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
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
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.