Fitch Ratings recently lowered its outlook on Honeywell International Inc. (HON) as it expects the defense contractor’s weak operating performance that began late last year to continue through 2009.

Lower earnings and cash flow have resulted in a leverage which is above normal levels for maintaining an “A” assigned to the company’s long-term default rating, unsecured bank credit and senior unsecured debt program. Fitch has an “F1″ rating on Honeywell’s short-term issuer default and commercial papers.

Although the global recession has hurt the company’s short-term outlook and 2009 results, Honeywell plans to continue its investments to ensure growth when the economy rebounds. It intends to reduce debt to help limit the impact of weaker financial results on leverage in 2009. The company continues to target strong financial metrics to improve its financial flexibility and ability to maintain a solid competitive edge.

Honeywell had cash and cash equivalents of $2.6 billion, long-term debt of $6.2 billion and net worth of $8.6 billion as of June 30. Its long-term debt-equity ratio is 0.72 and net debt stands at $3.6 billion, down by $20 million from the first half of 2009.

A rating downgrade is unlikely if Honeywell’s actions and planned debt reduction contribute to a financial improvement by end of 2009.

A change in the level of the US Government’s defense and aerospace funding could adversely impact sales of Aerospace’s defense and space-related product and services. Future growth is also dependent upon the company’s ability to develop pioneering technologies that achieve market acceptance with acceptable margins.

Honeywell is a diversified technology and manufacturing company, serving customers worldwide with aerospace products and services, control, sensing and security technologies for buildings, homes and industry, among other things. United Technologies Corp. (UTX) and Johnson Controls Inc. (JCI) are its major competitors.

We currently have a Neutral Recommendation on Honeywell.

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