulted from a decline in the
UTC expects to reduce discretionary spending in the near term to mitigate the
impact of the Goodrich acquisition on leverage and liquidity. The company has
suspended share repurchases through at least the first three quarters of 2012
and plans to keep share repurchases at reduced levels for two years thereafter.
It also expects to limit acquisition spending for several years, including a
budget of $500 million in 2012, excluding Goodrich and IAE. UTC typically plans
to spend several billion dollars each year for a mix of acquisitions and share
Today's rating action also reflects Fitch's expectation that P&W will complete
its agreement to buy out Rolls-Royce's interest in International Aero Engines AG
(IAE) for $1.5 billion, plus payments over 15 years. Payments will be based on
hours flown by aircraft using V2500 engines produced by IAE which are in service
when the transaction closes. V2500 engines are used for Airbus A320 family of
aircraft. After closing, P&W will own 66% of IAE which will be consolidated with
P&W's results. The agreement was reached in October 2011, and closing is
anticipated by mid-2012. Orders for V2500 engines could eventually decline as
new engine designs such as the GTF ramp up production, but the installed base
should support substantial aftermarket business in subsequent years. P&W and
Rolls-Royce also agreed to form a joint venture to develop engines for 120-230
seat commercial aircraft. The venture will focus on P&W's geared turbofan
technology and on developing new engine technologies. The timing for closing of
the new venture is uncertain.
UTC's ratings incorporate the company's consistently strong operating
performance, competitive market positions, geographic and product
diversification, solid free cash flow, and ability to generate favorable margins
through economic cycles. UTC's overall results at existing businesses could
improve modestly as strong commercial aerospace markets and UTC's stable
aftermarket business mitigate concerns about lower military spending, economic
weakness in Europe and construction activity in the U.S. which remains near
Emerging markets represent an important source of sales growth. A sharp downturn
in emerging regions, although not expected, would hurt local sales and could
also affect developed economies which remain fragile. In 2011, growth slowed in
three of the four BRIC countries including Brazil, China and India. China could
slow again in 2012 due to efforts to control real estate prices and inflation.
However, Fitch expects the BRIC countries will continue to grow faster than
UTC estimates it will incur $450 million of restructuring charges in 2012. The
amount includes approximately $300 million at UTC and $150 million associated
with the Goodrich acquisition. Total restructuring charges in 2012 could
increase, partly reflecting streamlining at Otis in response to slower growth in
China and weak conditions in Europe. UTC estimates it will incur approximately
$500 million of one-time costs as it integrates Goodrich, including charges in
2012, and implements cost reductions which could total approximately $400
million annually after several years. Charges in 2012 will be partly offset by
$600 million of one-time gains, including a $300 million tax settlement.
At March 31, 2012, UTC's liquidity included cash and equivalents of $6.3 billion
and $4 billion of committed bank facilities that mature in 2016. Liquidity was
offset by $300 million of short-term debt and current maturities. UTC also has a
$15 billion bridge facility and a $2 billion short term bank loan facility to
assist with near-term financing for the Goodrich acquisition if needed. In
addition to debt, UTC has contingent obligations related to its financing
commitments for customers, primarily at the aerospace businesses. UTC's
financing commitments are increasing from modest levels as demand in UTC's
commercial aerospace markets continues to be strong. However, the commitments
are spread out over several years which mitigates the impact.
Fitch has downgraded UTC's long-term ratings as follows:
--IDR to 'A' from 'A+';
--Senior unsecured bank credit facilities to 'A' from 'A+';
--Senior unsecured debt to 'A' from 'A+'.
Fitch has affirmed UTC's short-term ratings as follows:
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.