Fitch Affirms Honeywell's IDR at 'A'; Outlook Stable
KEY RATING DRIVERS
HON's ratings incorporate the company's consistent operating performance, leading market positions, diversification across product markets and geographies, substantial liquidity, and improving margins and free cash flow (FCF). Leverage is at a low level that supports the existing ratings; debt-to-EBITDA was 1.2x on a preliminary basis as of Dec. 31, 2014 compared to slightly above 1.3x at the end of 2013.
Fitch anticipates HON's future operating results will benefit from a well-positioned business portfolio centered on high technology content with broad applications in aerospace and defense, industrial processes, and controls used in buildings. The company has effectively realigned its business portfolio in these markets through acquisitions and divestitures, most recently with the divestiture of Friction Materials in 2014 and the pending acquisition of Datamax-O'Neil in the Automation and Control Solutions segment.
Fitch expects margins will continue to increase across all of HON's segments as a result of restructuring and various programs to improve efficiency, reduce costs, and focus on effective product development. Margins in the Aerospace segment are negatively affected by incentive costs related to HON's content on new platforms, but Fitch expects HON will realize favorable margins over the life of the platforms.
Rating concerns include low oil prices, cash payments related to asbestos and environmental liabilities, and the potential negative impact on leverage and other credit metrics from future 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 would support discretionary cash deployment and maintain financial flexibility over the long term.
Low oil prices could reduce capital spending by upstream customers or in oil-producing regions, but activity at HON's refining customers should not be materially affected and there could be longer-term economic benefits if oil prices remain low.
FCF after dividends in 2014 totaled \$2.4 billion on a preliminary basis compared to \$2 billion one year earlier. Fitch estimates FCF in 2015 will increase slightly to approximately \$2.5 billion. HON's strong FCF reflects the company's steadily improving operating results and manageable cash requirements for pension contributions and environmental payments, partly offset by higher dividends and capital expenditures. Capital expenditures should peak in 2015 as HON adds production capacity in the Performance Materials and Technologies segment but could remain somewhat higher than in the past as HON invests in product development and production capacity across its businesses.
FCF includes the impact of asbestos and environmental payments. Asbestos payments include Bendix-related liabilities that have ranged between \$150 million - \$200 million annually, and NARCO payments that are currently capped at \$140 million annually before including separate, one-time payments of around \$260 million, more than half of which Fitch estimates could occur in 2015. Asbestos payments for Bendix and NARCO are reduced by insurance receipts which totaled approximately \$200 million in the first nine months of 2014. HON made \$202 million of environmental payments in the same period.
HON did not make contributions to its U.S. pension plans in 2014 and does not plan to make contributions in 2015. It contributed \$117 million to non-U.S. plans in through the first nine months in 2014. Global and U.S. plans were approximately 94%-95% funded at the end of 2014.
Liquidity at Dec. 31, 2014 included nearly \$7 billion of cash, not including marketable securities. Most of HON's cash is located outside the U.S. which would reduce the company's effective liquidity modestly after the impact of potential taxes on repatriated earnings. Liquidity also includes a \$4 billion credit facility that matures in 2018. Liquidity was offset by \$1.6 billion of commercial paper and approximately \$1 billion of scheduled long-term debt maturities and short-term borrowings. Long-term debt maturities after 2015 are well distributed and don't exceed \$900 million in any single year.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--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;
--FCF-to-total adjusted debt declines below 10%;
--Margins weaken unexpectedly;
--An increase in contingent asbestos or environmental liabilities leads to significantly higher annual cash payments.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Consistently strong FCF, defined as FCF-to-total adjusted debt near 25% or higher;
--A material reduction in leverage, including debt/EBITDA near 1.0x or below;
--A long-term reduction in asbestos and environmental liabilities;
--Further margin expansion.
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.
HON's outstanding debt totaled approximately \$8.7 billion at Dec. 31, 2014.
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