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
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
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
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.