DBRS Confirms Honeywell International at “A” and R-1 (low)

DBRS has today confirmed the Senior Unsecured Debt rating for Honeywell International Inc. (Honeywell or the Company) at “A,” with a Stable trend. The rating primarily reflects Honeywell’s position as a global leader in its core businesses, notably aerospace and automation and controls, its highly diversified revenue base that adds earnings stability, and its consistent free cash flow generation. The rating also takes into account the Company’s exposure to cyclical changes in demand that impact many of its core end markets.

The ratings for Honeywell are expected to remain stable over the near term despite the expectation for slowing earnings and cash flow, mainly related to weak economic conditions in its core global markets. The decline will be relative to very strong financial results reached in 2008, which were driven mainly by the aerospace and automation and controls (ACS) segments. While these segments are expected to weaken, they should also help add a degree of stability in relation to the Company’s transportation and specialty materials businesses, which are facing significant challenges (but account for a modest share of total sales). Key factors include the relative stability of the Company’s defense/space business (which accounts for close to 50% of aerospace division sales), high amount of retrofit work in ACS and strong market shares within its core businesses. In addition, the Company’s repositioning efforts should help improve efficiency and benefit profitability when demand improves beyond 2009. These factors are expected to limit the impact of depressed commercial and business jet aircraft market conditions (within the aerospace division) and slowing non-residential ACS demand, notably in the United States and Europe.

Honeywell’s balance sheet has become increasingly levered over the past several years, which has contributed to weaker credit metrics. Large share repurchases and acquisitions were mainly responsible, and led to leverage and coverage ratios that are aggressive for the current ratings. However, the Company has suspended its share buyback program and large acquisitions are not expected over the near term. Honeywell is expected to continue to generate solid free cash flow, which provides support for the ratings, and plans to use the proceeds toward debt reduction. While earnings and operating cash flow are expected to decline, the subsequent reduction in debt should enable the Company to improve its credit metrics to more acceptable levels. In addition, while its pension deficit has significantly increased, common shares ($1 billion in total) will be used to help address the underfunded position and limit near-term cash contributions. Furthermore, Honeywell’s liquidity position is strong and not an issue. Near-term debt maturities are large ($1.6 billion through 2010), but the Company has significant cash reserves ($2 billion at March 31, 2009) and credit availability ($3.3 billion, with no financial covenants) and should continue to generate solid free cash flow.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.