Honeywell International Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Unaudited interim statements received an independent accountant’s review, not a full audit. Consumer Products Group (CPG) is presented as a discontinued operation.
Financial performance
Amounts are in millions of dollars, except per-share data. Continuing operations exclude CPG.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $9,298 | $8,139 | $27,056 | $23,601 |
| Income from continuing operations attributable to Honeywell | $685 | $579 | $2,168 | $1,600 |
| Net income attributable to Honeywell, including discontinued operations | $862 | $598 | $2,377 | $1,653 |
| Diluted EPS from continuing operations | $0.87 | $0.74 | $2.73 | $2.06 |
| Diluted net EPS | $1.10 | $0.76 | $2.99 | $2.13 |
| Gross margin | 24.4% | 24.2% | 25.6% | 24.6% |
| Effective tax rate | 23.2% | 29.8% | 26.1% | 28.7% |
Sales rose 14% in Q3 and 15% year to date. Management attributed growth to volume, pricing, acquisitions/divestitures, and foreign exchange. Segment profit increased across all four reporting segments; this is the company’s segment measure, which excludes specified corporate costs and other items.
| Segment | Q3 sales | Q3 segment profit | Year-to-date sales | Year-to-date segment profit |
|---|---|---|---|---|
| Aerospace | $2,922 (+8%) | $532 (+16%) | $8,428 (+7%) | $1,450 (+10%) |
| Automation and Control Solutions | $3,948 (+14%) | $544 (+15%) | $11,484 (+17%) | $1,499 (+19%) |
| Specialty Materials | $1,468 (+25%) | $254 (+31%) | $4,229 (+18%) | $819 (+42%) |
| Transportation Systems | $960 (+22%) | $121 (+32%) | $2,915 (+25%) | $368 (+47%) |
Cash flow and capital: Nine-month operating cash flow was $1,356, down from $3,158 in 2010. The decline primarily reflected $1.4 billion of voluntary U.S. pension contributions, lower deferred tax effects, higher cash taxes, and higher repositioning payments; higher underlying earnings partly offset these items. Investing activities provided $113, versus $1,980 used in 2010, including $1,170 of business-sale proceeds. Financing used $195; the company issued $1,389 of long-term debt, repurchased $1,009 of shares, and paid $796 in dividends. Cash increased $1,235 to $3,885.
Balance sheet at September 30, 2011: Current assets were $17,044 and current liabilities $12,859 (working capital $4,185). Total debt, including current maturities, was $7,395, compared with $6,278 at year-end 2010; cash was $3,885. Commercial paper outstanding was $700. Honeywell had a new $2.8 billion five-year credit agreement, with no borrowings under it; it contains no financial covenants and does not restrict dividends.
Material changes and unusual items
- CPG was sold in July for approximately $955 million cash proceeds, generating a $301 million pretax gain ($178 million after tax). Discontinued operations contributed $177 million to Q3 net income and $209 million year to date. The sale also changed the scope of continuing Transportation Systems results.
- Honeywell acquired EMS Technologies in August for approximately $513 million net of cash acquired. Its post-acquisition results were not material to consolidated results; purchase accounting remained preliminary.
- Repositioning and other charges were $410 million in Q3 and $637 million year to date, versus $212 million and $480 million, respectively, in 2010. Q3 actions included workforce reductions affecting 2,097 positions. Management expected approximately $200 million of incremental pretax savings in 2011 versus 2010; remaining 2011 cash costs were estimated at about $150 million.
- Higher segment margins and lower pension/postretirement expense supported gross-margin improvement, partly offset by higher repositioning charges. Lower Q3 tax expense reflected favorable tax-audit outcomes and comparison with the 2010 joint-venture tax impact.
- Cash paid for pension contributions was $1.4 billion in the first nine months. Management was considering an additional $250 million contribution in Q4 and further contributions in 2012. A Q4 pension mark-to-market charge remained uncertain; the filing’s sensitivity analysis ranged from no charge to $4.008 billion under the specified discount-rate and asset-return scenarios.
Outlook, risks and contingencies
- Management expected turbocharger sales growth to moderate in Q4 2011 as vehicle-production growth slowed and diesel penetration stabilized.
- Environmental liabilities recorded were $777 million. The company said further environmental costs could materially affect results or operating cash flow when recognized or paid, although it did not expect a material adverse effect on financial position based on current reserves and experience.
- Recorded asbestos liabilities totaled $1.737 billion, with $845 million of related insurance receivables. Estimates depend on claim trends, insurance recoveries, litigation, and the status of the NARCO bankruptcy plan; adverse developments could affect results or cash flows.
- Other litigation outcomes are uncertain. A proposed $23.8 million settlement in the Allen pension-plan class action awaited court approval. The company was negotiating with federal authorities concerning alleged Clean Air Act violations at its Hopewell, Virginia facility.
- The filing cautions that forward-looking statements are subject to risks and uncertainties and that interim results are not necessarily indicative of full-year results. Market-risk disclosures were reported as not materially changed from the 2010 Form 10-K.
Important facts for investors to verify
- How much reported earnings growth was recurring: assess continuing-operations results separately from the CPG disposal gain and other unusual charges or benefits.
- Whether operating cash generation strengthens after the unusually large pension contributions and whether additional pension funding or a mark-to-market charge is required.
- Progress in realizing repositioning savings, against the charges, cash costs, and workforce actions disclosed.
- Debt, commercial-paper use, and liquidity needs following debt issuance, share repurchases, dividends, and acquisitions.
- Updates to environmental and asbestos reserves, related insurance recoveries, and the NARCO reorganization and insurance-coverage proceedings.
- Whether Q4 turbocharger growth moderated as anticipated and whether commercial aerospace, defense, and other segment trends changed.