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 ratings and those of its subsidiaries at R-1 (low). All trends are Stable. The rating action reflects that, despite the relatively more challenging operating conditions over the past year, the Company has performed in line with DBRS’s expectation, maintaining its cost discipline and financial metrics in a manner consistent with its ratings.

Honeywell’s strong business risk profile remains supported by its widely diverse business portfolio, sustained commitment toward productivity gains, and its technology leadership and focus on innovation. Operating conditions in 2015 and 2016 to date have been challenging, reflecting slower economic growth in emerging markets, reduced industrial productions in oil and gas sectors and unfavourable translation of non-U.S. revenue because of the strong U.S. dollar. Despite reporting revenue decline of 4% in 2015, the Company’s focus on cost discipline contributed to 8% to 9% reduction in operating costs and a material 220 basis-point profit margin improvement.

Consistent with its strategic plan, Honeywell targeted its acquisitions toward companies with proven software and technology innovation and completed approximately $6.0 billion of acquisitions in 2015 and Q1 2016. The Company also increased its share repurchases to $2.7 billion in addition to dividend of $2.2 billion. Although Honeywell’s operating cash flow of $7.7 billion during the period covered a large proportion of these cash uses, the Company increased its borrowing by approximately $5.0 billion during the period. As a result, debt coverage metrics were weaker, with adjusted cash flow-to-debt of 41% in the last-12-months (LTM) ended March 31, 2016, and adjusted debt-to-EBITDA of 1.95 times (x) compared with 48% and 1.51x, respectively, in 2014. These metrics, while weaker, remain consistent with levels expected for the ratings. DBRS is mindful that, while the LTM March 2016 EBITDA and cash flows only included approximately one-quarter of operating results from these acquisitions completed on or after December 29, 2015, the entire debt financing was on balance sheet. DBRS expects full-year 2016 financial metrics, which should include full-year contribution of these acquired companies, to improve and provide a more accurate picture of the Company’s financial risk profile.

DBRS expects 2016 to remain difficult and revenue growth to largely be driven by the inclusion of acquired companies rather than organic growth, the recovery of which is likely to be more noticeable in 2017. Continued cost focus and increase in profit margins should help achieve higher operating cash flow and moderately improve the Company’s financial metrics in the next two to three years. The Stable trend reflects DBRS’s expectation that Honeywell’s operating cash flow should remain strong and that its financial and shareholder distribution policies will not cause material deviation of its financial metrics from their current levels.

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

The ratings of Honeywell ASCa Inc., Honeywell Aerospatiale Inc. and Honeywell Limited/Honeywell Limitée are unconditionally guaranteed by Honeywell International Inc.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.