Honeywell International Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. Amounts are in millions of dollars except per-share data. Honeywell operates through Aerospace, Automation and Control Solutions, Performance Materials and Technologies, and Transportation Systems.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $9,328 | $9,307 | Approximately flat |
| Income before taxes | $1,260 | $1,122 | Up 12% |
| Net income attributable to Honeywell | $966 | $823 | Up 17% |
| Diluted EPS | $1.21 | $1.04 | Up $0.17 |
| Gross margin | 27.3% | 26.1% | Up 1.2 percentage points |
| Effective tax rate | 23.1% | 26.5% | Down 3.4 percentage points |
| Operating cash flow | $341 | $196 | Up $145 |
Sales volume declined 2%, offset by 1% pricing and 1% net contribution from acquisitions and divestitures. Lower material costs, productivity, and reduced pension expense supported gross-margin improvement. Management attributed EPS growth mainly to higher profit in three segments and lower pension expense. Cash dividends were $0.4100 per share, versus $0.3725.
Segments
- Aerospace: Sales $2,911, down 1%; segment profit $551, up 3%. Commercial aftermarket and defense and space demand were weaker.
- Automation and Control Solutions: Sales $3,786, flat; segment profit $523, up 7%, reflecting price and productivity.
- Performance Materials and Technologies: Sales $1,717, up 6%; segment profit $374, up 17%. UOP strength and acquisitions helped; Advanced Materials sales fell 9%.
- Transportation Systems: Sales $914, down 4%; segment profit $111, down 8%, reflecting lower European light-vehicle production, weaker aftermarket sales, pricing pressure, and lower volume.
Total segment profit rose to $1,508 from $1,415.
Cash, debt, and liquidity
- Cash and equivalents were $4,539 at March 31, 2013, down from $4,634 at year-end. Net cash decreased $95 during the quarter.
- Operating cash flow was $341; investing used $311, including $122 for acquisitions; financing used $58. Operating cash flow benefited from higher earnings, lower pension contributions, customer advances, and lower cash taxes, partly offset by working-capital outflows.
- Long-term debt, including current maturities, was $6,413, down from $7,020. Honeywell repaid $600 of 4.25% notes, funded with commercial paper. Commercial paper outstanding increased to $1,200 from $400; short-term borrowings were $86.
- Current assets were $17,681 and current liabilities $13,111. Total assets were $41,800 and total shareowners’ equity $13,533.
- Honeywell reported access to committed credit lines, commercial-paper and public debt markets, and receivables financing as liquidity sources. The filing states none of the designated receivables pools had been sold at quarter-end.
Outlook, management commentary, and material risks
- The filing provides no consolidated full-year revenue or EPS guidance. Repositioning actions are expected to generate approximately $150 of incremental pretax savings in 2013 versus 2012; remaining 2013 cash costs for severance and other exit costs were estimated at approximately $175.
- The planned acquisition of Intermec for approximately $600, net of cash acquired, was expected to close by the end of Q2 2013, subject to U.S. and European regulatory review. Funding was expected from available cash and commercial paper.
- Production at the Metropolis Works facility had been suspended since Q2 2012 during NRC-required seismic upgrades. Honeywell expected work could be completed by the end of Q2 2013 and did not expect the suspension and upgrade costs to materially hurt 2013 segment results.
- Environmental liabilities were $685 at quarter-end, including $54 of new accruals. The company said the timing and ultimate cost are uncertain and could materially affect results or operating cash flow when recognized or paid, though it did not expect a material adverse effect on financial position.
- Asbestos-related liabilities were $1,780, with related insurance recoveries of $698. Estimates depend on future claims, claim values, insurance recoveries, and legal developments. The NARCO reorganization plans were targeting effectiveness in Q2 2013; stated funding obligations include specified payments and future trust claims, subject to applicable terms and caps.
- An adverse ruling in retiree healthcare litigation could increase other postretirement benefits for pre-2003 retirees by an estimated $175. Honeywell said it was confident its negotiated contribution limits would be upheld.
- Honeywell agreed to a $3 civil penalty and remedial actions under a March 2013 Clean Air Act settlement concerning its Hopewell, Virginia facility. It was also investigating additional alleged air-permit violations there.
- Foreign-currency translation reduced Q1 comprehensive income: other comprehensive loss was $317, largely due to a $381 translation adjustment. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether sales growth and margin gains persist, particularly given uneven segment demand and the contribution of acquisitions.
- Cash conversion and working-capital trends, including receivables, customer advances, and accounts payable.
- Commercial-paper levels, debt maturities, and the financing and closing status of the Intermec acquisition.
- Actual savings and cash costs from repositioning actions, and timing of Metropolis facility reopening.
- Changes in environmental and asbestos liabilities, insurance recoveries, NARCO trust implementation, and related cash-payment timing.
- Developments in retiree healthcare litigation and Hopewell environmental matters.
The interim financial statements were reviewed by the independent accountant, not audited; the accountant reported no material modifications were identified as necessary.