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 at “A” and R-1 (low), all with Stable trends. The ratings continue to reflect (1) Honeywell’s strong market and technology leadership and broad product ranges in its key market segments, (2) sustained cost and efficiency focus to support profit margin improvement, achieved with its Honeywell Operating System (HOS) and (3) continued penetration and revenue growth in emerging markets. In the opinion of DBRS, these strengths have, and should continue to position the Company well in executing its strategy in the expected slow-growth business conditions and competitive markets in the near to medium term. As part of the strategy, Honeywell has been actively acquiring companies that could enrich its product ranges in industries considered to have good prospects, while divesting in those that are non-core, with slow growth or limited product differentiation.

Honeywell has performed better than most industry peers during the recent recession and under the current slow market conditions, 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 2012 from 11% in 2005. The Company estimates that about 21% of total revenues in 2012 were generated from regions with high growth prospects.

For the full year 2012, revenue has moderately increased by 3% to $37.7 billion, as stronger growth in the Performance Materials and Technologies (PMT) and non-defense Aerospace businesses were partly offset by weak defense Aerospace and Transportation Systems segments and the strong U.S. dollar against major currencies. Profit margins (before corporate-level selling, general and administrative costs, as well as pension expenses) continued their upward trends for all segments except Transportation Systems (TS), reflecting generally increasing scale and efficiency gains.

Honeywell has maintained its expectation of a slow-growing global economy in the near term as a result of the government debt problems and possible spending austerity in major developed countries. DBRS expects difficult operating conditions to continue in defense and space products in the Aerospace segment, as well as in the TS segment (where Europe accounts for about two-thirds of revenue) in the coming year. Under such economic conditions, the Company intends to focus on outperforming competitors in cost effectiveness, expanding its product ranges and providing innovative solutions to its customers. While DBRS recognizes that Honeywell has demonstrated a good track record of success in these focus areas, its ability to continue these efforts will be important to achieving its operational targets. Much of the future revenue growth momentum will also depend on the Company’s continued success in penetrating the faster-growing emerging economies, particularly China and India, while adequately managing operating risks in these markets.

In the medium term, the Company is also well positioned to take advantage of favourable developing trends in areas such as energy efficiency, green energy, health and safety, increasing demand for food and commodities and the recovery in other sectors such as air transportation and industrial production. The Company indicated its medium-term targets of $41 billion to $45 billion in sales by 2014 (compared to $37.7 billion in 2012) and a profit margin of 16% to 18% (15.6% in 2012). Although the Company has been and expects to remain acquisitive to achieve its targets, its history of more than 70 acquisitions in the past ten years has demonstrated discipline in decision making, consistency with overall strategy and experience in business integrations.

Honeywell’s financial profile remains consistent with the current rating and has improved from 2011, largely as a result of stronger operating cash flow and moderate debt reduction. This followed moderately weaker financial metrics in 2011, a result of increased debt levels to finance part of its one-time voluntary pension contribution of $1.65 billion. As of December 31, 2012, Honeywell’s pension obligations were 84% funded – despite another 36 basis point decrease in the discount rate – and the Company believes that additional contribution to its U.S. pension plan is unlikely to be required. DBRS does not include pension deficit as debt when computing financial metrics 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 1.7 times (x) and cash flow-to-debt was 45% for the last twelve months (LTM) ended March 31, 2013, improving from 2.4x and 33%, respectively, in 2011. DBRS considers these levels to be consistent with the ratings. The Company’s financial profile is further supported by strong liquidity, which includes a large cash balance of $4.5 billion, an undrawn credit facility of about $1.7 billion and annual operating cash flow in excess of $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 (capex). 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 repurchases are an ongoing consideration in terms of rewarding shareholders. DBRS understands that Honeywell is committed to maintaining its “A” rating and expects the Company to maintain its debt-to-EBITDA around or lower than the 2.0x range (or around 2.3x 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Industrial Products Industry and DBRS Criteria: Financial Ratios and Accounting Treatments – Non Financial Companies, which can be found on our website under Methodologies.