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Fitch Affirms Honeywell at 'A/F1'; Outlook Stable

January 24, 2014

Fitch Ratings has affirmed Honeywell International Inc.'s (HON) long-term and short-term Issuer Default Ratings (IDRs) at 'A'/'F1'. The Rating Outlook is Stable. A full rating list is provided at the end of this release. KEY RATING DRIVERS HON's ratings incorporate the company's solid operating performance, leading market positions, diverse business portfolio, substantial liquidity, and improving cash flow from operations. The company's end-markets are mixed, reflecting slow global economic growth, while operating improvements support higher margins despite slow revenue growth. The company continues to make progress addressing contingent obligations for asbestos and environmental liabilities, and pension funding has improved. Leverage remains stable, with debt-to-EBITDA at 1.3x as of Sept. 30, 2013 compared to 1.2x at the end of 2012. This level is higher than some of HON's 'A' rated peers but is within an acceptable range given HON's consistent free cash flow (FCF) and ample liquidity. Rating concerns include cash payments related to asbestos and environmental liabilities and the potential negative impact on leverage and other credit metrics from future discretionary cash deployment for acquisitions and share repurchases. However, Fitch expects HON will maintain a strong balance sheet and generate solid margins and FCF through business cycles that should support at least a modest level of discretionary cash deployment and maintain financial flexibility over the long term. Concerns about pressure on HON's defense business from sequestration have been reduced, but not eliminated, by the recent budget agreement which provides some relief into 2015. Fitch estimates FCF after dividends in 2013 increased to around $2 billion , compared to $1.4 billion in 2012. The increase in FCF largely reflects a substantial decline in pension contributions, partly offset by higher dividends and NARCO asbestos liability payments. FCF is benefiting from a modest improvement in sales and operating margins, reflecting the benefits from acquisitions and restructuring at existing operations. Fitch estimates FCF in 2014 may be flat or slightly lower than 2013 due to a planned increase in capital expenditures and additional NARCO payments that should trend lower in 2015. FCF includes the impact of environmental liability payments that typically are in the range of $260 million-$320 million annually (estimated by HON at $300 million in 2013) and asbestos liability payments related to Bendix of approximately $160 million-$170 million annually. Net asbestos payments for NARCO and Bendix are reduced by insurance receipts which Fitch estimates declined below $100 million in 2013 compared to amounts in the range of $120 million-$140 million in recent years. As anticipated, payments related to NARCO asbestos liabilities became material in 2013 following the establishment of a federally authorized trust in April 2013 . Under the trust arrangement, HON's payments are capped at $150 million annually, but payments during the initial two years will be substantially higher due to a $100 million exclusion to the cap, approximately $280 million of obligations not covered by the cap, and other items totaling approximately $70 million-$75 million. Other cash deployment includes capital expenditures to support internal growth, acquisitions, share repurchases, and dividends. HON estimates capital expenditures will increase to $1.2 billion in 2014 from $900 million-$1,000 million in 2013 to fund high-return development projects. HON increased its dividend by 10 percent in the fourth quarter of 2013, and intends to use share repurchases to maintain a stable share count. The company did not expect to make contributions to its U.S. pension plans in 2013 following large voluntary contributions in previous years. Large cash contributions prior to 2013, a higher discount rate, and favorable asset returns should improve the funded status of the U.S. plans which were 85 percent funded at the end of 2012. HON expected to make $160 million of contributions to non- U.S. plans in 2013, including $151 million through the first nine months. The significant reduction in expected future contributions improves HON's financial flexibility and mitigates the negative impact of ongoing asbestos and environmental liability payments. Liquidity at Sept. 30, 2013 included $5.5 billion of cash, most of which is located outside the U.S., and a $3 billion credit facility that matures in 2017. The facility was increased to $4 billion in the fourth quarter of 2013 and the maturity date was extended to 2018. HON also has an on-balance-sheet securitization program which was unused. Liquidity was offset by $2.1 billion of commercial paper and $700 million of current maturities and short- term debt. Long-term debt maturities are well distributed; the nearest maturities include approximately $600 million in 2014 and $450 million in 2016. HON issued $1 billion of new notes in November 2013 which increased liquidity ahead of the $600 million debt maturity in 2014. Revenue growth in 2014 could improve slightly from 2013, which HON estimated was up by low single digits, excluding acquisitions. Backlogs are solid in the commercial aerospace and UOP businesses and orders have recently improved in the process solutions businesses. Strength in these areas is offset by lower defense and space revenue due to program wind-downs and deferred maintenance associated with sequestration. Also, economic growth is slower, albeit positive, in emerging regions. The advanced materials business was challenged by low demand and weak pricing early in 2013, but the completion of scheduled plant upgrades and benefits from restructuring could support better results in 2014. HON continues to generate solid margins across most of its businesses, particularly in UOP and aerospace. Operating margins increased more than 60 bps during the first nine months of 2013, reflecting improvements in all segments except Performance Materials and Technologies, where strength at UOP was offset by weaker results in the advanced materials business. Margins are supported by incremental restructuring savings which HON estimates could total an additional $125 million in 2014. An improvement in margins in 2014 would also benefit from favorable product mix and pricing in certain businesses such as commercial aerospace and process solutions. HON recently announced an agreement to sell the Friction Materials business for approximately $155 million . Closing is expected during the second half of 2014. The business underwent substantial restructuring during the past two years to improve weak margins but was not considered a core part of HON's business portfolio. RATING SENSITIVITIES Positive: Fitch believes a positive rating action is unlikely in the near term. However, future developments that may, individually or collectively, lead to a positive rating action include: --Further margin expansion; --Consistently strong FCF, defined as FCF-to-total adjusted debt above 20 percent; --A material reduction in leverage; --A long-term reduction in asbestos and environmental liabilities. Negative: Fitch could take negative rating action if: --Margins weaken unexpectedly; --Recurring FCF-to-total adjusted debt declines significantly from the current level near 15 percent; --Contingent asbestos or environmental liabilities increase; --Debt/EBITDA increases toward 1.5x or higher due to large acquisitions or other discretionary spending without a clear means to return to lower leverage in the near term. Fitch has affirmed HON's ratings as follows: --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 Rating Outlook is Stable. The ratings affect $8.6 billion of debt outstanding at Sept. 30, 2013 and $1 billion of senior unsecured notes issued in November 2013 . Additional information is available at 'fitchratings.com '. Applicable Criteria and Related Research : --'Corporate Rating Methodology', Aug. 5, 2013 . Applicable Criteria and Related Research : Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=715139 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=813952 ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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