Honeywell Zooms Past Earnings Expectations

Technology giant splits its ACS business, spins off R&C business to enhance efficiency

H1Manufacturing and technology giant, Honeywell International Inc. (NYSE: HON) announced its Q2 FY16 financial results on July 22nd, 2016. The Morris Plains, New Jersey-based company offers aerospace products and services; turbochargers; control, sensing and security technologies for buildings, homes and industry; chemicals, electronic and materials, and process technology for refining and petrochemicals; and energy products and solutions for homes, business and transportation. The Company operates in three segments: Aerospace, Automation and Control Solutions (ACS), and Performance Materials and Technologies (PMT). It reported revenues of $38.58 billion in FY15. Read more about Honeywell’s financial results below.

Q2 FY16 financial highlights

Sales by region, Source: Honeywell
Sales by region, Source: Honeywell

During Q2 FY16, Honeywell’s overall sales grew 2% to $10.0 billion mainly due to acquisitions. The Company’s core organic sales declined by 2% owing to the negative impacts of foreign currency translation and raw materials pass-through pricing. Honeywell reported overall segment margin improvement of 10bps to 18.5% during Q2 FY16, while operating margins increased 80bps to 18.4%.

Despite the revenue shortfall, Honeywell reported higher quarterly profitability, with gross margins up 140 basis points to 31.7%, while EBITDA grew 8% to $2.1 billion. These helped EPS rise 10% to $1.66 during the reporting quarter. The stronger profitability helped free cash flow increase by $98 million to $1.3 billion during Q2 FY16.

Source: Honeywell
Source: Honeywell

Segmental highlights

Source: Honeywell
Source: Honeywell

Aerospace: This segment’s Q2 FY16 sales declined 1% on a reported basis and 2% on a core organic basis. The fall in core organic sales was mainly due to program delays and completions in Defense & Space, lower shipments to Business and General Aviation OEMs, and higher OEM incentives. These factors were partially offset by higher spares sales, higher repair and overhaul activities. The difference between reported and core organic sales was due to the favorable impact from acquisitions. The segment’s profit grew 2% and its margin expanded 60bps to 20.9%, driven by higher productivity, but partially offset by higher investments and acquisition amortization and integration costs. Excluding the impact of acquisitions, the segment’s margin expanded 80bps.

Source: Honeywell
Source: Honeywell

Automation and Control Solutions: This segment’s Q2 FY16 sales grew 9% on a reported basis and declined 1% on a core organic basis, as a result of lower volume in Sensing & Productivity Solutions, partially offset by global growth in Security and Fire as well as Americas Distribution business. The difference between reported and core organic sales was due to the favorable impact from Elster acquisition. The segment’s profit rose 8% while its margin contracted 20bps to 15.8%, primarily due to acquisition amortization and integration costs. Excluding the impact of acquisitions, the segment’s margin expanded 50bps.

Source: Honeywell
Source: Honeywell

Performance Materials and Technologies: This segment’s Q2 FY16 sales declined 3% on a reported basis and declined 4% on a core organic basis, mainly due to lower UOP gas processing, licensing, and equipment sales and lower market pricing in Resins & Chemicals. These negatives were partially offset by higher projects, software, and services sales in Process Solutions and stronger volume in Fluorine Products. The difference between reported and core organic sales was due to the favorable impact from acquisitions, partially offset by the unfavorable impact of foreign currency and lower raw materials pass-through pricing in Resins & Chemicals. The segment’s profit declined 4% and its margins contracted 20bps to 21.1%, due to lower volume and continued investments for growth, partially offset by restructuring actions.

Other highlights

On August 3rd, 2016, Honeywell UOP, a part of Honeywell’s Performance Materials and Technologies strategic business group, and Exxon Mobil Corp. (NYSE: XOM) announced a technology licensing agreement with China-based Hainan Handi Sunshine Petrochemical Co. Ltd. Under the agreement, the integrated UOP and ExxonMobil technology platform enables Handi Sunshine to meet the growing Chinese demand for cleaner jet fuel and diesel along with high-quality Group II/III base oils, typically used in high performance motor oils and industrial lubricants. Honeywell UOP’s Unicracking technology and ExxonMobil’s MSDW catalytic lubes de-waxing technology will be installed at the Hainan, China facility.

Honeywell also announced a few portfolio changes, including the spin-off of its $1.3 billion resins and chemicals (R&C) business by 2017.

Acquisition of Intelligrated

In July 2016, Honeywell acquired Intelligrated, a leader in supply chain and warehouse automation technologies, for $1.5 billion. Intelligrated’s business is seen as a strategic fit to Honeywell’s suite of transportation and logistics technologies with warehouse execution software and other technologies enabling superior efficiency in warehouse and distribution operations.

Source: Honeywell
Source: Honeywell

ACS realignment

Honeywell announced the splitting of its ACS business segment into two new segments: Home and Building Technologies (HBT) and Safety and Productivity Solutions (SPS). Financial reporting for Q3 FY16 will be based on this realignment. The splitting of ACS into two businesses is aimed at enhancing efficiency and speed of decision-making as well as a more comprehensive integrated suite of technologies for the respective end markets.

HBT benefits from Honeywell’s advanced software and connectivity capability combined with an installed base of products and technologies in more than 150 million homes and 10 million buildings worldwide. It will include Honeywell’s Environmental & Energy Solutions, Security and Fire, and Building Solutions and Distribution businesses. The new segment will be led by Terrence Hahn, the previous head of Honeywell’s Transportation Systems unit.

SPS technologies will support the productivity and safety of more than half a billion workers worldwide and will include Honeywell’s Sensing & Productivity Solutions and Industrial Safety business units, as well as the Intelligrated acquisition after it closes. SPS will be led by John Waldron, who earlier served as president of the Sensing and Productivity Solutions business unit.

Share repurchase, Dividend, and Cash Flow

Honeywell paid $458 million in dividends, and repurchased $477 million worth of shares during Q2 FY16, bringing its year-to-date total to $1.6 billion.

The Company’s free cash flow increased by $98 million to $1.3 billion, during the reporting quarter.

Updated guidance for full year FY16

Honeywell expects full year FY16 sales to range between $40.0 and $40.6 billion, reflecting core organic growth of about 1%. Segment margins are predicted to range between 18.9% and 19.3%, and operating income margin in the range of 18.0% to 18.4%. EPS is forecast to range between $6.60 and $6.70, reflecting growth of 8-10%.

Stock Performance

H8Honeywell’s stock finished the day at $115.95, slipping 0.05%, at the close on Thursday, August 4th, 2016, having vacillated between an intraday high of $116.59 and a low of $115.90 during the session. The stock’s trading volume was at 1,290,169 for the day. The Company’s market cap was at $88.50 billion as of Thursday’s close.

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