CHICAGO - (Business Wire) Fitch Ratings does not expect the agreement announced earlier today by United Technologies Corporation (UTC) (NYSE: UTX) to acquire GE Security for $1.8 billion to affect the ratings or Outlook once it is completed. The acquisition is consistent with Fitch's expectations for UTC's cash deployment. GE Security complements UTC's Fire & Security business which has been built through a series of acquisitions during the past several years. UTC has effectively integrated acquisitions in the past and can be expected to realize cost efficiencies as it integrates GE Security and would support a history of margin improvement in the business. Potential rating concerns related to the acquisition include normal integration risks and a possible increase in debt and leverage depending on how the transaction is funded. UTC's leverage has increased modestly during 2009 despite a reduction in debt, primarily due to the global recession that has pressured UTC's earnings and cash flow. As of Sept. 30, 2009, the company's debt/EBITDA had increased toward the high end of its historical range, at just over 1.3 times (x). This level could potentially increase toward 1.5x by the end of 2009 as estimated by Fitch. If leverage were to remain at higher levels, the ratings or Outlook could be reviewed on the downside. However, a deterioration in credit metrics is not unusual at this point in the economic cycle and UTC should see additional benefits from ongoing restructuring and a gradual improvement in operating results as the economy recovers.
The timing of an improvement in UTC's credit metrics will also depend on its discretionary spending. UTC continues to generate solid free cash flow, albeit at lower levels than in recent years due to the recession. UTC has the flexibility to control discretionary spending, if necessary, to reduce debt and strengthen its balance sheet. Fitch believes UTC will continue to maintain consistent financial policies that support solid credit metrics.
UTC's sales have been sharply affected by the broad-based recession in its construction, aerospace and industrial markets. The impact has been mitigated by solid demand for military helicopters at Sikorsky and by extensive restructuring and temporary cost reductions. UTC's substantial aftermarket business has also been affected, but it is likely to improve sooner than original equipment. Demand appears to have stabilized, albeit at low levels, in many of UTC's markets although declining activity in non-residential construction in developed markets is likely to persist through much of 2010.
UTC's margins have held up relatively well, largely due to restructuring efforts across all of its business. Restructuring has been concentrated in the commercial segments where the downturn has been most pronounced. UTC estimates that incremental cost savings from these efforts will amount to an additional $425 million spread out through 2010 and 2011.
Free cash flow after dividends in 2009 is likely to decline substantially to around $2.4 billion as estimated by Fitch, compared to $3.7 billion in 2008. The decline reflects the impact of lower sales, restructuring expenditures and an increase in pension contributions.
The ratings for UTC also incorporate the company's geographic and product diversification and competitive market positions. Rating concerns include uncertainty about the pace of an eventual economic recovery, the impact of UTC's future spending for acquisitions and share repurchases, event risk at the aerospace businesses, and net pension liabilities.
On Sept. 30, 2009 UTC's liquidity included cash of $4.6 billion and $2.5 billion of committed bank facilities, offset by $1.6 billion of short-term debt and current maturities. Long-term debt totaled $8.7 billion and is well-distributed, with maturities in any one year not exceeding $1.1 billion. Net pension liabilities of $5.6 billion at the end of 2009 represent another cash requirement that could potentially be large in future years, depending on market conditions. UTC estimates it will contribute $750 million to its plans in 2009. In addition, UTC provides financing commitments for its customers, primarily at the aerospace businesses. UTC's liquidity could be affected by the use of such commitments but their use has been modest and they are spread out over time, which helps to mitigate the impact.
The ratings for United Technologies Corporation (NYSE: UTX) are as follows:
--Long-termIssuer Default Rating (IDR) 'A+';
--Senior unsecured debt 'A+;'
--Senior unsecured bank credit facilities 'A+';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The Rating Outlook is Stable. Approximately $10.4 billion of debt was outstanding on Sept. 30, 2009.
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings
Eric Ause, 312-606-2302, Chicago
Craig Fraser, 212-908-0310, New York
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