Fitch Ratings expects to assign Honeywell International’s planned issue of euro-denominated senior unsecured notes, which will include a mix of maturities, a rating of 'A'. Proceeds will be available for general corporate purposes, including repayment of commercial paper, which totaled $5.9 billion at the end of 2015. The Rating Outlook is Stable.
HON's leverage deteriorated modestly following significant cash deployment in 2015, which included more than $5 billion of acquisitions and $1.9 billion of share repurchases. Debt increased to nearly $12.1 billion at 31 December 2015 from $8.7 billion at the end of 2014. As a result, debt-to-EBITDA increased to 1.5x at 31 December 2015, which excludes the positive impact of acquired EBITDA, compared with 1.24x at the end of 2014. This level is near the high end of the range incorporated by Fitch in the current ratings for HON. Fitch believes leverage will decline gradually as HON continues to streamline operations and invest in new product development.
The increase in leverage is offset by strong free cash flow (FCF) and a high level of liquidity, which provides financial flexibility to fund discretionary spending and cope with cyclical end markets. Fitch expects EBITDA margins, which increased to nearly 20% in 2015, will be flat or improve in the near term although HON targets additional margin improvement across all of its segments.
Margins improved by more than 500 bps during the past four years, roughly half of which occurred in 2015, due to a better product mix, partly achieved through acquisitions and divestitures, ongoing operating improvements, and restructuring which HON estimates will reduce costs by at least $150 million in 2016. Margin growth in the Aerospace segment is partly offset by the negative near-term impact of incentive costs related to HON's content on new platforms.
At the end of 2015, HON acquired the Elster division of Melrose Industries for approximately $5 billion. Elster generates favorable EBITDA margins of over 20% and will be integrated with HON's Automation and Controls Solutions and Performance and Materials and Technologies segments.
Rating weaknesses include cash deployment for share repurchases and large acquisitions that contributed to a $3.4 billion increase in HON's debt during 2015. In addition to the acquisition of Elster, HON repurchased shares totaling $1.9 billion in 2015. Fitch expects share repurchases and acquisitions in 2016 will be substantially below the amount of $7 billion in 2015. HON should generate sufficient FCF, however, to fund a modest level of discretionary spending without increasing debt.
Other risks include the negative impact of currency exchange rates on results, difficult conditions in oil and gas markets, slow global economic growth, and ongoing cash payments related to asbestos and environmental liabilities. HON's revenue fell 4% in 2015 as the strong dollar more than offset organic growth across most of the company's businesses. Currency likely will pressure sales again in 2016 although HON has hedged a large part (85%) of its exposure to the euro.