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 rating action reflects that the Company has performed in line with expectations. The Company’s strong and diverse businesses and disciplined execution of operating plan allowed it to generate strong net income in 2013 despite a slow-growing global economy. The Company is well-positioned to maintain its earnings momentum, supported by a growing presence in high growth regions, innovative products and robust business processes to drive productivity gains. With a solid business profile and strengthening financial profile, the above ratings are expected to remain stable for the foreseeable future.

The Company has turned in a solid performance in 2013 despite headwinds to some of its businesses. Most of its business lines reported year-over-year increases in revenue, except Defense and Space and Advanced Materials. Overall revenue increased by almost 3.7% (on a year-over-year basis), a combination of modest organic growth and acquisitions (notably in UOP). However, the Company reported a near-28% increase in EBIT (as defined by DBRS). All four major business segments, namely, Aerospace, Automatic Control Solutions (ACS), Performance Materials and Technologies (PMT) and Transportation Systems (TS), reported higher segment profit and record segment profit margins. This strong improvement has been the result of Honeywell’s disciplined approach in executing its business plan supported by well-developed internal business processes (collectively, the Honeywell Enablers) to drive productivity improvement, product development and cost savings.

The Company has maintained a high free cash flow conversion rate in relation to revenue. Internal cash generation was more than sufficient to meet all funding needs in 2013, despite higher spending on capital expenditures to expand capacity, working capital to support increased sales activities, acquisitions (net) and shareholder-friendly actions (dividends and share repurchases). Additionally, solid returns from pension assets and favourable discount rates have resulted in the U.S. pension plans being fully funded at the end of 2013. However, the balance sheet remains aggressive but manageable for the current rating. Despite the higher gross debt, all debt coverage ratios actually improved due to stronger operating results and the resultant cash flow. Additionally, the Company’s liquidity position is solid, with over $8 billion (cash and cash equivalents, and unused credit facility) availability at the end of March 31, 2014.

Near term, the Company expects market conditions to remain supportive. Honeywell forecasts growth in the economy of all its key geographical markets in 2014, although Europe is just marginally positive. Organic growth will be the key driver to the forecast 3% to 4% increase in revenue in 2014. In addition, the Company expects to boost segment profit by 5% to 9%, with a further increase in segment margin (the forecast has similar financial targets set out in the current Five-Year Plan (2010-2014)). DBRS notes that the Company’s methodical application of the Honeywell Enablers to drive organizational efficiency and service quality, development of new products and improve its cost structure provide a solid base to achieve its 2014 financial goals. Additionally, the Company’s ongoing efforts to improve the free cash flow conversion rate should continue to generate strong cash flow internally to fund the increased operating needs. Moreover, the fully funded status of its U.S. pension plans further adds to the Company’s financial flexibility. DBRS expects the Company’s financial profile to remain compatible with the current rating.

Medium term, Honeywell has announced a new Five-Year Plan (2014-2018) in early 2014, targeting revenue to grow from $39.1 billion (2013) to between $46 billion and $51 billion, with segment profit margin to increase from 16.3% (2013) to between the 18.5% to 20.0% range by 2018. The key drivers for revenue growth are (1) to emphasize innovation for new products and services; (2) to take advantage of the above-average growth potential of existing businesses, focusing on energy efficiency, clean energy generation, safety and security; (3) to increase presence and investment in high growth regions; and (4) ongoing repositioning of its business portfolio to get rid of weak performers. Higher operating leverage from increased sales volume, higher margin products and services and continuous improvement in productivity and efficiency and cost reduction should drive profit and margin improvement. The Company has already demonstrated that it has world-class processes and discipline in executing its strategies. The Company is well-positioned to make steady progress in achieving its latest Five-Year Plan (2014-2018).

The Company has a solid business profile with diversified businesses and geographies. Most of the Company’s businesses are market leaders and have above-average growth potential. The historic steady revenue growth trend is a reflection of the quality of its business portfolio. The Company’s ongoing efforts to reposition its businesses and improve its business portfolio by getting rid of weaker performers, supplemented by bolt-on and strategic acquisitions, have helped incrementally strengthen its business profile. The Company’s new Five-Year Plan (2014-2018) emphasizing high growth markets and businesses should further strengthen its business profile.

DBRS notes that the Company is acquisitive, even though it has demonstrated discipline and has had a good track record in executing acquisition transactions and the subsequent integration. All merger and acquisition (M&A) activities still expose the Company to business and integration risks, especially in markets with less developed legal frameworks and different cultures. Being acquisitive does increase the risk to its business profile. Furthermore, spending on shareholder-friendly actions, dividends and share repurchases has been on the rise. These may put pressure on the Company’s financial profile during an unexpected market downturn and deteriorations in its performance. Nevertheless, DBRS expects the Company to remain disciplined in its M&A and shareholder activities and maintain a financial profile compatible with the current rating.

In summary, the Company has performed as expected in 2013 and its discipline and well-entrenched business processes should support its efforts to meet the financial targets detailed in its new Five-Year Plan (2014-2018). DBRS expects the current rating to remain stable in the foreseeable future.

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.