Despite macroeconomic headwinds, Honeywell International Inc. (HON) reported solid second quarter 2013 results with earnings improving 12.3% to $1.28 per share from $1.14 in the year-ago quarter. Earnings also comprehensively beat the Zacks Consensus Estimate by 6 cents. Net income increased 13.2% to $1.02 billion from $902 million in second quarter 2012.
Revenues
Revenues in second quarter 2013 could only manage a 2.7% year-over-year increase to $9.7 billion owing to the sluggish macroeconomic environment. Total revenue was in line with the Zacks Consensus Estimate of $9.7 billion.
Except the Aerospace segment, all segments reported increased sales. Honeywell continued to benefit from new products launches, new contract wins, strong growth from Automation and Control Solutions segment and Turbo Technologies. Moreover, Honeywell’s long-cycle businesses such as Commercial Aerospace, Process Solutions, and UOP were the key growth drivers.
Operating margins expanded 70 bps year over year.
Segment Performance
Aerospace segment sales dipped 1% year over year to $3.0 billion primarily due to a decline in the Defense and Space business, partially offset by Commercial Growth. However, segment profit increased 4% year over year to $583 million on the back of commercial excellence and superior productivity net of inflation, partially offset by lower aftermarket volumes in Defense and Space.
Margins rose 90 bps year over year to 19.5%.
Automation and Control Solutions segment sales were up 3% year over year to $4.06 billion in the reported quarter. The growth was driven primarily by new product launches, stronger services and better residential end market conditions, partially offset by lackluster non-residential end market.
Moreover, segment profit surged by a healthy 11% to $585 million on the back of commercial excellence and superior productivity net of inflation. Margins for this segment also expanded 110bps year-over-year to 14.4%.
Transportation Systems segment revenues of $947 million for the quarter increased 5% year over year due to rise in sales from platform launches, advanced turbo gas penetrations in majority of region and better commercial vehicle sales from China. However, decline in European light vehicle production volumes partially hampered the growth.
In addition, segment profit reported growth of 11% year over year to $126 million mainly driven by strong productivity and volume leverage, partially offset by unfavorable pricing and in-process projects. Margins for this segment came in at 13.3%, up 60 bps year over year.
Performance Materials and Technologies segment sales increased 9% during the quarter to $1.68 billion due to acquisition of Thomas Russell, higher petrochemical catalyst shipments and higher equipment sales in UOP, partially offset by lower sales in Advanced Materials and unfavorable impact of extreme weather conditions on Fluorine products volume.
However, segment profit plunged 9% to $320 million, due to lower UOP licensing and Advanced Materials sales, investments for growth, inflation, and the dilutive impact of the Thomas Russell acquisition. Margins in the segment contracted 360 bps year over year to 19.0%.
Balance Sheet
Cash and cash equivalents at quarter-end was $4.55 billion. Long-term debt at quarter-end was $5.78 billion.
Cash Flow
Cash flow from operating activities improved significantly to $1.3 billion compared with $973 million in the year-ago quarter.
Outlook
With strong growth in the second quarter earnings, Honeywell increased the low-end of the full year 2013 earnings guidance by five cents to $4.85 to $4.95 a share from $4.80-$4.95. Concurrently, it also increased it low-end sales guidance for the full-year to $38.9- $39.3 billion from prior guidance of $38.8 – $39.3 billion.
We remain encouraged by management’s continued effort to launch products and technologies in order to drive organic growth and expand its business in new geographical regions. Additionally, management’s effort to drive margin expansion is also praiseworthy. Honeywell currently has a Zacks Rank #3 (Hold).
Better-placed stocks in the same sector include Marubeni Corporation (MARUY), Hutchison Whampoa Ltd. (HUWHY) and Macquarie Infrastructure Company LLC (MIC). While, Marubeni carries a Zacks Rank #1 (Strong Buy), Hutchison and Macquarie carry a Zacks Rank #2 (Buy) each.
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