Honeywell International (HON)

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The rising price of oil has affected many of Honeywell's clients in the transportation industry. Auto-makers such as Ford and GM have been forced to close some of their plants, lowering their demand for Honeywell's products. ^[3] Meanwhile, struggles in the U.S. Housing Market related to the subprime lending crisis have hurt demand in the construction industry.^[4] Demand for new heating and air conditioning systems depends upon construction levels, leaving Honeywell exposed to the downturn. However, sales by the division, fueled by increased business in Asia, had an organic growth of 3% in the first quarter of 2008.^[5]

[edit] Business Overview

Honeywell: Financial Performance^[6]

Honeywell: Segment Revenues^[7]

Honeywell: Geographical Distribution^[8]

[edit] Business Financials

In 2007, Honeywell's revenue was $34.5 billion having grown steadily at an average rate of 10.5% for the last three years. Its net income was $2.4 billion and this has grown at a rate of 25%, on average, over the last three years. Honeywell has also managed to increase its operating efficiency, illustrated by an increase in operating margin from 6.3% in 2004 to 9.6% in 2007.^[9] Acquisitions have also been a catalyst of Honeywell's growth; in 2007 Honeywell added roughly 2.6% to its overall growth rate through acquisition.^[10]

[edit] Operating Segments

The company operates through four major business segments: Aerospace Products and Services; Automation and Control Solutions; Transportation Systems; Specialty Materials.

[edit] Aerospace: 35% of Revenue, 45% of Net Income

Honeywell Aerospace sells aircraft engines and other parts to aircraft manufacturers and airlines. At nearly $2.2 billion in 2007, this segment makes up the largest portion of Honeywell's net income. It grew by 10% in 2007.^[11] The segment's revenue is driven by global demand for air travel - as reflected in new aircraft production, and the demand for spare parts for aircraft currently in use.

Honeywell is the largest producer of cockpit electronics, and the company says its products are in virtually every type of aircraft in use.^[12]

In 3Q 2007, Honeywell secured the largest single-source contract ever awarded by Airbus to supply three mechanical systems for the new A350 aircraft -- the contract is valued at $16 billion over the expected lifetime of 20-25 years. ^[13]

[edit] Automation and Control: 36% of Revenue, 29% of Net Income

The Automation and Control Solutions (ACS) manufactures and installs building control systems, which include Heating and Air Conditioning (HVAC) systems, security and safety systems, and more complex safety systems for industrial uses. The segment's revenues are driven by residential, commercial, and industrial construction, and capital spending on process and building automation.

ACS is Honeywell's largest revenue segment (at $12.5 billion in 2007, up 13% from 2006), although margins, and hence net income, are lower than those in the company's aerospace segment. The division made 8 acquisitions in 2007, which collectively contributed 3.4% to the segment's 13% revenue growth.^[14]

Honeywell's Automation and Control segment was the company's fastest growing segment by revenue in 2007. Growth in developing markets such as the Middle East exceeded 20 percent.^[15]

[edit] Transportation Systems: 15% of Revenue, 12% of Net Income

Transportation Systems produces car and truck parts, especially engines and filters, under the brands Garrett, Autolite, Prestone and Holts. The segment's revenue is driven by driven by U.S. automobile production.

Sales in the segment were up nearly 11% to $5.09 billion in 2007.^[16] The company's turbo-chargers, which make automobiles more efficient by increasing the air entering engines, are in demand given the rise of oil prices in 2008 - global turbo-charger sales are expected to grow at three times the rate of automobile sales.^[17] .^[18] Turbo-chargers and Nonetheless, sales volume in this segment fell by 3% in the first quarter of 2008 and net income fell by 4%.^[19]

[edit] Specialty Materials: 14% of Revenue, 14% of Net Income

Specialty Materials makes raw materials, especially chemicals, for industrial use. Specialty materials contributed $4.87 billion to Honeywell's revenues and $689 million to its net income.^[20] While the segment is smaller than the others in terms of sales, the margins are relatively higher. The segment grew by 5.2%, but its net income increased by 18%.

[edit] Geographical Distribution

The majority of Honeywell's sales come from North America (61%) and Europe (26%).^[21] In the first quarter of 2008, more than two-thirds of Honeywell's 11% revenue growth came from outside the US. Sales in Honeywell's Automation and Control division saw a jump of 20% in the Middle East and nearly 50% in India and China in 2007.^[22] Honeywell plans on making acquisitions in Asia to fast-track its growth in the region.^[23]

Most of Honeywell's manufacturing takes place in the US. Of the 122,000 people employed by the company, 59,000 were located in the U.S.^[24]

[edit] Trends and Forces

[edit] Decreased housing starts due to subprime crisis affects Automation and Control segment revenues

New construction^[25] is at its lowest level in five years due to the subprime crisis and slowing home sales. June 2008 home construction level was down 23.9% from the year earlier.^[26] Demand for home safety products and heating/air-conditioning systems depends upon construction levels, leaving Honeywell's Automation and Control division, which produces such systems and constitutes 34% of Honeywell's revenues, exposed to the downturn. Nevertheless, sales by the division, fueled by increased business in Asia, had an organic growth of 3% in the first quarter of 2008.^[27]

[edit] High Oil Prices affects Honeywell's Transport Systems business due to reduced demand for automobiles

The rising price of oil has affected many of Honeywell's clients in the transportation industry. Car and car parts sale in the U.S. declined by 9.5% in 2008. Auto-makers such as Ford and GM have been forced to close some of their plants. ^[28] Revenue from Honeywell's Transportation Systems business, which manufactures automobile parts and contributes 15% of Honeywell's revenues, remained stagnant; while its net income fell by 4% in the first quarter of 2008. ^[29]

[edit] International growth offsets a weak domestic market

39% of Honeywell's income comes from the outside US, compared to 29% in 2005, indicating a rapid growth of the company's international business.^[30] In 2007, revenue for Honeywell's Automation and Control Division from India and China grew by 50% and from Middle East by 20%.^[31] The company expects that in 2008 U.S. revenues will remain stagnant due to an economic downturn, while Asia will be the key driver for revenue growth.^[32] The company also plans to make acquisitions in India and China to fast-pace the growth in the region. ^[33]

[edit] Demand for airplanes and airplane parts impacts Honeywell's revenue

The Aerospace division contributed 35% of Honeywell's revenues and 45% of its net income. Demand for its products is dependent on worldwide demand for new airplanes and airplane part, which in turn is dependent on demand for airline travel. However, rising oil prices are hurting the airline industry, which already operates on very thin margins, and this is forcing major carriers to cancel flights and cut back on their number of Available Seat Miles (ASM).^[34] This, in turn, impacts their demand for new parts and new planes in the long term. In the shrot term, however, the Aerospace division is somewhat protected from downturns in the industry because of long-term contracts and sales to the US government, which constituted 30% of the division's revenue in 2007.^[35] In the first quarter of 2008 the divisions sales increased by 8% and margins increased by 1%.^[36]

[edit] Competition

The best way to look at Honeywell's competition is to break it up by divisions:

[edit] Aerospace

• Goodrich Corporation (GR) makes components and systems for commercial and military aircraft. Revenue of $6.3 billion in 2007.
• United Technologies (UTX): manufactures helicopters and aircraft parts. Revenue of $54.8 billion in 2007.
• General Electric Company (GE): industrial conglomerate with strong aircraft parts business. Revenues of $173 billion in 2007.

[edit] Automation and Control

• General Electric Company (GE): manufactures competing safety products and heating/air-conditioning systems. Revenues of $173 billion in 2007.
• Motorola (MOT): competes with Honeywell in safety and networking product's markets. Revenue of $3.0 billion in 2007.
• Ingersoll-Rand Company (IR): manufactures competing temperature control systems and safety products. Revenue of $8.7 billion in 2007.

[edit] Transportation Systems

• BorgWarner (BWA): manufactures automobile engine parts and "Powertrain" products for cars. Revenue of $5.3 billion in 2007.

[edit] Specialty Materials

• Exxon Mobil (XOM): primarily an oil producer, however competes with Honeywell in providing process-based services to petrochemical companies. Revenue of $378 billion in 2007.
• Dow Chemical Company (DOW): manufactures customized chemicals for a number of industries and direct competitor to Honeywell's specialty materials division. Revenue of $53.5 billion in 2007.

GE is probably Honeywell's most significant competitor. It competes in all segments except in specialty materials. GE is the larger of the two companies with revenues and net income of $172 billion and $23billion respectively. The operations of GE are much more diverse allowing it to weather various negative impacts better. However, there is no indication that the competition between GE and Honeywell is cut-throat and, historically, the two companies have co-existed pretty well.

[edit] References

1. ↑ Honeywell 2007 10-K, Item 8. Financial Statements and Supplementary Data, Page 47
2. ↑ Honeywell 2007 Annual report, Letter to Shareholders
3. ↑ "Ford sells off its 2nd closed plant in week", Detroit Free Press, 6/13/08
4. ↑ Housing Starts data by U.S. Census Bureau
5. ↑ Honeywell 2008 1Q 10-Q, Note 11: Segment Financial Data, Page 15
6. ↑ Honeywell 2007 10-K, Item 8. Financial Statements and Supplementary Data, Page 47
7. ↑ Honeywell 2007 10-K, Business Overview, Pages 23-28
8. ↑ Honeywell 2007 10-K, Note 24:Geographic Areas, page 99
9. ↑ Honeywell 2007 10-K, Item 8. Financial Statements and Supplementary Data, Page 47
10. ↑ Honeywell 10-K, Acquisitions and Divestitures, Page 57
11. ↑ Honeywell 2007 10-K, Business Overview, Pages 23-28
12. ↑ Honeywell Aerospace Website, retrieved on July 14, 2008
13. ↑ Honeywell signs $16 billion contract with Airbus, Globeinvestor.com, September 17, 2007
14. ↑ Honeywell 10-K, Acquisitions and Divestitures, Page 57
15. ↑ Honeywell 2007 Annual report, Letter to Shareholders
16. ↑ Honeywell 2007 10-K, Business Overview, Pages 23-28
17. ↑ Honeywell 2007 Annual report
18. ↑ Honeywell 2007 Annual report
19. ↑ Honeywell 2008 1Q 10-Q, Note 11: Segment Financial Data, Page 15
20. ↑ Honeywell 10-K, Business Overview, Pages 23-28
21. ↑ Honeywell 2007 10-K, Note 24:Geographic Areas, page 99
22. ↑ Honeywell 2007 Annual report, Letter to Shareholders
23. ↑ "Honeywell's CEO Sees Steady Growth in Asia", Reuters UK, 2/26/2008
24. ↑ Honeywell 2007 10-K, Item 1. Business, Page 9
25. ↑ Housing Starts data by U.S. Census Bureau
26. ↑ Housing Starts data by U.S. Census Bureau
27. ↑ Honeywell 2008 1Q 10-Q, Note 11: Segment Financial Data, Page 15
28. ↑ "Ford sells off its 2nd closed plant in week", Detroit Free Press, 6/13/08
29. ↑ Honeywell 2008 1Q 10-Q, Note 11: Segment Financial Data, Page 15
30. ↑ Honeywell 2007 10-K, Note 24:Geographic Areas, page 99
31. ↑ Honeywell 2007 10-K, Item 1. Business, Page 9
32. ↑ Honeywell CEO sees steady growth in Asia, Reuters, 2/26/08
33. ↑ Honeywell CEO sees steady growth in Asia, Reuters, 2/26/08
34. ↑ To save cost no speck is too small, New York Times, 6/12/08
35. ↑ Honeywell 2007 10-K, Item 1. Business, Page 7
36. ↑ Honeywell 2008 1Q 10-Q, Note 11: Segment Financial Data, Page 15
37. ↑ GE 2007 10-K, Item 15: Exhibits, Financial Statement Schedules, Page 31
38. ↑ Honeywell 2007 10-K, Item 8. Financial Statements and Supplementary Data, Page 47