Honeywell Earnings: Revenue Down On Friction Materials Divestiture, Foreign Exchange Headwinds

Honeywell International (NYSE:HON) announced its first quarter results on Friday, April 17. As a result of the foreign currency headwinds, the Friction Materials divestiture, and resin and chemicals pricing, the company reported a 5% year-on-year decline in its first quarter revenue, to reach $9.2 billion, missing market expectations by $270 million. ^[1] However, on an organic basis, which excludes these factors, Honeywell’s revenue grew 2%.

Honeywell reported a solid 10% increase in its first quarter earnings per share to reach $1.41, compared to $1.28 in the previous year’s first quarter, beating market expectations of $1.39. Profit improvement programs such as HOS Gold and restructuring helped the company boost its operating margins by 220 basis points. Hedging activities, low cost sourcing and manufacturing also contributed to margin growth.

Despite the double digit earnings growth and higher revised earnings guidance, Honeywell’s stock declined 2.14%. Investors did not take kindly to the quarter’s revenue decline and lowered revenue guidance. For the full year 2015, Honeywell now forecasts a 2-3% year-on-year decrease in revenues, compared to its earlier guidance of a 1-2% increase, primarily due to foreign currency headwinds. It expects to see an 8-11% increase in earnings per share, or $6.00-6.15, compared to earlier expectations of $5.95-6.15, which excludes any mark-to-market pension adjustment. ^[1]

See our complete analysis of Honeywell here

Aerospace Down Due To Friction Materials

Honeywell’s Aerospace segment, which manufactures aircraft equipment and aftermarket parts and spares, reported a 6% year-on-year decline in revenues, primarily due to the Friction Materials Divestiture in July 2014. However, since the business had low margins, the divestiture helped Honeywell’s operating margins grow 30 basis points. Strong currency headwinds also had a negative impact on the segment’s reported revenues.

On an organic basis, Aerospace revenues were up 1% year-on-year. The sluggish revenues were a result of intentionally slow commercial and spares sales in order to manage funding risks at their emerging market customers’ end, particularly in Russia. Repair and overhaul services continued to see growth in demand.

Aerospace sales to the U.S. defense industry remained weak, which led to a 1% year-on-year decline in Honeywell’s Defense and Space business sales, partially offset by double digit growth in the international defense sector. U.S. defense sales are likely to remain poor in 2015. However, Honeywell expects its defense and space sales to grow in the low single digits, primarily due to growth in defense spending across the world, especially developing countries. ^[2] For example, the new government in India increased defense spending by 12% to $38 billion. ^[3] China also increased its defense budget by 12%, to $132 billion. ^[4]

Sales of turbochargers were up 5% year-on-year in the first quarter, driven by strong demand for light vehicle applications. Most recently, Honeywell announced that its turbochargers will be included in the new Volkswagen and Skoda vehicles in India. ^[5] The global turbocharger market is expected to grow at an average rate of 10.12% each year through 2019 driven by the increased use of turbochargers by manufacturers as they try to fulfill the demand for fuel efficient vehicles. ^[6] Since Honeywell is the leading turbocharger manufacturer in the world, its large market share positions it well to capture a major portion of the growth in the turbocharger industry.

Foreign Exchange Headwinds Drive Down ACS Revenues

Honeywell’s Automation and Control Systems’ (ACS) revenue was down 3% year-on-year, primarily due to foreign exchange headwinds. ^[1] However, on an organic basis, sales were up 3%, driven by double digit growth in its scanning and mobility business and high demand for energy, safety and security products in markets such as China and India.

In the first quarter, Honeywell’s scanning and mobility business continued to grow at a strong pace driven by the acquisition of Intermec, a leading provider of mobile computing equipment, radio frequency identification (RFID) scanners and tags, bar code scanners, and printers. With the acquisition, Honeywell has been able to increase its market share in the scanning and mobility industry through Intermec’s vast product line. Scanning and mobility equipment volumes were primarily driven by the mobile delivery device contract that the U.S. Postal Services had awarded Honeywell last year.

Going forward, we expect to see continued growth in Honeywell’s ACS segment as the rising demand for scanning and mobility products and strength in the global economy fuels sales. Honeywell’s ACS segment will also benefit from its acquisition of Datamax-O’Neil, a manufacturer of fixed and mobile printers used in the retail, warehouse and health care industries. The acquisition, which was completed in March, positions Honeywell to expand into the $1.5 billion global bio-code printing industry.

PMT Declines On Oil Prices

Honeywell’s Performance Materials and Technologies segment reported a 5% year-on-year decline in revenues driven by the decline in price of resins and chemicals. Price of resins and chemicals of the segment are closely tied to the price of raw materials used, in this case crude oil. Crude oil prices have declined sharply in the past year as a result of high production in the U.S. and OPEC’s unwillingness to cut production.

PMT revenues benefited from solid demand for Honeywell’s Solstice low global warming suite of products. Honeywell has now signed agreements for the products with a lifetime value of about $2.6 billion and has another $800 million under negotiation. ^[7]

In 2015, the segment could suffer from the continued decline in oil prices as oil and gas companies continue to delay capital and operational spending in order to maintain profits. Honeywell had earlier expected a lesser impact, but now it fears that the impact will present a challenging operational environment for the company. Though only a small part of the segment is tied to the upstream oil and gas industry, a large part is exposed to midstream operations, which is likely to suffer due to the drop in rig counts in the U.S. One order worth $35 million was cancelled in the first quarter.

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1. Honeywell’s First Quarter 2015 Financial Release, April 17, 2015, www.honeywell.com [↩] [↩] [↩]
2. Honeywell’s Q1 2015 Earnings Conference Call Presentation, April 17, 2015, www.honeywell.com [↩]
3. India raises military spending, eases foreign investment limit in arms industry, July 2014, www.reuters.com [↩]
4. China Announces 12.2% Increase in Military Budget, March 2014, www.nytimes.com [↩]
5. Honeywell Turbochargers to be Included on The New 1.5L TDI Diesel Engine for Volkswagen and Škoda Models in India, April 2, 2015, www.honeywell.com [↩]
6. Turbocharger Market by Vehicle Type, Fuel Type, Technology & Region- Industry Trends & Forecasts to 2019, August 25, 2014, www.marketwatch.com [↩]
7. Honeywell’s (HON) CEO David Cote on Q1 2015 Results – Earnings Call Transcript, April 17, 2015, www.seekingalpha.com [↩]