Fitch Affirms Rockwell Collins' Ratings at 'A', Outlook Stable

NEW YORK--()--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.

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. 8, 2012;
--'2013 Outlook: Global Aerospace and Defense', Dec. 21, 2012.

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Contacts

Fitch Ratings
Primary Analyst:
David Petu, CFA, +1-212-908-0280
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson:
Monica Bonar, +1-212-908-0579
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
David Petu, CFA, +1-212-908-0280
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson:
Monica Bonar, +1-212-908-0579
Senior Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com