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Fitch Ratings Affirms Rockwell Collins.

NEW YORK -- Fitch Ratings has affirmed Rockwell Collins, Inc.'s (COL) credit ratings as follows:

--Issuer Default Rating (IDR) at 'A';

--Senior unsecured notes at 'A';

--Senior unsecured bank facility at 'A';

--Commercial paper program at 'F1'.

The Outlook is Stable.

Rockwell Collins, Inc.'s (COL) ratings and outlook are supported by the company's position as a leading provider of commercial and military communication, navigation and electronic products and systems and the continuing strength of these markets. Within its markets, COL continues to maintain a well-diversified revenue base of defense and other government sales (53% combined) and commercial customers (47%). The U.S. government accounted for 39% of sales and nearly one-third of fiscal 2006 sales were international. On the commercial side of COL's business, ratings are aided by another strong year of orders for large commercial aircraft in 2006 with backlogs of approximately five years at both Airbus S.A.S. (Airbus) and The Boeing Company (Boeing); the continued growth of global airline traffic, which drives commercial aftermarket sales; the aging of the Airbus and regional jet (RJ) fleets, which is also benefiting commercial aftermarket sales; and the robust business jet market. For COL's military business, ratings continue to benefit from high military budgets and the company's position in some of the most favorable parts of the Department of Defense (DoD) budget.

Additional support for the ratings is derived from COL's high and still growing operating margins and strong cash generation. These have allowed the company to maintain a strong balance sheet and a solid liquidity position, despite increased share repurchases, discretionary pension contributions and small bolt-on acquisitions.

Concerns center on COL's cash deployment strategy, namely share repurchases and acquisitions. The Democrats' victory in the recent elections and the change in the Secretary of Defense have added some uncertainty for COL's defense business, but Fitch does not expect these changes will materially affect defense spending in the next several years. The underfunded pension plan is less of a concern due to an increased discount rate, ongoing discretionary contributions and the end of further accruals in COL's defined benefits plan for approximately 80% of COL's workforce beginning this fiscal year. With Bombardier Inc.'s (Bombardier) 50-seat RJ200 no longer in production and its larger RJ build rates already at low levels, Fitch believes that further declines would not have a material impact, especially given strength in all other areas of COL's businesses. Although demand for new 50-seat RJs has evaporated, the number of parked Bombardier RJs peaked in May 2006 and has been declining. Fitch expects that the parked fleet will continue to decline as owners reduce lease or sale prices to economically viable levels and will not have a significant long-term impact on COL's aftermarket revenues. The commercial aviation industry's susceptibility to exogenous shocks remains a concern, but COL's successful weathering of the most recent downturn indicates management's ability and willingness to take the necessary actions to maintain financial strength in difficult markets.

Fitch expects that cash deployment will continue to focus on share repurchases, acquisitions and discretionary pension contributions with the goal of minimizing the effect on its credit profile. In the past four fiscal years, COL repurchased shares totaling $1.4 billion, including nearly $0.5 billion in each of the last two years. Remaining board authorization for repurchases was $74 million as of Sept. 30, 2006, but Fitch expects COL's board to authorize additional repurchases. COL made acquisitions totaling $100 million in fiscal 2006 and continues to look for bolt-on acquisitions and Fitch's concerns are focused on the possibility of a sizable acquisition(s) that may create integration issues. Also in fiscal 2006, COL made $50 million in discretionary pension contributions and plans to make $75 million this year. With only $245 million in debt, Fitch does not expect debt reduction to be a focus of cash deployment. Debt increased $45 million in fiscal 2006 in order to partially fund the repatriation of $91 million under the American Jobs Creation Act of 2004.

At Sept. 30, 2006, COL had a liquidity position of $994 million, consisting of $144 million of cash and full availability under its $850 million domestic credit facility, which is intended as a backstop for the company's $850 million commercial paper (CP) program. COL also had $57 million in overseas short-term credit facilities, of which $25 million was used to support letters of credit. The company also has $90 million in letters of credit outstanding which are not part of any of the credit facilities. COL's credit ratios remain strong for the rating category and have seen little change over the past year. Improving EBITDA was offset by the small increase in debt and associated interest expense. Interest coverage as defined by operating EBITDA to interest was 61.8 times (x) in fiscal 2006 vs. 61.5x in fiscal 2005, while leverage as defined by debt to operating EBITDA was largely unchanged at 0.3x.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
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Publication:Business Wire
Date:Jan 10, 2007
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