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Honeywell's Margins Down as Acquisitions Boost Costs

April 22, 2016
“We have eight acquisitions that we’re integrating this quarter,” CFO Tom Szlosek said. “When you take into account the first year’s integration, there’s a significant amount of one-time cost.”

Honeywell International Inc. reported lower margins because of increased costs from acquisitions, dragging on shares even as earnings topped estimates and the company lifted its profit forecast.

First-quarter margins from Honeywell’s three business segments fell to 18.1% from 18.7%, reversing a trend of increasing profitability. Profit margins would have been 18.9% without the cost of integrating eight acquisitions, the company said.

“You look underneath the numbers here a little bit and the margins were a little weaker,” said Jeff Windau, an analyst with Edward Jones & Co. in St. Louis. “A big portion of that was due to some of the deal costs and associated expenses.”

Shares fell 0.9% to $113.87 at 3:01 p.m. Friday in New York. The shares had gained 11% this year through Thursday.

Honeywell raised the low end of its 2016 earnings forecast to $6.55 to $6.70 a share and boosted expectations for sales to between $40.3 billion and $40.9 billion. The previous forecasts had been for earnings of $6.45 to $6.70 and sales of $39.9 billion to $40.9 billion.

Elster Purchase

Earnings in the first quarter were helped by the $5.1 billion purchase of Elster, the largest acquisition since Chief Executive Officer Dave Cote took the helm in 2002. The maker of water and gas meters helped cushioned a sales drop at the Performance Materials and Technologies unit, which provide services and products to the oil and gas industry.

Although investors have encouraged Cote to use Honeywell’s cash to acquire more companies, they balked at a $90 billion bid in February to take over United Technologies Corp. as too large and risky. Cote scuttled the bid after United Technologies rebuffed the offer and aerospace customers including Airbus Group SE opposed the deal.

First-quarter earnings rose to $1.53 a share from $1.41 a year earlier. That beat the $1.50 average of 19 analysts’ estimates compiled by Bloomberg. Sales increased 3.4% to $9.52 billion. Analysts had anticipated $9.37 billion.

The sales gain was led by the Automation and Control Solutions unit, which climbed 13% to $3.68 billion, driven by the addition of Elster. Aerospace sales rose 2.7% to $3.71 billion and Performance Materials and Technologies had a sales decline of 8.6% to $2.14 billion as demand faltered for gas processing and equipment.

Margin Forecast

Honeywell maintained its forecast for 2016 profit margins at 18.9% to 19.3%. The company over the long term has room to boost profit margins by 3 to 4 percentage points, Cote said on a conference call.

“We have eight acquisitions that we’re integrating this quarter,” Chief Financial Officer Tom Szlosek said in an interview. “When you bring on an acquisition and you take into account the first year’s integration, there’s a significant amount of one-time cost.”

Honeywell forecast second-quarter earnings between $1.61 and $1.66 a share, compared with the $1.64 average of 17 analysts’ estimates compiled by Bloomberg. Sales are expected to be as much as $10.2 billion, Honeywell said, which would be a 4.3% gain from a year earlier as the revenue decline at Performance Materials and Technologies moderates.

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