Fitch Affirms Rockwell Collins at 'A'; Outlook Negative

Fitch Ratings has removed Rockwell Collins, Inc.'s (COL) ratings from Rating Watch Negative and affirmed the long-term and short-term ratings at 'A' and 'F1'. The ratings were placed on Rating Watch Negative on Aug. 13, 2013, following the company's announcement that it had agreed to acquire ARINC Inc., (Arinc) from the Carlyle Group for approximately $1.4 billion. The Rating Outlook is Negative. A full rating list follows at the end of this release.

The Arinc transaction is expected to close sometime in the fourth quarter of 2013, subject to regulatory approval, and COL plans to fund the acquisition cost entirely with debt. Fitch's ratings currently cover approximately $1.2 billion of debt and will cover approximately $2.4 billion long term and short term borrowings giving effect to expected issuance of new senior unsecured notes and additional commercial paper. The ratings affirmations reflect Fitch's view that COL has the cash generating ability to reduce post-acquisition leverage to levels consistent with an 'A' rating within 12 - 24 months of the closing of the acquisition. However, COL's leverage will be high for the current ratings immediately after purchasing Arinc, leaving the company's ratings exposed to unforeseen developments that could reduce the pace of leverage reduction.

KEY RATING DRIVERS

Fitch's primary credit concern is the timing of COL's return to stronger financial metrics, including the risk of sequestration and of a weaker economy that could constrain the company's earnings and cash flow and slow a reduction in leverage. This concern is mitigated by COL's solid margins and strong cash flow generation which were typically deployed towards share repurchases and dividends. Fitch expects share repurchase activities to moderate in the near future, and COL will deploy its cash towards repayment of its commercial paper expected to be incurred in connection with the Arinc acquisition. Fitch is also concerned with the integration risk of the acquisition as COL is not experienced in integrating large scale operations due to the bolt-on acquisition strategy followed by the company in the recent past. However Fitch expects integration challenges could be mitigated by the treatment of Arinc as a stand-alone business unit within COL's existing organizational structure.

The Negative Rating Outlook is driven by a significant increase in COL's leverage due to the Arinc acquisition. Fitch estimates the issuance of debt associated with the acquisition will increase COL's debt/EBITDA to approximately 2.2x immediately following the issuance, not taking into account Arinc's pro-forma financials. At June 30, 2013, COL's debt/EBITDA was 1.1x, up from 0.7x at the end of fiscal 2012 due to commercial paper borrowings to fund share repurchases and on-going operations. Fitch expects that COL will repay acquisition-related short term borrowings within two years to return to stronger credit metrics with leverage in the 1.2x - 1.4x range by the end of fiscal 2015 (ending Sept. 30, 2015). Fitch also expects leverage to continue to decline following fiscal 2015. Following the acquisition, the ratings of the company will be highly exposed to a downturn in the cyclical aerospace industry and unexpected additional cuts to the Department of Defense (DoD) budget. Fitch is likely to take a negative rating action should COL face challenges in achieving projected financial results.

Fitch's other concerns include risks to core defense spending during and after fiscal 2014, including sequestration, COL's large pension plan deficit and potential cash deployment actions towards acquisitions. Fitch does not expect COL to make other large acquisitions in the near future, but small scale acquisitions are possible.

COL's ratings are supported by Fitch's expectations that the company will be able to de-lever rapidly and reach below 1.4x leverage by the end of fiscal 2015 fuelled by strong cash flow from operations and free cash flow (FCF: cash from operations less capital expenditures and dividends). The ratings are also supported by an increase in high margin commercial sales, an expected diversification of revenue sources from the Arinc acquisition, a balanced portfolio within aerospace and defense markets, high defense spending levels, and conservative financial policies.

Arinc complements COL's strong position as the industry's leading avionics and cabin technologies developer by enabling the company to diversify into another spectrum of aviation information management such as ground to plane communications. The acquisition could enable COL to develop new products or solutions by combining Arinc's ground networks with its avionics products. Additionally, Arinc's revenues are highly subscription based, diversifying COL's revenue sources and providing higher stability to its revenue stream.

COL's liquidity declined during fiscal 2013 as the company accessed the commercial paper market to fund share repurchases. At June 30, 2013, COL's liquidity was approximately $804 million down from $1.2 billion at end of fiscal 2012 and consisted of $354 million in cash and approximately $450 million availability under its $850 million revolver. Fitch expects the company's liquidity to fluctuate within the $800 million to $1 billion range in fiscal 2014 and 2015 as the company expects to increase its revolving facilities to address anticipated higher commercial paper borrowings in the first quarter of fiscal 2014. Fitch expects liquidity will gradually improve to above $1.3 billion by the end of 2015 as COL will repay its short term debt.

COL generated $651 million of cash flow from operating activities (CFO) during last twelve months (LTM) ended June 30, 2013, up from $534 million in 2012; FCF totaled $363 million during LTM ended June 30, 2013, up from $239 million in fiscal 2012. Fitch expects FCF generation to range from $250 million to $450 million over the next several years.

Historically, COL's cash deployment has focused 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.

COL repurchased a total of $524 million common stock in the first three quarters of fiscal 2013, down from $710 million repurchased during the same period of the prior year. 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 of unsecured senior notes issued on Nov. 16, 2011. Fitch expects COL to moderate share repurchase activity for the near future and deploy the majority of its free cash towards leverage reduction.

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 had already contributed a total of $110 million during the first three quarters of fiscal 2013. COL does not expect to make additional contributions to the qualified U.S. pension plan in fiscal 2013.

RATING SENSITIVITIES

Fitch does not expect to take positive rating actions over the next several years as COL will gradually reduce its leverage. Fitch may take a negative rating action if COL's debt reduction pace is significantly slower than currently anticipated due to insufficient cash generation to reduce leverage to the 1.2x - 1.4x range by the end of fiscal 2015. Further negative rating actions could be expected if defense spending cuts have a more significant impact on the company's earnings and FCF than currently anticipated.

Fitch removes from Rating Watch Negative and affirms COL's ratings as follows:

--Long Term IDR at 'A';

--Short-term IDR at 'F1';

--Senior unsecured revolving credit facilities at 'A';

--Senior unsecured notes at 'A';

--Commercial paper (CP) at 'F1'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=803822

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