DBRS Confirms Honeywell International Inc. at "A" and R-1 (low)

DBRS has today confirmed the ratings of Honeywell International Inc. (Honeywell or the Company) and its subsidiaries, all with Stable trends. The ratings continue to reflect (1) Honeywell’s strong market position supported by technology leadership and broad product ranges in its key market segments, (2) demonstrated efficiency and profit margin improvement achieved with its Honeywell Operating System (HOS) and (3) continued penetration and revenue growth in emerging markets. These strengths have, in DBRS’s opinion, facilitated recovery in revenue and credit metrics from the deep recession in 2009 and positioned the Company well to face future headwinds and competition.

Honeywell performed better than most industry peers during the recent recession, thanks to the solid market position of its key businesses, the diversity of its products and geographies and the ongoing focus to improve its operating leverage and product developments. The Company’s growing presence in emerging markets is also a key contributor to its above average performance during the past recession. Revenue from markets other than the United States and Europe expanded steadily to 16% in 2011 from 11% in 2005. For the full year 2011, revenue recovered to the pre-recession level of $36.5 billion, while profit margins (before corporate-level selling, general and administrative, as well as pension expenses) have generally trended upward through the recession for all segments, largely resulting from increased scale and efficiency gains.

Although DBRS expects revenue increases and operating margin improvements to continue into 2011, the pace of improvement could moderate in the near term as demand for some individual product segments could be adversely affected by government spending cuts and fragile economies in Europe and the United States. Segments that could be affected include defense and space products in the Aerospace segment, the Transportation Systems (TS) segment (where Europe accounts for about two-thirds of its revenue) and residential and commercial sales of the Automation and Control Systems (ACS) segment. In view of this, much of the future revenue growth momentum will depend on the Company’s continued success in penetrating the faster growing emerging economies, particularly in China and India, while adequately managing operating risks in these markets. This, together with continued expansion in product portfolio and improvement in operational efficiency, should help the Company cushion the overall impact of the aforementioned challenges.

In the medium term, growth prospects for Honeywell’s businesses are supported by a strong new product pipeline and increasing critical mass in emerging markets. The Company is also well positioned to take advantage of favourable developing trends in areas such as energy efficiency, green energy and health and safety; increasing demand for food and commodities etc.; and the recovery in other sectors such as air transportation and industrial production. In addition, Honeywell’s performance culture and its focus on its “Five Initiatives” (Growth, Productivity, Cash, People and Enablers) should continue to drive operating efficiency gains. The Company indicated its medium-term targets of $41 billion to $45 billion in sales by 2014 (compared to $36.5 billion in 2011) and a profit margin of 16% to 18% (14.7% in 2011). Although the Company has been and expects to remain acquisitive to achieve its targets, its track record of about 70 acquisitions in the past ten years demonstrates discipline in decision making and experience in business integrations.

Honeywell’s financial profile remains consistent with the current rating, although financial metrics weakened in 2011, largely as a result of increased debt levels to finance part of its one-time voluntary pension contribution of $1.65 billion. As the additional contributions in 2011 largely offset the increase in pension obligations resulting mainly from lower discount rates, underfunded pensions remained manageable at approximately 15% of total liabilities as at December 31, 2011. DBRS does not include pension deficit as debt but focuses instead on the financial implications of cash contributions toward the deficit and the manner in which the Company funds such contributions. The Company’s adjusted debt-to-EBITDA was 2.4 times (x) and cash flow-to-debt was 33% for the 12 months ended March 31, 2012, and DBRS expects the metrics to remain at similar levels or moderately improve as Honeywell could apply its strong cash flow generation to reduce its debt or to fund cash flow accretive acquisitions. Currently, DBRS does not expect future pension contributions by Honeywell to result in a material deterioration of its financial metrics from their current levels.

The Company’s financial profile is further supported by strong liquidity, which includes a large cash balance of almost $4.0 billion, an undrawn credit facility of about $2.0 billion and annual operating cash flow of $2.8 billion to $3.0 billion, which should be more than adequate to cover near-term cash uses. Regular access to debt and equity capital markets provides further financial flexibility.

Going forward, DBRS expects that Honeywell will continue to generate strong operating cash flow that should more than cover working capital, dividends and capital expenditures. While free cash flow should remain strong, the Company is expected to remain acquisitive, which is an integral part of its growth strategy. In addition, share repurchase is also an ongoing consideration to reward shareholders. DBRS understands that Honeywell is committed to maintaining its “A” rating and expects the Company to maintain its debt-to-EBITDA around the 2.0x range (or around 2.4x to 2.5x on a lease-adjusted basis) and debt-to-capital around 40% (or around the mid-40% range on a lease-adjusted basis). With this commitment, DBRS expects Honeywell to remain disciplined in its acquisitions and share repurchase actions to maintain a financial profile compatible with the current rating.

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

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