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

DBRS has today confirmed the Senior Unsecured Debt rating of Honeywell International Inc. (Honeywell or the Company) at “A” with a Stable trend. The Commercial Paper ratings of Honeywell and its affiliates have also been confirmed at R-1 (low) with Stable trends. Honeywell’s credit profile remains acceptable for its ratings, and is largely supported by its leading market positions in its well-diversified Aerospace, Automation and Control (ACS), Specialty Materials and Transportation Systems businesses, as well as the Company’s consistently strong free cash flow. The Company’s financial profile remains in line with expectations.

Honeywell performed well over the past year in light of the sharp deterioration in macro economic and credit market conditions. While sales and earnings from each of its four main operating segments declined in 2009, consolidated net earnings (before non-recurring items) remained above $2 billion with operating margins that were relatively stable and solid. As expected, Aerospace segment results were pressured mainly from continued weakness in the commercial and business aircraft industry (i.e., limited aircraft orders and reduced after-market parts/services). However, Honeywell’s defense/space business within this segment (which accounts for roughly 50% of Aerospace sales) added a degree of stability. While ACS operating results also weakened, margins notably improved from cost savings (i.e., furloughs), productivity initiatives and new products/price increases that were implemented across the Company, as well as its mix of products and services that are generally less cyclical than the other operating segments.

Earnings (before non-recurring items) are expected to decline to below $2 billion for the year but remain acceptable for the rating and should improve beyond 2010. Higher pension and Other Postemployment Benefit (OPEB) expenses are largely responsible for the outlook and are expected at roughly $800 million. Signs of stabilization in the aerospace industry, combined with stronger automotive (Transportation Systems) and commodity market fundamentals (Specialty Materials), should lead to modest improvement in segment profits (before corporate eliminations) over the near term.

Honeywell’s ability to consistently generate strong free cash flow provides a high degree of financial flexibility. Free cash flow was used mainly toward debt reduction over the past year, which was expected as debt had become aggressive for the ratings. Debt-to-capital markedly improved from aggressive 2008 levels, which was a function of a large pension write-down, share repurchases and acquisitions (i.e., Norcross). In addition, debt-to-EBITDA was relatively stable at 2-times despite lower earnings, and cash flow-to-debt modestly improved to 0.40.

DBRS expects the Company to continue to use free cash flow and cash toward debt reduction. Debt-to-EBITDA should remain in the 2-times range and adjusted debt-to-capital in the mid-40% range (as per DBRS calculations) over the near- to medium-term. While acquisitions are also likely to be a use of cash, larger-scale purchases are unlikely in the near future following the planned $1.4 billion Sperian purchase in Q2 2010; Honeywell is expected to be focused mainly on debt/pension liability reduction as it is committed to maintaining an “A” long-term rating. As such, future large near-term acquisitions could pressure the rating if debt materially increases and is not reduced expeditiously. That said, free cash flow and the Company’s significant cash position should provide the flexibility to manage its growth and balance sheet objectives.

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

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

This is a Corporate rating.