Honeywell Addresses Sales Shortfall -- Update

By Ted Mann 

Honeywell International Inc. said an unexpectedly weak September was to blame for an anticipated drop in its annual sales, which confused and spooked investors in the aerospace and building systems conglomerate.

Chief Executive Dave Cote told investors Friday morning that sales in areas such as aftermarket services for business jet engines and hand-held scanners for shippers and logistics companies "failed to materialize" in the third quarter, requiring the company to cut its targets for earnings and annual sales.

"We expected short cycle orders that normally materialize," Mr. Cote said. "They usually do, but in this case, they didn't."

Honeywell shares fell 8% Friday morning, pressuring shares of other industrial players General Electric Co. and United Technologies Corp.

The announcement was "uncomfortable," Mr. Cote said on a conference call. But the company remains confident in its direction for the long term, he said, and executives say they have weathered some of the headwinds, including weakness in its business linked to oil refining and chemicals.

"This is the bottom" for Honeywell businesses exposed to the oil and gas industries, Mr. Cote said, even as he cautioned troubles in the business jet industry "will get worse" next year.

Sales related to business jets were hurt by a variety of factors, executives said, including slowing growth in emerging regions including the Middle East, Russia and China, where Chief Financial Officer Tom Szlosek said an anticorruption campaign has blunted the market for luxury goods such as private aircraft.

Honeywell's announcement came amid other changes it reported ahead of its third-quarter earnings release, scheduled for Oct. 21, including a reorganization of a business unit and the integration of an acquisition that sells automation systems to warehouse operators.

Nigel Coe, an analyst at Morgan Stanley, derisively compared Honeywell's announcement to a "paella bowl" dropped in front of investors. "The elephant in the room is that credibility is becoming a growing issue," he wrote in a research report. "Can we be sure that the wound has been cauterized?"

In addition to the drop-off in expected business jet sales, Honeywell also is paying up to lock in future business, taking a $140 million charge in the third quarter for sales incentives that will get the company's aerospace systems included on new aircraft.

Those incentives are "painful to do," Mr. Cote said. "You take a short term hit for it, but I really think it sets you up for a long time to come."

Honeywell has been a Wall Street darling over the last half-decade, seeming to perfect a strategy of small- to midsize acquisitions. The company prides itself on integration and has earned the right, in the view of many bullish analysts, to function as a throwback conglomerate, with product offerings that range from jet engines to chemical catalysts for oil refining to thermostats and rubber boots.

The steadiness of that model, along with a strong record for meeting and beating Wall Street expectations, has been a key element of the legacy being built by Mr. Cote, who is scheduled to retire as CEO in March. Mr. Cote will be succeeded by Darius Adamczyk, who joined the company in 2008. Mr. Cote is to stay on as executive chairman through 2018, after Mr. Adamczyk takes the reins.

Mr. Adamczyk didn't appear on Friday's conference call. In response to an analyst's question, Mr. Cote said that Mr. Adamczyk had been "fully involved" and that corporate strategy as his successor takes over would be "consistent with what we're saying today."

Mr. Cote's final months have included some moves that struck observers as out of character, especially an unsuccessful $90 billion takeover bid for United Technologies, one of its chief aerospace industry rivals. United Technologies rebuffed the bid, saying neither customers nor regulators would allow it, and Honeywell said it was walking away from the bid in March.

Write to Ted Mann at [e-mail]

(END) Dow Jones Newswires

October 07, 2016 10:36 ET (14:36 GMT)

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