Honeywell’s Growth Curbed by Softness in Jets Business

Technology giant overall sales grew 2% to $9.8 billion in Q3 FY16

h1Manufacturing and technology giant, Honeywell International Inc. (NYSE: HON) announced its Q3 FY16 financial results on October 21st, 2016. It reported revenues of $38.58 billion in FY15.

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 four segments: Aerospace, Home and Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. Read more about Honeywell’s financial results below.

Q3 FY16 financial highlights

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

During Q3 FY16, Honeywell’s overall sales grew 2% to $9.8 billion from $9.61 billion in the year-ago period buoyed by its restructuring and ongoing productivity initiatives. Core organic growth declined 3% due to softness in business jets, defense & space, and productivity solutions. Segment margins declined 180 bps to 17.5% from 19.3% in the year-ago period, while segment profit fell to $1.7 billion owing to M&A integration costs. Operating income margin also fell 270 bps to 15.6% from 18.3% in the year-ago period. As a result, net income during the reporting quarter fell to $1.24 billion from $1.26 billion in the year-ago period. While diluted EPS remained flat at $1.60, diluted EPS excluding $0.07 deployed for restructuring came in higher at $1.67 during the reporting quarter.

Honeywell’s cash flow from operations was at $1.55 billion, while free cash flow was at $1.28 billion during Q3 FY16.

Source: Honeywell
Source: Honeywell

Segmental highlights

Aerospace: This segment’s Q3 FY16 sales fell 6% on a reported and core organic basis due to the unfavorable impact of third-quarter OEM incentives, lower volumes in Business and General Aviation, program completions in the U.S. Space and international Defense businesses, and continued weakness in the commercial helicopter business. This was partially offset by increased Air Transport OE deliveries as well as repair and overhaul activities, and new turbo platform launches on passenger vehicles in Transportation Systems. The segment’s profit plunged 20% and its margin declined 340 bps to 18.4%, due to higher Aerospace OEM incentives and lower volumes in Business Jet and Defense, partially offset by productivity net of inflation and commercial excellence.

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Home and Building Technologies: This segment’s Q3 FY16 sales jumped 17% on a reported basis and grew 5% on a core organic basis, driven by Distribution and Building Solutions businesses, and Products growth in Environmental & Energy Solutions and in China. The difference between reported and core organic sales was due to the favorable impact from the Elster acquisition. The segment’s profit was up 8% and margin declined 130 bps to 16.3%, driven by acquisition amortization and integration costs, continued growth investments in salespeople and research and development, and the unfavorable mix impact of increased sales in Building Solutions and Distribution, partially offset by benefits from previously-funded restructuring, higher sales volumes, and commercial excellence.

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Performance Materials and Technologies: This segment’s Q3 FY16 sales grew 2% on a reported basis. Core organic sales fell 3% due to declines in UOP gas processing, licensing, and engineering, partially offset by strong catalyst shipments and conversion of global mega projects in Process Solutions. 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 market pricing headwinds in Resins & Chemicals. The segment’s profit grew 6% and its margins expanded 80 bps to 21.6%, driven by productivity net of inflation, higher catalyst volumes, and acquisition integration excellence, partially offset by continued investments for growth.

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Safety and Productivity Solutions: This segment’s Q3 FY16 sales fell 2% on a reported basis. Core organic sales plunged 8% as a result of lower volume in Productivity Solutions associated with the USPS contract (completed in Q3 FY15), continued channel headwinds, and lower volumes in the Safety business. The difference between reported and core organic sales was due to the favorable impact from the Intelligrated acquisition. The segment’s profit fell 11% and margin contracted 140 bps to 14.7%, primarily due to lower volumes and acquisition amortization and integration costs, partially offset by restructuring benefits.

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Other highlights

ACS realignment: Honeywell announced the splitting of its Automation and Control Solutions (ACS) business segment into two new segments: Home and Building Technologies (HBT) and Safety and Productivity Solutions (SPS). The splitting of ACS into two businesses is aimed at enhancing efficiency and speeding 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.

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Spin-off of resins and chemicals business: Honeywell spun off its resins and chemicals business into a stand-alone, publicly traded company called AdvanSix Inc. (NYSE: ASIX), which began trading on the New York Stock Exchange from October 3rd, 2016. AdvanSix, which had 2015 revenues of $1.3 billion, is a manufacturer of Nylon 6, a polymer resin sold under the Aegis® brand to produce engineered plastics, fibers, filaments, and films that are used in end products such as automotive and electronic components, carpets, sports apparel, fishing nets, and food and industrial packaging. AdvanSix also produces caprolactam, the main feedstock for producing nylon; Capran® nylon film; Sulf-N® ammonium sulfate fertilizers; and chemical intermediates, including phenol, acetone, and Nadone® cyclohexanone.

Honeywell said that it will pay a spinoff dividend of AdvanSix’s common shares on October 1st, 2016. Honeywell’s shareholders of record as of September 16th, 2016, will receive one AdvanSix share for every 25 shares of Honeywell stock owned, on a pro-rated basis.

Restructuring: Honeywell funded approximately $250 million in restructuring and other actions from a $0.07 increase Q1 FY16 and Q2 FY16 EPS, caused by an accounting standard adoption, and the $0.14 gain related to the sale of government services business. These actions will drive more than $175 million of benefits in 2017 alone.

Collaboration with Flowserve: Honeywell and Flowserve Corp. (NYSE: FLS) announced a collaboration on October 26th, 2016, to provide Industrial Internet of Things (IIoT) solutions to help industrial customers make their operations, safer, more efficient and more reliable. The collaboration will be part of the Honeywell INspire program, Honeywell’s joint customer development program for its IIoT ecosystem. Honeywell’s capabilities in data consolidation, cyber and software development combine well with Flowserve’s deep domain knowledge to allow the expansion of a robust IIoT ecosystem that is designed to help customers solve previously unsolvable problems.

MoU with Inmarsat: Inmarsat PLC, a British satellite telecommunications company, signed a memorandum of understanding (MoU) with Honeywell, appointing the company as distribution partner for new aviation safety communications service. Honeywell will provide commercial airlines and business aviation operators throughout the world with SwiftBroadband-Safety, an advanced new service from Inmarsat that will transform cockpit and aircraft operations through the use of secure broadband connectivity. SwiftBroadband-Safety utilizes secure IP-based broadband connectivity that far exceeds the capabilities of other alternatives in the market and represents a paradigm shift in the advancement of aviation safety services. The service builds on Inmarsat’s reputation as a provider of high-quality voice and data service to 95% of the world’s trans-oceanic aircraft fleet.

Share repurchase and dividends: Honeywell repurchased $233 million in common stock and paid $453 million in dividends in Q3 FY16. The company’s year-to-date share repurchases amounted to $1.9 billion at the end of Q3 FY16.

Updated guidance for full year FY16

Honeywell revised its FY16 guidance wherein the top end of prior adjusted EPS guidance has been lowered from $6.70 to $6.64 while the low end remained unchanged at $6.60, about 8% to 9% higher than FY15. Sales guidance decreased from a range of $40.0 billion to $40.6 billion to a new range of $39.4 billion to $39.6 billion. Operating margin guidance is now approximately 17.6% and free cash flow guidance was lowered from a range of $4.6 billion to $4.8 billion to a new range of $4.2 billion to $4.3 billion.

The Company forecasts Q4 FY16 earnings of $1.74 to $1.78 a share, reflecting a growth of 10% to 13% Y-o-Y.

Stock Performance

h9Honeywell’s stock finished the day at $108.83, slipping 0.55%, at the close on Thursday, October 28th, 2016, having vacillated between an intraday high of $109.89 and a low of $108.42 during the session. The stock’s trading volume was at 2,862,094 for the day. The Company’s market cap was at $83.11 billion as of Thursday’s close.

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