“High-growth nations” found in the Middle East and southeast Asia are playing a key role in the international growth of Honeywell’s [HON] defense and space business, according to a company executive.
Mike Madsen, president of Honeywell’s defense and space business, said his sector has increased its presence internationally by about 1-2 percent of revenue per year. Madsen said going back go 2010, defense and space was at about 20 percent international business, but it is about 25 percent today. Madsen said he expects international sales represent over 30 percent of his sector’s business in five years.
About seven percent of his defense business today, Madsen said, is in high-growth nations such as Israel, Turkey and South Korea, in addition to parts of the Middle East and southeast Asia. He expects sales from these types of customers to reach over 13 percent over five years.
“It’s really becoming a much more global business,” Madsen said Aug. 14 at the Jefferies Global Industrials Conference in New York. “Of course, that’s a trend that’s been going on for a long time in the commercial sector.”
Madsen gave a rather pessimistic economic outlook outside international growth and high-growth nations. He said he didn’t expect economies in the United States and western Europe to reach three percent Gross Domestic Product (GDP) or better in the next couple of years. Three percent, Madsen said, is the GDP rate necessary for “the economy to really take off,” and he said economic growth “muddles” along at two or 2.5 percent GDP.
Madsen also said Honeywell continues to see Defense Department contract award delays, particularly in service programs, as DoD deals with challenges from decreased spending through sequestration-related budget caps. Though he said he didn’t expect this to change in the next 12 to 24 months, Madsen said once the government gets through the fiscal year 2015 budget cycle and the fiscal picture for FY ’16 and beyond becomes clearer the contract award delay issue will “begin to resolve itself.”
Though Honeywell has seen contract award delays in services, Madsen said, overall, services like reliability enhancements and fuel efficiency improvements have been a success story for the company over the last 10 years and he sees this both continuing and expanding.
Honeywell is planning for sequestration to continue through FY ’16, Madsen said, and he expects DoD’s budget to be less than the president’s budget request. Madsen said Honeywell has incorporated continued sequestration in its financials and that it has also shaped its business and cost structure accordingly.
Next year Honeywell’s defense and space business will return to growth, Madsen said. He specifically saw the U.S.-centric part of the business growing at about 3 percent and international in the 8-to-9 percent range. Madsen said international growth of 8 percent is “very consistent” with what the company has seen over the past few years.
“We see the international growth really helping us drive that top line growth there of about 4 percent,” Madsen said.
Honeywell said its defense and space business is a $5.1 billion sector serving original equipment manufacturers (OEM), aftermarket, military, government agency and commercial helicopter segments internationally.