Honeywell (HON) Beats On Q2 Earnings, Revises '16 Outlook

Honeywell International Inc. (NYSE:HON) reported relatively healthy second-quarter 2016 results. Quarterly income came in at $1,282 million or $1.66 per share compared with $1,194 million or $1.51 per share in the prior-year quarter. The year-over-year increase in income was attributed to higher revenues during the quarter. The bottom line surpassed the Zacks Consensus Estimate of $1.64.

Operational Details

Second-quarter revenues inched up 2.2% year over year to $9,991 million, but missed the Zacks Consensus Estimate of $10,134 million. The year-over-year improvement was driven by strong performance of the Automation and Control Solutions (ACS) segment owing to solid performance of the commercial, residential and Chinese business, and increased sales of Fluorine Products and Process Solutions sales in the Performance Materials and Technologies (PMT) segment.

Total segment profit was $1,847 million compared with $1,803 million in the year-ago quarter. Overall segment profit margin improved marginally to 18.5% from 18.4% in the prior-year period.

Operating income increased to $1,841 million from $1,719 million in second-quarter 2015 on the back of disciplined cost management. Operating margin during the quarter was 18.4%, up 80 bps.

Segment Performance

Aerospace segment sales were $3,779 million in the reported quarter, down 1%. The year-over-year decline in core organic sales was primarily due to program delays and completions in the international, U.S., and services businesses, partially offset by higher spares sales, increased overhaul and repairing activities, and new product launches.

The ACS segment sales climbed 9% to $3,886 million in the reported quarter. Sales were up 50 bps, driven by productivity, benefits of previous restructuring actions, and commercial excellence, partially offset by continued investments for growth.

The PMT segment sales declined 3% year over year to $2,326 million. Unfavorable foreign exchange translations and raw materials pricing in Resins & Chemicals led to the downside. Weaker equipment, catalyst and UOP gas processing sales also weighed on the quarterly sales figure.

Significant Quarter Developments

During the quarter, Honeywell unveiled plans to spin off its $1.3 billion resins and chemicals business into a standalone, publicly traded company called AdvanSix. This move came two months after it backed out of a $90 billion blockbuster bid to buy rival giant United Technologies Corp. (NYSE:UTX) after facing resistance from the target, antitrust regulators and key clients. Post spin-off, the new company will be a leading producer of Nylon 6, a polymer resin used to produce engineered plastics, filaments, fibers and films that are used in products such as automotive and electronic components, and also in food and industrial packaging.

Honeywell also announced that it is realigning the ACS business segment into two new segments – Home and Building Technologies (HBT) and Safety and Productivity Solutions (SPS), effective third quarter. The separation into two entities will improve efficiency and accelerate decision-making, as well as lead to a more complete integrated suite of technologies for the relevant end markets.

Balance Sheet and Cash Flow

Cash and cash equivalents as of Jun 30, 2016, were $5,045 million with long-term debt of $9,607 million.

Net cash provided from operating activities for the three months ended Jun 30, 2016, was $1,544 million, compared with $1,408 million in the prior-year period. Free cash flow increased 8.4% to $1,263 million during the quarter.

Acquisition

Subsequent to the second quarter, Honeywell acquired Intelligrated, a leader in supply chain and warehouse automation technologies, for $1.5 billion. The acquisition is expected to augment the company’s suite of transportation and logistics technologies with the addition of warehouse execution software and other technologies, enabling better efficiency in warehouse and distribution operations.

Shares Repurchase

During the reported quarter, the company repurchased approximately $500 million worth of shares, bringing its year-to-date tally to $1.6 billion, and funded $97 million in new restructuring projects.

Outlook

Honeywell aims to improve its revenues and margins in the upcoming quarters backed by greater business internationalization, new innovations and product portfolio solidification. Based on favorable business conditions, the company has revised its full-year earnings guidance.

Earnings are now expected in the range of $6.60–$6.70 per share, up 8–10%, compared with the previous projection of $6.55–$6.70. The company also revised its revenue guidance for the full year to the range of $40.0–$40.6 billion (up 4-5%), compared with the earlier projection of $40.3–$40.9 billion.

Honeywell currently has a Zacks Rank #2 (Buy). Other stocks that look promising include Core-Mark Holding Company, Inc. (NASDAQ:CORE) and Leucadia National Corporation (NYSE:LUK) . Both these stocks carry the same Zacks Rank as Honeywell.