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Announcement:

Moody's Affirms A2 rating of United Technologies; Reviews Baa2 rating of Goodrich for possible Upgrade

22 Sep 2011

New York, September 22, 2011 -- Moody's Investors Service affirmed the ratings of United Technologies Corporation (UTC or the company), including the company's A2 senior unsecured and Prime-1 short term ratings, following the announcement that the company has reached an agreement to acquire Goodrich Corporation (Goodrich) in a transaction valued at $18.4 billion, including assumed Goodrich debt. In a related action, Moody's placed the ratings of Goodrich (Baa2 senior unsecured) under review for possible upgrade.

RATINGS RATIONALE

Affirmation of the UTC ratings reflects Moody's view that Goodrich's aerospace businesses represent good strategic additions to the company's existing portfolio, and that despite an approximate $12 billion increase in debt to fund the transaction, the strong earnings and cash flow profile of the combined businesses coupled with historically demonstrated and committed fiscal conservatism should result in fairly quick restoration of financial metrics to levels supportive of the A2 rating. With forecasted 2011 revenues approximating $8 billion, Goodrich brings strong competitive positions in its three business segments (Nacelles and Interior Systems, Actuation and Landing Systems, and Electronics Systems), which are complementary to UTC's businesses, particularly Hamilton Sundstrand. Goodrich has a firm order backlog approaching $5 billion, supported by strong positions on next generation aircraft such as the Boeing 787 and Airbus A380 and A350 models, which should support future revenue growth. Like many of UTC's past acquisitions, Goodrich also brings strong aftermarket revenue opportunities, particularly in the area of aircraft landing gears and wheels, which enhance margins and returns. The transaction significantly increases UTC's content on a wide range of commercial and defense related aircraft platforms and should offer opportunities for revenue and/or cost synergies, although the transaction is not heavily reliant on achieving those synergies.

UTC has historically employed acquisitions as part of its growth initiative, and over the last decade acquisition spending has averaged just under $2 billion per year. At more than $18 billion the Goodrich transaction would be significantly larger than any of the company's past transactions. UTC will incur approximately $12 billion of debt and issue roughly $4 billion of new equity and/or equity-like securities to fund the transaction. It will also assume approximately $2.4 billion of existing Goodrich debt and almost $900 million in combined underfunded pension obligations and capitalized leases. As a result, proforma Debt-to-EBITDA could approach 3x at the time of closing the transaction. UTC has identified a number of initiatives that it will pursue to support free cash flow and effect a rapid deleveraging, notably including cessation of its share repurchase program through 2012 and curtailment of the same thereafter, and curtailment of its future acquisition activities as well. These proactive measures are additive to a strong free cash flow profile and other opportunities (including the sale of non-core assets and possible repatriation of overseas cash) that are also expected to yield accelerated repayment of a good portion of the acquisition-related debt. The partial funding of the acquisition with new equity, combined with the offsetting actions designed to facilitate debt reduction should facilitate restoration of UTC's credit metrics to levels supportive of the A2 rating within 24 months of closing of the transaction, including Debt-to-EBITDA around 2x, EBIT-to-Interest approaching 8x and retained cash flow to debt above 30%.

It is unlikely that UTC's rating would face any upward potential until the Goodrich acquisition is fully integrated. At that time, Debt-to-EBITDA below 1.5x, Interest Coverage exceeding 15x and Retained Cash Flow-to-Debt approaching 50% could be supportive of a higher rating.

Moody's noted that UTC could face some challenges in meeting its debt reduction goals, including friction costs associated with the repatriation of foreign cash and/or execution of planned asset dispositions. Should events occur that impair UTC's ability to reduce debt and restore its financial metrics, including risks associated with integration of the Goodrich businesses, failure to execute on debt reduction initiatives, or erosion of fundamental business performance, the company's ratings could face downward pressure. Debt-to-EBITDA that persists above 2.5x during the first year following the acquisition, EBIT-to-Interest stalled in the 7x range, or Retained Cash Flow-to-Debt falling below the 30% range could be indicative of lower ratings.

The review of Goodrich's ratings for possible upgrade will consider the treatment of existing Goodrich debt obligations within the capital structure of the larger UTC following completion of the transaction. Legal assumption of the obligations by UTC or formal support in the form of an unconditional guarantee could result in an upgrade of the Goodrich debt ratings to (or closer to) the level of UTC's senior unsecured debt rating. Absent formal support, the Goodrich rating would be based on the credit quality of its businesses (provided sufficient financial information is available to assess Goodrich) with some potential for modest uplift to reflect the strategic importance of the Goodrich businesses to UTC. If, following the acquisition, UTC provides no formal support of the Goodrich debt obligations and there is insufficient financial information to assess the credit quality of Goodrich, the ratings could be withdrawn.

The principal methodology used in rating United Technologies Corporation and Goodrich Corporation was the Global Aerospace and Defense Industry Methodology published in June 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Affirms A2 rating of United Technologies; Reviews Baa2 rating of Goodrich for possible Upgrade
No Related Data.
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