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Fitch Affirms Rockwell Collins' Ratings at 'A'

Dépèche transmise le 10 janvier 2012 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Rockwell Collins, Inc.'s (COL) Issuer Default Ratings and debt ratings at 'A'. Fitch also affirmed COL's 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), well diversified 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 dividends, as well as large pension plan deficit and underfunded status of its pension liabilities. Risks to core defense spending after fiscal 2012 and potential cash deployment actions towards acquisitions and related integration challenges are also general rating concerns.

Future Rating Actions:

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 1.0-1.3 times (x); or if defense spending cuts have more significant impact on the company's earnings and FCF than currently anticipated.

Leverage:

COL's leverage was 0.52x at the end of the fiscal 2011 (ended Sept. 30, 2011) and has ranged from 0.52x to 0.72x over the past four years. On Nov. 16, 2011, COL issued $250 million senior unsecured notes increasing its leverage to 0.74x at the time of the issuance. Despite an increase in leverage, COL's current financial metrics are solid for the ratings. Fitch projects COL's leverage to remain relatively flat over the next couple of years.

Liquidity:

At Sept. 30, 2011, COL's liquidity of approximately $1.4 billion consisted of $530 million in cash and full availability under its $850 million domestic credit revolving facility. COL's liquidity increased by $83 million in fiscal 2011 primarily driven by healthy operating cash flows. COL does not have major maturities until fiscal 2014 when $200 million of senior unsecured notes become due. Fitch expects COL to maintain a solid liquidity position in fiscal 2012.

Cash Generation:

COL generated $657 million cash flow from operating activities during 2011, down from $711 million in 2010. Lower cash flow was primarily due to changes in working capital, less favorable payment authorizations driving lower customer advances and progress payments as well as higher inventory levels. COL's FCF totaled $357 million in fiscal 2011, down from $451 million in 2010. FCF was lower due to changes in working capital and higher levels of capital spending. Fitch expects COL's fiscal 2012 FCF to be higher than that of fiscal 2011, primarily driven by higher cash flow from operations.

Cash Deployment:

COL's cash deployment focuses on share repurchases, dividends, pension contributions and capital expenditures. In fiscal 2011, COL spent approximately $148 million, $113 million, and $152 million on dividends, pension contributions and capital expenditures which were in line with the averages of $145 million, $94 million and $146 million over the past four years, respectively.

The company repurchased a total of $328 million of common stock in fiscal 2011. COL indicated that it will be increasing share repurchasing up to $700 million worth of shares in fiscal 2012, of which $250 million will be purchased with the proceeds from $250 million of unsecured senior notes issued on Nov. 16, 2011. Fitch expects COL's share repurchase activity in fiscal 2013 will be closer to the past four year average of $286 million. Additionally, Fitch expects COL's pension plan contributions to become a larger part of the cash deployment strategy given the underfunded status of its qualified U.S. plan.

Pension Analysis:

COL's funding deficit increased by $222 million to $1.4 billion from $1.19 billion in 2010 (60% funded). The increase was driven primarily by the change in the discount rate from 4.85% to 4.43% that was partly offset by $113 million of pension contributions. In October 2011, COL made a $47 million contribution to its pension plans and it plans to contribute a total of $110 million in fiscal 2012.

COL's under funded status of its other post employment benefits (OPEB) at Sept. 30, 2011 was $245 million, an $11 million decrease from the same period in 2010 mainly due to improved actuarial gains. COL anticipates contributing $22 million to OPEB in fiscal 2012, compared to contribution of $17 million in 2011.

Industry Overview:

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

Approximately 59% of COL's revenues are derived from the defense industry. High levels of defense spending currently support COL's ratings, but the Department of Defense (DoD) budget environment is highly uncertain after fiscal 2012 because of large U.S. government budget deficits and the potential for large, automatic spending cuts beginning in fiscal 2013. Fitch believes that modest declines in defense spending would not lead to negative rating actions given COL's liquidity position and diversified product portfolio.

The end of the 'Supercommittee' negotiations without an agreement increases the probability of Fitch's harshest DoD spending scenario ('sequestration'), but Fitch expects less severe and/or more orderly spending scenarios are possible because Congress could act to avoid or modify sequestration's automatic cuts beginning in January 2013. Fitch estimates that DoD spending reductions in the sequestration scenario would total nearly $1 trillion over 10 years. In Fitch's view, the most negative element of this scenario is an estimated 12%-13% decline in spending in fiscal 2013, which Fitch understands would be made across the board without consideration of program health or national security priorities.

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.

Fitch considers the conditions within the airline 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 planes.

Aftermarket sales should continue to be strong in 2012, benefiting from the growing global demand for air travel, but the segment remains exposed to economic downturns. Aftermarket sales should also experience some gain from various new platforms expected to come on to the market over the course of the next decade.

The business jet segment remains more of a risk, with aircraft production remaining at low levels. Though order rates have improved for medium and larger jets, the smaller end of the market continues to struggle. Fitch expects a modest improvement for the segment in the near term, however, business jets remain vulnerable to a potential economic downturn.

Fitch affirms COL's ratings as follows:

--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'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Rating Aerospace and Defense Companies: Sector Credit Factors', June 10, 2010;

--'2012 Outlook: Global Aerospace and Defense', Dec. 20, 2011;

--'U.S. Defense: Rising Pressure on Credit Profiles', Nov. 30, 2011

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Aerospace and Defense Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=529973

2012 Outlook: Global Aerospace and Defense

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=660209

U.S. Defense: Rising Pressure on Credit Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657218

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