TEXT - Fitch affirms Honeywell International
Jan 10 - Fitch Ratings has affirmed Honeywell International Inc.'s (HON) long-term and short-term ratings at 'A'/'F1'. The Rating Outlook is Stable. A full rating list is provided at the end of this release. HON's ratings incorporate the company's solid operating performance, strong market positions across a diversified business portfolio, a high level of liquidity, and steady operating cash flow. Debt-to-EBITDA was within a normal range for the ratings, at 1.3x as of Sept. 30, 2012. Free cash flow (FCF)-to-total adjusted debt of 14% on a trailing 12-month basis was somewhat weak, partly due to the negative impact of large pension contributions which could decline in 2013. Fitch expects HON to see modest internal sales growth and margin improvement in the near term, reflecting mixed conditions in its end markets. Global economic conditions have dampened demand in certain end markets during the past year, but solid backlogs support HON's commercial aerospace business, refining markets at HON's UOP unit, and the process solutions business. Revenue in HON's defense and space business could decline as a result of lower U.S. military spending, but the impact is mitigated by the company's limited exposure to overseas contingency operations (OCO) and diversification across a large number of platforms. HON continues to generate solid margins across most of its businesses, particularly in the UOP and aerospace businesses. Margin performance in the Performance Materials and Technologies (PMT) segment could be tempered in the near term by integration costs associated with UOP's recent acquisition of Thomas Russell. The Transportation Systems (TS) segment is exposed to Europe where vehicle production is falling, but results at TS should benefit from new product launches and increasing market penetration in the U.S., which could offset the impact of Europe. Margins will be supported by incremental restructuring savings in 2013 estimated by HON at approximately $150 million. Restructuring charges through the first nine months of 2012 totaled $95 million, before reversals, and are directed toward improving operating efficiency and product development. Recent charges have been concentrated in the TS segment related to operating challenges at its friction materials business. Rating concerns include slower growth in emerging regions and in Europe, lower defense spending, contingent liabilities including asbestos and environmental, and discretionary cash deployment. These concerns are mitigated by HON's financial flexibility and demonstrated ability to maintain satisfactory margins through business cycles. Fitch anticipates HON will maintain a stable financial profile while it expands existing businesses internally and through acquisitions, and that it will generate sufficient cash flow to support modest share repurchases and other discretionary spending. Fitch estimates FCF after dividends in 2013 could approach $2.2 billion, before including benefits from recent acquisitions, compared to an estimated $1.3 billion - $1.4 billion in 2012. The increase largely reflects a substantial decline in planned pension contributions. FCF could be lower if the long-delayed NARCO trust is completed. HON estimates payments to fund the trust would be $200-$300 million annually in 2013 and 2014, followed by smaller payments in subsequent years. If completed, the establishment of the trust would provide additional clarity around HON's asbestos liabilities which represent a long term drag on cash flow. HON also has legacy environmental liabilities. Amounts to fund asbestos and environmental liabilities, not including the possible NARCO trust payments, have typically been in the range of $300 million - $450 million annually. HON does not plan to make contributions to its U.S. pension plans in 2013. It made large voluntary contributions during the past several years and expected to contribute slightly more than $1 billion of cash to all of its plans in 2012, mostly to U.S. plans. The contributions helped offset the negative impact of declining discount rates on pension liabilities. HON estimates U.S. plans were 85% funded at the end of 2012. HON's priorities for cash deployment include capital expenditures to support internal growth, acquisitions, share repurchases, and dividends. The company plans to increase capital expenditures by roughly a third in 2013, with much of the increase used to support new business at UOP. HON recently increased dividends by 10%, and it intends to use share repurchases to maintain a stable share count. Spending for acquisitions is targeted toward bolt-on transactions that complement HON's existing product portfolio and support expansion in high-growth markets. HON completed or announced two material acquisitions in 2012. UOP purchased 70% of Thomas Russell for $525 million, and has the right to buy the remainder at a price based on future results. Russell provides equipment and technology for treating and processing natural gas. HON also announced the $600 million acquisition of Intermec by the Automation and Control Solutions segment which is expected to close by the end of the second quarter of 2013 and will expand HON's presence in scanning and mobile computing. Liquidity at Sept. 30, 2012 included $4.8 billion of cash, much of which is located outside the U.S., and a $3 billion credit facility that matures in 2017. HON also has an on-balance-sheet securitization program of $400 million which was unused. Liquidity is offset by $974 million of short-term debt and $624 million of long term debt scheduled to mature within one year. Fitch estimates HON's near term debt maturities could be refinanced. Other long-term debt maturities are well distributed. Fitch believes a positive rating action is unlikely in the near term. However, developments that could contribute to higher ratings over the long term include consistently lower leverage, stronger margins and FCF, and sustaining a high level of liquidity. Fitch could take a negative rating action if margins weaken unexpectedly, FCF or liquidity decline, or net pension obligations and contingent liabilities increase. The ratings and Outlook could also be negatively affected in the event of large acquisitions or other discretionary spending that lead to higher leverage. Fitch has affirmed HON's ratings as follows: --Issuer Default Rating (IDR) at 'A'; --Senior unsecured bank credit facilities at 'A'; --Senior unsecured debt at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'. The ratings affect nearly $8 billion of debt outstanding at Sept. 30, 2012.
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