DBRS Confirms Honeywell International Inc. 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 subsidiaries have also been confirmed at R-1 (low) with Stable trends. The rating actions recognize that the Company has fully recovered from the deep recession with credit metrics back to pre-recession levels. Moreover, the Company is well positioned in its key business segments to benefit from global growth especially in emerging markets.

The Company performed better than most industry peers during the recent recession due to the solid market position of its key businesses, the diversity of its products and geographies and ongoing focus to improve its operating leverage and cash generation. The Company’s growing presence in emerging markets is also a key contributor of its above average performance during the past recession. In 2010, sales at most business segments reported year-over-year improvement with Aerospace the only laggard with a slight decline. More encouragingly, market conditions were trending in the right direction through the year with Q4 2010 sales reported solid gains on a year-over-year basis in all business segments. This positive momentum carried through to H1 2011. Honeywell’s ongoing efforts to improve productivity and operating processes boosted solid gains in margins. Moreover, Honeywell’s focus on cash generation has resulted in a stronger balance sheet as it emerged from the recession and all debt coverage ratios recovered to pre-recession levels.

Near term, global GDP growth is expected to continue to strengthen especially in emerging economies such as China and India. With a healthy backlog and a strong new product pipeline in most business segments, the Company expects to grow faster than the respective regional market growth rate. The Company has targeted overall revenue growth in 2011 in the range of between 12% to 14% with all business segments to report year-over-year increases and segmented profit to rise between 16% to 19% (15% in H1 2011). However, the Company does face some headwinds in growing operating profit. Fiscal problems at the U.S. government are expected to impact defence spending and the desire to reduce the budget deficit could lead to a larger than anticipated reduction in defence spending. Secondly, inflationary pressure is building especially in commodity prices which adds to cost pressure.

Medium term, growth prospects for the Company’s businesses are also positive. The Company has a strong new product pipeline and is well positioned to take advantage of favourable developing trends in areas such as energy efficiency, green energy, health and safety, etc., and the recovery in other sectors such as air transportation and industrial production. The Company’s rising penetration of emerging markets also enhances growth potential. Moreover, the Company’s performance culture and the focus on the “Five Initiatives” (Growth, Productivity, Cash, People, Enablers) will continue to drive improvement. The Company has set a medium-term target of $41 billion to $45 billion in sales and a profit margin of 16% to 18% by 2014.

The Company’s financial profile remains compatible with the current rating. Although the Company’s leverage is at the high end of the rating range for a cyclical company, its strong cash flow generation is more than adequate to support the debt levels. All debt coverage ratios are above average relative to industry peers. Moreover, the recent action to address the pension situation with large cash contributions has reduced the underfunded position to a manageable level. (The deficit is forecasted to be about 10% of liability at the end of 2011.) The Company has significant financial flexibility with its large cash on hand (over $3 billion at the end of June 2011) and unused credit facility.

Going forward, DBRS expects that the Company will continue to generate strong cash flow internally and should more than cover working capital, dividends and capital expenditures. Free cash flow should remain above average. However, the Company remains acquisitive which is an integral part of its growth strategy. In addition, share repurchase is also an ongoing consideration to reward shareholders. Nevertheless, the Company is committed to maintain a “A” rating and DBRS expects the Company to remain disciplined in its acquisitions and share repurchase actions to maintain a financial profile compatible with the current rating. 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.

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

None of the commercial paper programs are currently active.

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