Fitch Affirms United Technologies at 'A'; Outlook Revised to Negative
CHICAGO -- July 11, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) for United
Technologies Corporation's (UTC; NYSE: UTX) at 'A'. The Rating Outlook is
revised to Negative from Stable. A detailed rating list follows at the end of
this press release.
Key Rating Drivers:
The ratings consider UTC's consistently strong operating performance,
competitive market positions, geographic and product diversification, solid
free cash flow (FCF), and ability to generate favorable margins through
economic cycles. The company made significant changes to its business
portfolio during the past year including the acquisition of Goodrich and the
purchase of a larger ownership interest in IAE International Aero Engines
(IAE) which is now consolidated with UTC's results. These transactions
strengthen UTC's presence in its aerospace markets and can be expected to
support the company's long-term financial results. It also made a number of
divestitures, primarily commercial businesses, which helped fund the
acquisitions. As a result, the proportion of commercial and military aerospace
business has increased to slightly more than half of UTC's revenue compared to
slightly more than 40% previously.
The Negative Rating Outlook reflects UTC's leverage, which remains weak for
the ratings while the company reduces debt used to fund last year's
acquisitions. The Outlook is centered on the pace of debt reduction and the
level at which credit metrics ultimately stabilize. Fitch believes UTC has
adequate financial capacity to rebuild credit metrics to strong levels in the
near term that would support a rating of at least 'A'. However, the expected
improvement in leverage could be less than initially anticipated by Fitch due
to conditions in certain of UTC's global markets which continue to face
challenges and where recovery has slowed or been delayed. The level at which
metrics eventually stabilize will depend on demand in UTC's end-markets as
well as the company's allocation of FCF toward debt reduction, internal
reinvestment, and discretionary spending for share repurchases and
Debt/EBITDA on a last-12-month basis at March 31, 2013 was 2.6x, well above
historical levels of around 1.3x or less, but was somewhat overstated as it
does not include the full impact of earnings from Goodrich and IAE. Fitch
expects debt/EBITDA to decline to around 2.1x by the end of 2013, slightly
above the original estimate of 2.0x, and toward 1.8x by the end of 2014.
Actual leverage could be lower if revenue is above the $64 million-$65 million
range assumed by Fitch, margins improve more than expected, or debt repayment
is greater or occurs sooner than anticipated.
The Rating Outlook could return to Stable if UTC rebuilds credit metrics to
stronger levels within the next two years or so. Credit metrics consistent
with UTC's current 'A' rating include debt/EBITDA near 1.5x-1.6x or below, and
FCF-to-total adjusted debt close to around 20% or higher. Historically, UTC
maintained the ratio closer to 25%, but the ratio could be somewhat less in
the near term due to investment in development programs and working capital
requirements in the aerospace business.
UTC is well-positioned to benefit from long-term growth in commercial
aerospace as global passenger traffic increases and airlines increase capacity
and upgrade aircraft. The Goodrich acquisition strengthened UTC's already
solid position as a supplier of aerospace and defense equipment and services.
Also, Pratt & Whitney's (P&W) development of the geared turbofan engine has
been successful to date; it has a solid backlog on several new aircraft
programs, which helps to address a long-term decline in P&W's market share for
large commercial engines. These developments should more than offset pressure
in defense aerospace associated with pressure on the U.S. defense budget and a
weak European economy. Concerns about military spending are also mitigated by
UTC's attractive positions 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
Emerging markets, particularly China, are an important source of long-term
growth for UTC. GDP growth in China has declined to a more moderate level,
projected by Fitch at 7.5% in 2013 and 2014. China also remains sensitive to
government policies and credit availability. In addition, Europe remains weak
and commercial construction in the U.S. is still slow despite some recent
improvement. These situations are likely to persist and could constrain UTC's
overall revenue and margin growth in the near term despite a recent increase
in orders in China at the Otis segment and gains in the residential
construction market in the U.S.
UTC expects to incur restructuring charges of at least $350 million in 2013,
compared to $614 million in 2012, which could support margin improvement in
2013 estimated by Fitch at approximately 80 basis points. Restructuring is
spread across all segments but was concentrated in 2012 at Otis; Climate,
Controls & Security (CCS); and UTC Aerospace Systems (UTAS). CCS is realigning
and integrating the fire and security business, and UTAS continues to
integrate Goodrich. UTC estimates cost synergies related to integrating
Goodrich could reach approximately $500 million annually by 2016.
Fitch views UTC's estimate of $6 billion of FCF before dividends in 2013 as
achievable based on synergies from the Goodrich acquisition, the inclusion of
IAE, ongoing restructuring in the CCS segment, and a nascent modest recovery
in some of Otis' end-markets. This level of FCF would support the company's
plan to reduce debt by at least $2 billion in 2013 in addition to funding
dividends and discretionary spending. Fitch expects FCF to increase modestly
in 2014 and be maintained at solid levels over the long term. FCF includes the
impact of lower pension contributions which UTC estimates will decline to $200
million in 2013 from $430 million in 2012. Additional contributions are
possible but not required. At March 31, 2013, U.S. plans were 88% funded. The
company suspended share repurchases in 2012 but repurchased $335 million in
the first quarter of 2013 and maintains a placeholder of $1 billion for
repurchases for the full year. It also budgets $1 billion for acquisitions.
In addition to leverage, rating concerns include risks related to developing
new aerospace programs, including Sikorsky's CH-148 helicopter program with
the Canadian government which has experienced significant cost overruns and
charges, although the program is still expected to be profitable over its life
when including aftermarket revenue. Other concerns include competitive
pressure, lower defense spending in the U.S., and contingent obligations which
include financing commitments and ongoing litigation surrounding P&W's F100
engine. Financing commitments have increased and are likely to increase
further, consistent with higher production in UTC's commercial aerospace
markets. However, commitments extend over several years, and concerns about
potential funding needs are mitigated by the availability of alternative
financing to customers and by minimum requirements for interest rates and
At March 31, 2013 UTC's liquidity included cash and equivalents of
approximately $4.8 billion and $4 billion of committed bank facilities that
mature in 2016. Liquidity was offset by $1.1 billion of debt due within one
year. UTC's outstanding debt totaled $22.8 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
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 combined with
UTC's Hamilton Sundstrand business. UTC has redeemed approximately $800
million principal amount of Goodrich debt since the acquisition, and
approximately $1.5 billion of Goodrich debt remains outstanding.
A positive rating action is unlikely in the near term while UTC rebuilds
credit metrics following the Goodrich acquisition. The Rating Outlook could
return to Stable if UTC rebuilds credit metrics to stronger levels within the
next two years or so. Credit metrics consistent with UTC's current 'A' rating
include debt/EBITDA near 1.5x-1.6x or below, and FCF-to-total adjusted debt
close to a range around 20% or higher.
Fitch could consider a downgrade if credit metrics do not strengthen
sufficiently which could occur if cash deployment is directed away from debt
reduction, or if financial results are weaker than anticipated. Developments
that could impair UTC's financial results include further slowing of economic
growth in China and other emerging regions, additional weakening in developed
economies, unexpected challenges in fully realizing synergies from integrating
Goodrich or restructuring in the CCS segment, negative events in UTC's
aerospace markets, and significant delays or cancellations for military
programs at P&W and Sikorsky.
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'.
--IDR at 'A';
--Senior unsecured notes at 'A'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 13, 2012).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Corporate Rating Methodology
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