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

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Honeywell International Inc. (Honeywell or the Company) at “A,” and its Short-Term Debt rating and the Short-Term Debt ratings of its subsidiaries at R-1 (low). All trends are Stable. The rating action reflects that over the past year, the Company has performed in line with guidance and DBRS’s expectations. The Company’s diverse business lines and demonstrated commitment to innovation and productivity gains drove favourable outcomes despite evidence of continued weakness in global macroeconomic conditions. Honeywell has also demonstrated an ability to achieve aggressive corporate goals, and as the Company moves forward with its new strategic plan, its solid business profile and improving financial profile should lead to ratings stability going forward.

After the successful completion of its initial five-year plan, the Company unveiled its second five-year plan in 2014, targeting 4% to 6% organic sales growth, segment margin improvement of up to 75 basis point (bps) per year and double-digit earnings growth through 2018. The results thus far have been positive. Innovation and a focus on improving customer experiences for the end user have supported organic revenue growth, while productivity gains have driven margin improvements. Organic sales growth in 2014 was 3%, while net income rose 12% on the back of a 70-bp margin improvement. The Company divested its Friction Materials brake pad and system manufacturing business, as it did not fit into its “core differentiated technologies focus,” and realigned its segments, incorporating Transportation Systems into the Aerospace division. All three of the reorganized divisions (Aerospace; Automation and Control Systems; Performance Materials and Technologies) contributed to the sales growth and margin improvement in 2014. Q1 2015 results were more modest because of a mix of temporary and more structural factors, but they were still favourable.

The Company continues to generate sufficient cash from operations to satisfy its main spending initiatives internally. These include investments in the business’ growth (capital expenditures and bolt-on acquisitions) and the return of capital to shareholders (steadily rising dividends and share buybacks). In 2014, Honeywell also paid down debt and was less active in mergers and acquisitions (M&A). As a result, most key credit metrics improved. In Q1 2015, heavy working capital requirements in the Aerospace division, a material reduction in advances from Oil & Gas customers and continued acquisition activity led to a free cash flow deficit, which caused a modest weakening of the credit profile.

The outlook for Honeywell’s credit profile in 2015 is stable. Projected operating cash flow (company definition, including changes in working capital) less capex for 2015 is approximately $4.2 billion to 4.3 billion. This would leave ample cash for another increase in dividends, as well as further share buybacks, debt repayments and pension contributions. After “modest” deal activity in 2014, the Company referred to the M&A pipeline as “robust” and clearly intends to continue its strategy of adding bolt-on acquisitions, although Honeywell also noted that pricing at this stage appears somewhat high. So long as the Company maintains its commitment to discipline with new acquisitions, DBRS expects the financial profile to remain consistent 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: Guarantees and Other Forms of Explicit Support, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.