Honeywell Beats on Q2 Earnings Estimates, Raises EPS Guidance

Honeywell International Inc. HON reported second-quarter 2014 net income of $1,126 million or $1.38 per share, compared with $1,022 million or $1.28 per share recorded in the year-ago quarter. Earnings per share registered a year-over-year growth of 7.8%.

This massive improvement in earnings was driven by robust sales growth across all of its divisions except aerospace. Reported earnings comfortably beat the Zacks Consensus Estimate of $1.36 by 2 cents.

Honeywell's short-cycle businesses, especially Energy, Safety and Security, and Turbo Technologies, gained from improving end markets; while its long-cycle businesses witnessed strong order backlog and improved win rates. The company capitalized on the consistent strong momentum across its product portfolio, aided by favorable macroeconomic trends. These traits, combined with successful product launches and geographic expansion, drove Honeywell's healthy earnings report.

Revenues

Revenues in the second quarter increased 5.8% year over year to $10,253 million. Honeywell benefited from continued operational momentum, driving sales growth and margin expansion.
    
Operating margins were up 110 bps year over year to 15.4% in the reported quarter.
    
Segment Performance

Aerospace segment sales were flat year over year at $2,991 million. Revenues for the segment were restricted by a decline in Defense & Space sales, despite slight growth in the Commercial operations. Notwithstanding weak sales, segment profit climbed 1.5% year over year to $592 million, while margins expanded 30 bps year over year to 19.8%, due to improved productivity.

Automation and Control Solutions segment sales were up 10.3% year over year to $3,607 million. The increase was driven primarily by the favorable impact of acquisitions, strong domestic residential end-markets, successful product launches, and persistent growth in fire, gas and the Americas Distribution business.

Moreover, segment profit surged 14.1% to $533 million, while margins for the segment were up 50 bps year over year to 14.8%. Growth in profits and margin expansion is attributable to higher sales and improved productivity, partially offset by the dilutive effect of acquisitions and investments.

Transportation Systems segment reported revenues of $1,019 million, registering an increase of 7.6% year over year. The rise was attributable to higher global automotive production, growth from new platform launches and higher demand for commercial vehicle in Europe.

In addition, segment profit reported an increase of 32.5% year over year to $167 million, largely driven by strong Turbo material productivity, volume leverage and improved operational productivity. Margins for this segment were 16.4%, up 310 bps year over year.

Performance Materials and Technologies segment sales increased 6.3% to $2,636 million driven by improvement in UOP catalyst and gas processing. Robust growth in revenues for Advanced Materials, particularly Fluorine Products, also contributed to the segment sales.

Segment profit increased 8.4% to $475 million, driven by improved productivity and higher volume, somewhat offset by adverse UOP catalyst shipment mix as well as price/raw material headwinds in Resins & Chemicals. Margins in the segment rose 30 bps year over year to 18.0%.

Change in Segment Reporting

In Jul 2014, Honeywell announced that it will realign its business segments, and report its Transportation Systems together with its Aerospace segment to capitalize on their engineering and technological similarities. Effective from third-quarter 2014, Honeywell will report its financial performance under three business segments: Aerospace, Automation and Control Solutions, and Performance Materials and Technologies.

Balance Sheet and Cash Flow

Cash and cash equivalents as of Jun 30, 2014 were $6.6 billion. Long-term debt as of Jun 30, 2014 stood at $6.8 billion. Net cash provided by operating activities improved to $1,341 million as of Jun 30, 2014, compared with $1,256 million in the prior-year period.

Outlook

Honeywell lowered its sales guidance for 2014 from a range of $40.3–$40.7 billion to $40.2–$40.4 billion. However, the company raised the lower end of its earnings per share guidance by $0.05, projecting EPS in the range of $5.45 to $5.55. The guidance range for operating margin was also increased to 15.4%–15.6%. Free cash flow is expected to be in the band of $3.8 billion–$4.0 billion.

Going forward, Honeywell remains positive on the macro environment and expects organic sales growth acceleration throughout the year. The recent sale of its Friction Materials business was an important step in its strategy to align its portfolio in favor of its core businesses.

Honeywell intends to continue investing in new products and technologies, and increase its footprint in high-growth markets. Moreover, its restructuring and cost streamlining initiatives should translate into continued margin expansion in the second half of the year.

Honeywell currently holds a Zacks Rank #3 (Hold). Other better-ranked stocks include Noble Group Ltd. (NOBGY), Macquarie Infrastructure Co. LLC MIC and United Technologies Corp. UTX. While Noble Group sports a Zacks Rank #1 (Strong Buy), both Macquarie and United Technologies carry a Zacks Rank #2 (Buy).

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