Morningstar DBRS Confirms Honeywell International Inc.'s Credit Ratings at "A" With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debt credit rating of Honeywell International Inc. (Honeywell or the Company) at "A" with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Honeywell's solid operational execution, sustained earnings growth, and overall stronger business risk profile after its debt-funded acquisitions of Carrier Global Corporation's Global Access Solutions business, CAES Systems Holdings LLC, and Air Products and Chemicals, Inc.'s (Air Products) liquified natural gas (LNG) process technology and equipment business, which more than offset a moderate weakening of the Company's credit metrics. The Stable trends reflect Morningstar DBRS' view that despite near-term weaker credit metrics owing to the Company's increased focus on inorganic growth across automation, the future of aviation, and energy transition megatrends, Honeywell's overall credit risk profile is expected to remain solidly placed in the current "A" credit rating category.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive credit rating action if there was a significant improvement in the Company's business risk profile and key credit metrics on a normalized and sustained basis (i.e., debt-to-EBITDA improving to below 2.5 times (x) and/or the cash flow-to-debt ratio increasing towards above 30% with EBITDA coverage remaining above 10.0x). Morningstar DBRS is highly unlikely to take a negative credit rating action in the near term, as this would be based on a meaningful and sustained deterioration in Honeywell's business risk profile and/or credit metrics because of weaker-than-expected operating performance and/or a more aggressive capital allocation policy.

EARNINGS OUTLOOK
Looking ahead, revenue growth should remain strong with revenues moving above $39 billion in F2024 and easily increasing above $41 billion in F2025 from $36.7 billion in F2023. Overall demand should remain fairly solid, with long-cycle businesses set to continue to grow and mixed performance across short-cycle businesses. Short-cycle business should also benefit from the U.S. Federal Reserve's recent base rate cuts. In F2024, sales contributions from Honeywell's recent acquisitions and the continuing outperformance of its Aerospace Technologies (Aerospace) segment should support the Company's revenue growth. In F2025, the Aerospace segment should continue to reflect solid organic growth, while the Building Automation segment should demonstrate organic growth helped by a growing backlog and potential support from pricing actions. Additionally, the Industrial Automation segment should bottom out in F2024 and be poised for growth in F2025 largely because of renewed growth in the Sensing and Safety Technologies and the Productivity Solutions sub-segments and continuing growth in the Process Solutions sub-segment; while the Energy and Sustainability Solutions segment should also continue to show organic growth. F2025 sales should include at least $2 billion (approximately $900 million for F2024) in additional revenues from the recent inorganic initiatives and the realization of potential sale synergies, although portfolio divestment actions may offset some of these inorganic sale gains. Productivity initiatives, monetizing of the installed base, and accelerated software offerings should reflect favourably on F2024 and F2025 EBITDA margins; however, the near-term headwinds stemming from labour and cost inflation, integration costs related to the newly acquired businesses, and a changing product mix will somewhat offset these advantages. In particular, a changing product mix which includes faster growing long-cycle business relative to the higher margin short-cycle business may weigh on the margin expansion but positions the Company for future growth as the installed base grows. Nevertheless, product mix should be a smaller headwind in F2025 relative to F2024. Overall, EBITDA margins should expand in F2024 from F2023 but then broadly remain flat in F2025. As such, EBITDA should increase to more than $9 billion in F2024 and more than $10 billion in F2025 from $8.7 billion in F2023.

FINANCIAL OUTLOOK
Morningstar DBRS expects Honeywell's financial profile to remain appropriate for the current credit rating category. Excluding any material effect from nonoperating expenses, Honeywell's cash flow from operations (before changes in working capital) is expected to be well above $6 billion in F2024 and to further improve to more than $7 billion in F2025. Operating cash flow should easily cover forecasted capital expenditures of more than $1 billion and dividends of more than $2.8 billion in each year, respectively. Honeywell could direct surplus cash flow in conjunction with portfolio divestitures and incremental debt towards acquisitions and share repurchases. Overall, despite the Company's active capital allocation policy, leverage (as defined by Morningstar DBRS) should remain between 3.0x and 3.5x before declining over the medium term.

CREDIT RATING RATIONALE
Honeywell's strong market position, growing installed base, technological expertise, highly efficient operations, and diversified portfolio of products and geographical markets support its credit ratings. The credit ratings also continue to acknowledge increasing focus on debt-funded acquisitions, exposure to more volatile emerging markets, and more cyclical end markets.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Honeywell, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Honeywell, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Honeywell, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Industrial Products Industry (April 15, 2024), https://dbrs.morningstar.com/research/431173

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

These are solicited credit ratings.

These credit ratings were disclosed to the issuer, Honeywell International Inc., and amended following that disclosure before being assigned.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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