Honeywell International is spinning off its oldest business as new Chief Executive Officer Darius Adamczyk shakes up the portfolio in an effort to accelerate growth and sharpen the focus on aerospace parts, factory sensors and products for the energy industry.
The automotive-turbocharger and household-systems operations, with combined sales of about $7.5 billion, will be turned into two stand-alone publicly traded companies, Honeywell said Tuesday. The home-goods unit’s thermostats business traces its roots to 1885, when inventor Albert Butz created a device to regulate furnaces — an innovation Honeywell cites as its “genesis.”
The spinoff plans further Adamczyk’s goal of simplifying the business mix at a company that sells cockpit controls, jet engines, handheld computers, work boots and catalysts for oil refineries. Honeywell will keep its aerospace unit, rejecting the argument of Daniel Loeb’s Third Point that splitting off that division would add $20 billion in shareholder value.
“All the remaining businesses offer options for investment and growth,” Adamczyk said. “I’m very excited about what we can do with this stronger, more simplified portfolio.”
Third Point expressed support for Adamczyk.
“We are pleased that the board and management chose to conduct a thorough portfolio review and agreed that Honeywell should narrow its business focus,” Third Point said. “We are supportive of CEO Darius Adamczyk’s leadership and confident that his commitment to continuous portfolio optimization will further improve shareholder value.”
The portfolio changes represent “pretty much the base case scenario,” said Morgan Stanley analyst Nigel Coe. The tax-free deals are expected to be completed by the end of next year.
Honeywell expects a dividend of $3 billion from the spinoffs, with potential uses such as share buybacks, repaying debt and deals, Adamczyk said. Coupled with free cash flow targeted for 2018, the company will have $7 billion to deploy in the U.S. and $17 billion globally.
“The punch line for me is, we’re going to be very active in the M&A arena,” Adamczyk said.
The lost sales from the spinoffs compare with revenue last year of $39.3 billion for the company, based in Morris Plains, New Jersey.
Providing a preview of third-quarter earnings, Honeywell said “strong results” at the aerospace business, and in the performance-materials and technologies operations, helped boost sales by about 3 percent. Earnings are expected to rise to around $1.75 a share, compared with the $1.74 average of analysts’ estimates compiled by Bloomberg.
Adamczyk took over March 31 from Dave Cote and has been reviewing Honeywell’s businesses. Third Point urged the aerospace spinoff in April.
Cote, who is staying on as chairman until next year, built up Honeywell with a series of moderately sized deals such as last year’s $1.5 billion purchase of warehouse-automation company Intelligrated.
His goal of a $90 billion merger with United Technologies Corp. fizzled in 2016 when the target rebuffed the proposal and customers including planemaker Airbus SE opposed it.
The auto-parts unit will generate about $3 billion in annual revenue and have a workforce of 6,500 employees, Honeywell said. The household-systems business, which includes air-conditioning controls and the ADI security-technology brand, is expected to post $4.5 billion in sales and employ 13,000 people, Honeywell said.
The automotive business had shown promise of outpacing the car industry as vehicle manufacturers used turbochargers to cut weight and emissions while retaining power. Growth prospects diminished as the percentage of engines with turbochargers increased, denting future demand, and the threat of electric-vehicle sales sharpened.
The automotive unit shrank in 2014 after Honeywell sold off a brakes business to Federal Mogul Corp. for $155 million. The operation was tucked under Honeywell’s aerospace division, where it didn’t quite fit. In 2013, the last full year Honeywell broke out financial results for the business, segment profit margin of 13.3 percent trailed the company average of 16.3 percent.