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Announcement:

Moody's affirms United Technologies A2 ratings; withdraws Goodrich ratings

22 Aug 2012

Rating outlook remains negative

New York, August 22, 2012 -- 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. The rating outlook remains negative following completion of the Goodrich Corporation (Goodrich) acquisition on 26 July 2012. In a related action, Goodrich's ratings, including its senior unsecured debt rated Baa2, were withdrawn.

"Affirmation of the UTC ratings reflects the strategic importance and good fit of Goodrich's aerospace businesses under the UTC umbrella," noted Russell Solomon, Moody's Senior Vice President and lead analyst for the two companies. "Moreover," Solomon added, "we deem the steps taken to effect accelerated repayment of much of the high, heavily debt-financed purchase price -- including the sale of assets and repatriation of offshore excess cash balances, as supplemented by organic cash flows that have not been diverted to share buybacks or other acquisitions -- sufficient to restore UTC's credit worthiness within a reasonable timeframe."

While Goodrich is now a wholly-owned subsidiary of UTC, the Goodrich debt (approximately $2.3 billion) has not been legally assumed and has not been (nor is it expected to be) guaranteed by UTC. The rated securities have also been deregistered, and separate financial statements for Goodrich will subsequently no longer be filed with the SEC. This, in turn, encumbers Moody's ability to adequately monitor the financial performance of Goodrich, and thereby effectively precludes the rating agency from maintaining rating coverage of the same; hence, the reason for the withdrawal of all ratings for Goodrich. This concludes Moody's review of Goodrich ratings as initiated 22 September 2011 following announcement of the acquisition.

Moody's has taken the following ratings actions:

Outlook Actions:

..Issuer: Goodrich Corporation

....Outlook, Changed To Rating Withdrawn From Rating Under Review

Withdrawals:

..Issuer: Goodrich Corporation

....Multiple Seniority Shelf, Withdrawn, previously rated (P)Ba1, (P)Baa2

....Senior Unsecured Medium-Term Note Program, Withdrawn, previously rated (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Withdrawn, previously rated Baa2

..Issuer: Pilchuck WA, Development Public Corporation

....Senior Unsecured Revenue Bonds, Withdrawn, previously rated Baa2

RATINGS RATIONALE

UTC's ratings continue to broadly reflect the company's large size and geographic scale, its diversified business lines, strong operating margins and stable free cash flow generation. Goodrich, which had $8.3B in sales for the LTM period ended 31 March 2012, will be combined with UTC's Hamilton Sundstrand to form the new UTC Aerospace Systems segment. Still, UTC's financial leverage is very high for the rating, with Moody's-Adjusted Debt-to-EBITDA approximating 3 times on a proforma basis at closing. We expect about one-half of one turn of improvement in this metric (again, on a proforma basis in consideration of a full year of ownership of Goodrich and pending asset dispositions) by year-end, however, as short-term borrowings are repaid with proceeds from pending asset dispositions and repatriation of overseas excess cash balances, and full restoration of the company's former sub-2 times level by 2014.

UTC has already announced asset sales approximating gross proceeds of $4 billion, with more to come -- at a minimum to account for the sale of Goodrich's engine control and electric power business units as stipulated by regulators in conjunction with garnering approval for the Goodrich acquisition. The company has stated that it expects to generate $3 billion or more in after-tax proceeds from its divestitures, an amount which could be conservative and when added to ongoing foreign cash repatriation initiatives and free cash flow should be sufficient to repay about half of the debt raised to fund the $16.5 billion Goodrich purchase price (excluding Goodrich debt) by early 2013. While the revenue reduction related to the sale of these businesses is material, the cash flow impact should be relatively modest as the high-level profitability related to the sold Hamilton Sundstrand businesses in particular is expected to be mostly offset by other sold and to-be-sold businesses that have been cash absorptive, particularly in consideration of requisite investment activities. The recently completed buy-out of Rolls-Royce plc's (A3 stable) stake in International Aero Engines AG (unrated) for $1.5 billion (less cash received from minority partner MTU Aero Engines GmbH to increase its stake by 5% to 16%) somewhat offsets the anticipated proceeds from pending and still-to-be-completed divestitures.

While much of the financial risk seems to have been mitigated, there remains substantial integration and broader execution risk and growing business risks related to the increasingly challenging market environment. We remain watchful of a further slow-down in fundamental business operations as UTC remains heavily exposed to the weak economic environment in Europe and potential further weakening in China, as well as currency rate volatility (in particular that associated with the Euro). The appropriateness of these concerns seems to have been at least somewhat confirmed by management's recently lowered guidance (albeit modestly) for financial performance during the balance of 2012. We have noted the persistence of the negative order trend in virtually all business lines, but particularly in the highly profitable spares and elevator operations, with potentially incremental pricing pressure yet to ensue and be evidenced in reported financial performance as a more specific area of concern. The ongoing negative rating outlook incorporates these risks, which are additive to the aforementioned strained credit profile at present, and the higher degree of financial risk that UTC was willing to incur with the Goodrich acquisition and the financing of the same more fundamentally, particularly in consideration of the fiscal conservatism that has historically been demonstrated.

Should events occur that impair UTC's ability to reduce debt and restore its financial metrics in short order, including risks related to the integration of Goodrich, failure to execute on debt reduction initiatives and/or erosion of fundamental business performance, the company's ratings could face downward pressure. If we no longer expect Debt-to-EBITDA of around 2x or lower and Retained Cash Flow-to-Debt to exceed 30% by early 2014, ratings could be lowered. Additionally, Debt-to-EBITDA that persists above 2.5x during the first year following the acquisition, EBIT-to-Interest stalled in the 7x range, and/or Retained Cash Flow-to-Debt falling below the 25% range could also warrant consideration for lower ratings.

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.

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 this methodology.

United Technologies Corporation (UTC) is a conglomerate which operates globally in the Industrial (Carrier, building controls; Otis, elevators; Fire & Security, systems) and Aerospace (Sikorsky, helicopters; Pratt & Whitney, engines; Hamilton Sundstrand, avionics and aircraft controls) markets. Headquartered in Hartford, Connecticut, UTC's revenue approximated $58 billion in the twelve months to 30 June 2012.

Goodrich Corporation, now a wholly-owned subsidiary of UTC, is a leading aerospace company serving commercial, military, regional and general aviation markets. Goodrich's revenue for the LTM period ended 31 March 2012 approximated $8.3 billion.

Moody's has withdrawn the Goodrich ratings because it believes it has insufficient or otherwise inadequate information to support the maintenance of these ratings. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its Web site, www.moodys.com.

REGULATORY DISCLOSURES

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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 United Technologies A2 ratings; withdraws Goodrich ratings
No Related Data.
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