Fitch Affirms United Technologies at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed United Technologies Corporation's (UTC; NYSE: UTX) long-term Issuer Default Rating (IDR) and long-term debt ratings at 'A-' and affirmed the short-term IDR and commercial paper ratings at 'F2'. Fitch has also assigned a rating of 'F2' to UTC's $2 billion euro commercial paper program. The program is fully backed by a $2.15 billion multicurrency revolving credit facility that matures in 2021. The Rating Outlook is Stable. A detailed list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The ratings for UTC incorporate Fitch expectations that credit metrics will be weak while the company deploys cash to fund large share repurchases and support the aerospace business. The aerospace business is using significant cash for development programs at Aerospace Systems and Pratt & Whitney (P&W) including the Geared Turbofan (GTF) engine. UTC's share repurchase program involves $16 billion of repurchases during the three-year period between 2015 and 2017, including $10 billion in 2015 and $2 billion to $3 billion in 2016. Repurchases totaled $528 million during the first nine months of 2016. UTC also has a $1 billion placeholder for acquisitions in 2016.

Cash deployment is being funded by UTC's free cash flow (FCF) and an increase in debt. In October 2016 the company issued $4 billion of long term debt with proceeds allocated for the repayment of $1 billion of debt scheduled to mature in 2017, $1.25 billion scheduled to mature in 2019, and a reduction in commercial paper balances. Fitch believes additional increases in debt are possible after 2016 to help fund the company's high cash usage.

Fitch views UTC's cash deployment plans as aggressive, and the company's credit metrics are weak for the ratings. It is possible UTC could exceed some of Fitch's negative rating sensitivities for up to two years or longer before the company begins to fully realize benefits from restructuring, a stronger focus by Otis on market share that would help expand its aftermarket business, and the production ramp for the Geared Turbofan (GTF).

A key driver of UTC's long-term performance is the company's product positioning in the aerospace cycle, which is contributing to elevated capital expenditures and reduced margins in the near term but should generate solid profitability over the product life-cycles. A near-term concern is the production ramp for the Geared Turbofan (GTF), which is proceeding more slowly than expected, including a roughly 25% reduction in projected deliveries in 2016 to 150 engines.

Delayed GTF deliveries are largely due to slow deliveries from suppliers and to technical challenges, particularly the build-time for the GTF fan blade which is moving down the learning curve more slowly than anticipated. These developments are pressuring UTC's near-term financial results but a large backlog of more than 8,400 orders for GTF engines, including options, should lead to higher margins and prospects for significant after-market business.

UTC has also adjusted its strategy for Otis, which has typically generated the highest profit margins among UTC's business segments. UTC intends to rebuild market share in China and Europe, and Fitch expects margins could decline slightly in favor of stronger sales growth. The impact would be offset by increasing Otis' installed base that typically produces high-margin service and parts business.

UTC's free cash flow (FCF) margin has been declining due to high spending for aerospace development. FCF/total adjusted debt was approximately 11% in 2015 compared with 15% in 2014 and could remain at lower levels through 2017. As a result of higher debt levels and margin pressure, Fitch believes UTC will be slow to rebuild FCF/total adjusted debt.

Fitch estimates FCF after dividends in 2016 will be steady near $2.5 billion excluding the negative impact of taxes in 2016 related to the divestiture of Sikorsky in 2015. Capital spending could remain elevated through at least 2017 to support the GTF production ramp and other aerospace programs. Also, UTC typically incurs restructuring each year which should total $350 million to $400 million in 2016.

FCF includes the negative impact of pension contributions and royalty payments to Canada. Royalty payments are related to government funding for engine research and development at Pratt & Whitney. Under a 2015 agreement to amend existing support arrangements, P&W will make four annual royalty payments of CAD327 million between 2016 and 2019 to settle its future contractual obligations that would have extended well beyond 2019.

UTC expects to contribute $200 million to global pension plans in 2016 although there are no required contributions through 2020. Global pension plans were underfunded by $4.4 billion at the end of 2015. U.S. plans were approximately 84% funded as of Sept. 30, 2016.

Rating strengths include UTC's technological capabilities and competitive positions in key aerospace and building-related markets, product and geographic diversification, a large installed base that supports attractive aftermarket revenue, and relatively stable operating performance and FCF through economic cycles compared to industrial peers. The company has attractive positions on commercial and military aerospace programs and is well positioned to benefit from rising production of commercial aircraft.

In addition to large cash deployment, rating concerns include slower growth in China and other developing markets, mixed global construction markets, typical risks associated with aerospace development programs, and negative currency movements. Large acquisitions could exacerbate UTC's increased leverage although UTC would benefit from acquired EBITDA.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Slow sales growth is in the low single digits through 2017 before production rates on new aerospace programs begin to increase and Otis realizes improvements in market share;

--Segment margins decline slightly through the next one to two years due to pricing pressure at Otis and negative margins on GTF production;

--UTC gains market share in commercial engines as GTF engine deliveries increase over the next several years;

--FCF remains solid but in the near term is below historical levels relative to sales and debt, largely reflecting cash requirements in the aerospace businesses;

--Cash deployment is high through 2017 for share repurchases, and capital expenditures remain elevated through at least 2017;

--Debt increases in 2016 and 2017 to help fund share repurchases and potentially for acquisitions.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:

--Execution challenges on the production ramp for the GTF engine that could reduce expected long-term benefits from market share gains and after-market expansion;

--At Otis, a significant loss of market share or persistent deterioration in margins that impairs UTC's overall profitability and FCF;

--Weak operating results or FCF resulting in FCF/total adjusted debt consistently below 10% after Otis fully implements its market share strategy and aerospace programs have ramped up;

--Shareholder-focused cash deployment results in debt/EBITDA sustained at levels materially above 2.5x or prevents an eventual improvement in debt/EBITDA below 2.0x. Fitch's definition of EBITDA does not include recurring royalty, joint venture and other income that provide additional modest support to UTC's profitability.

An upgrade is unlikely in the near term given near-term challenges to UTC's performance and credit metrics that are weak for the current rating level.

LIQUIDITY

At Sept. 30, 2016 UTC's liquidity included $7.1 billion of cash, most of which was located outside the U.S. Liquidity also included $4.35 billion of committed bank facilities that mature in 2021. UTC generally has access to foreign cash and typically repatriates a portion which is subject to taxes. Liquidity was offset by $1.6 billion of long term debt maturities due within one year and $871 million of short-term debt. UTC's outstanding debt totaled $22.7 billion at Sept. 30, 2016.

FULL LIST OF RATINGS

Fitch has affirmed the following ratings:

United Technologies Corporation

--Long-term Issuer Default Rating (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 'F2';

--Commercial paper at 'F2'.

Goodrich Corporation:

--Long-term IDR at 'A-';

--Senior unsecured notes at 'A-'.

Fitch has assigned the following rating:

United Technologies Corporation

--Euro commercial paper 'F2'.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available on www.fitchratings.com

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014824

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014824

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

Contacts

Fitch Ratings
Primary Analyst
Eric Ause
Senior Director
+1-312-606-2302
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phil Zahn
Senior Director
+1-312-606-2336
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eric Ause
Senior Director
+1-312-606-2302
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phil Zahn
Senior Director
+1-312-606-2336
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com