Fitch Ratings has affirmed ratings for Honeywell International (HON) and its wholly-owned subsidiary, Honeywell Holding B.V., as follows:
Honeywell International Inc.
-- Issuer Default Rating 'A+';
-- Senior unsecured bank credit facilities 'A+';
-- Senior unsecured debt 'A+';
-- Commercial paper 'F1'.
Honeywell Holding B.V.
-- Issuer Default Rating 'A+';
-- Senior unsecured debt 'A+'.
The Rating Outlook is Stable. Approximately $5.7 billion of debt is affected by the ratings.
The ratings incorporate HON's geographic and product diversification, ongoing operating improvements, strong cash flow, financial flexibility, and well-positioned technology portfolio. HON's financial performance is supported by favorable economic conditions across many of its markets and by the company's realignment of its business portfolio. Through a combination of restructuring, acquisitions and divestitures, HON has positioned itself to benefit from a stronger mix of businesses across the company, most notably in the Specialty Materials segment, where it has reduced its exposure to raw material prices and in late 2005 acquired the remainder of the profitable UOP business.
Rating concerns include the negative impact on leverage from HON's expenditures for acquisitions and share repurchases, cyclicality in a number of its end-markets, and liabilities related to asbestos, environmental remediation and pensions. HON's net pension liabilities increased substantially in 2005, partly as a result of acquisitions, but near- to medium-term funding requirements are likely to be contained by the positive impact of rising interest rates on pension calculations and by the proportion of foreign plans that do not require pre-funding.
Although HON's financial measures are somewhat weak relative to similarly rated companies, leverage has improved slightly (free cash flow to total adjusted debt was 15.1% for the last 12 months ended June 30, 2006) as stronger operating earnings and cash flow have offset HON's discretionary expenditures. HON's financial measures should also benefit from recent acquisitions, ongoing integration and cost controls, and HON's expectations for gradually declining cash payments beginning in 2006 for asbestos and environmental liabilities. HON's exposure to lingering asbestos litigation is mitigated by insurance coverage and a possible legislative settlement, but uncertainties remain due to the long term and unpredictable nature of asbestos liabilities.
Fitch believes HON, having substantially repositioned its business portfolio, will continue to demonstrate disciplined financial policies with respect to cash deployment that will support appropriate credit metrics. However, an inability to generate modestly stronger financial ratios or a significant worsening of estimated asbestos and environmental liabilities could potentially lead to a review of the ratings and Outlook.
Net liquidity of $1.9 billion at June 30, 2006 included $1.4 billion of cash and approximately $2.5 billion bank credit facilities, offset by $1.8 billion of current maturities and other short-term debt and by $175 million of letters of credit issued under the bank facilities. Total debt at June 30 increased to $5.7 billion following the acquisitions of First Technology and Gardiner Groupe in the first half of 2006. In addition, HON fully utilizes a $500 million accounts receivable securitization program. Fitch anticipates that HON's total outstanding debt, including receivables securitizations, will generally remain in the range of $5.5 billion or less as it pays down a portion of its current debt in the near term.