CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign a rating of 'A' to Honeywell International Inc.'s (NYSE: HON) planned issuance of approximately $1 billion of senior unsecured notes, including a mix of two-year floating rate notes and ten-year fixed rate notes. Proceeds will be available for general corporate purposes and will support HON's liquidity ahead of the scheduled maturity of $600 million 3.875% notes due February 2014. The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
HON's ratings incorporate the company's solid operating performance, leading market positions, diverse business portfolio, high liquidity, and consistent cash flow. Debt-to-EBITDA was 1.3x at Sept. 30, 2013. Fitch estimates FCF after dividends in 2013 could increase to around $2 billion compared to $1.4 billion in 2012. The increase largely reflects a substantial decline in planned pension contributions. FCF includes the impact of environmental liability payments, which have typically been in the range of $260 million - $320 million annually, and asbestos liability payments, net of insurance receipts, of less than $50 million annually. The establishment of the long-delayed NARCO trust in 2013 will limit future NARCO-related asbestos payments to $150 million annually, although payments could be substantially higher during the first two years due to additional one-time payments associated with the arrangement.
Conditions in HON's end markets are mixed. Revenue growth in 2013 could be in the low single digits based on solid backlogs in the commercial aerospace, UOP, and process solutions businesses, partly offset by slower economic growth in emerging regions. Revenue in HON's defense and space business is likely to remain under pressure, but international military business could potentially see some improvement.
HON continues to generate solid margins across most of its businesses, particularly in the UOP and aerospace businesses. Margins are supported by incremental restructuring savings which HON estimates could be an additional $125 million in 2014. Net restructuring charges through the first nine months of 2013 totaled $116 million. Recent charges have been concentrated in the friction materials business in the TS segment.
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.
HON's priorities for cash deployment include capital expenditures to support internal growth, acquisitions, share repurchases, and dividends. HON recently announced a 10% dividend increase, and it intends to use share repurchases to maintain a stable share count. The company does not plan to make contributions to its U.S. pension plans in 2013 following large voluntary contributions in previous years. These contributions, combined with a decline in the discount rate and favorable asset returns, should lead to an increase in the funded status of the U.S. plans which stood at 85% at the end of 2012.
Liquidity at Sept. 30, 2013 included $5.5 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 $2.8 billion of commercial paper and debt due within one year. Long-term debt maturities are well distributed; the nearest maturities total approximately $600 million in 2014 and $450 million in 2016.
RATING SENSITIVITIES
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 increases in margins and FCF, consistently lower leverage, and sustained levels of high level liquidity. Fitch could take a negative rating action if margins weaken unexpectedly, FCF or liquidity decline, or 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 rates HON as follows:
--Issuer Default Rating (IDR) 'A';
--Senior unsecured bank credit facilities 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1';
--Commercial paper 'F1'.
The ratings affect $8.6 billion of debt outstanding at Sept. 30, 2013.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=808395
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