Honeywell International Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise stated. Amounts are in millions of dollars except per-share data.
Financial performance and liquidity
- Sales: $7,776, up 3% from $7,570. Management attributed the increase to foreign exchange (+3%) and price (+1%), partly offset by volume (-1%). Product sales were $6,047; service sales were $1,729.
- Profit: Income from continuing operations before taxes was $553 versus $543. Net income attributable to Honeywell was $386 versus $397; diluted EPS was $0.50 versus $0.54. The effective tax rate rose to 28.9% from 26.5%.
- Margins and expenses: Gross margin was 23.1%, down from 24.0%. SG&A was $1,136, or 14.6% of sales, compared with $1,152, or 15.2%. Interest and other financial charges declined to $107 from $117.
- Segment results: Aerospace sales/profit were $2,506/$413, down 9%/15%. Automation and Control Solutions were $3,124/$386, up 4%/24%. Specialty Materials were $1,139/$170, up 8%/36%. Transportation Systems were $1,007/$96, up 33%; the segment had a $3 loss in Q1 2009. Total segment profit increased to $1,036 from $876.
- Cash flow: Operating cash flow was $743, versus $341. Investing used $381, including $296 invested in marketable securities; capital expenditures were $70. Financing used $249, including $231 of dividends and $1,001 of long-term debt repayments. Cash increased by $50 to $2,851.
- Balance sheet and debt: Current assets were $14,333 and current liabilities $11,101. Long-term debt was $6,246, with $23 of current maturities; commercial paper was $1,248 and short-term borrowings $44. Honeywell repaid $1,000 of 7.50% notes, funding the payment with commercial paper and operating cash. Cash dividends were $0.3025 per share.
Material changes and notable items
- Sales growth was uneven: Aerospace declined, while Transportation Systems, Specialty Materials, and Automation and Control Solutions grew. Aerospace weakness included a 59% fall in business and general aviation original-equipment sales.
- Pension expense increased substantially, with pension expense of $194 versus $21; management cited increased amortization of U.S. plan losses as a key factor in lower gross margin and EPS. A $37 postretirement curtailment gain partly offset costs.
- Q1 repositioning and other charges totaled $142 versus $111, including $40 of net repositioning charges, $46 for probable environmental liabilities, $38 for asbestos litigation (net of insurance), and $18 related to evaluation of potential legal settlements. Repositioning actions affected 617 positions.
- Management expects repositioning actions to generate approximately $300 of incremental pretax savings in 2010 versus 2009. It expected approximately $225 of further 2010 cash costs for severance and other exit costs, funded from operating cash flow.
- A one-time, non-cash $13 tax charge followed changes to Medicare Part D tax treatment. In April 2010, Honeywell contributed $100 of marketable securities to a non-U.S. pension plan.
Outlook, risks, and contingencies
- The filing provides no consolidated earnings or revenue guidance. Management expected Aerospace aftermarket sales to be flat for 2010 versus 2009, anticipated slight growth in global flying hours, and noted possible timing effects from defense and space program delays. Specialty Materials’ positive trends in certain end markets were expected to continue; Transportation Systems cited expected turbocharger volume benefits from new platform launches and increased diesel penetration in Western Europe.
- Management identified potential customer or supplier financing constraints and bankruptcies as risks, particularly in long-cycle businesses and airline and automotive markets. It reported no material impact from customer or supplier liquidity issues to date.
- Environmental liabilities were $801 at March 31. The company said ultimate costs and timing are uncertain and could materially affect results or operating cash flow in periods recognized or paid, though it did not expect a material adverse effect on financial position.
- Asbestos liabilities totaled $1,703, with recorded insurance recoveries of $998. NARCO recoveries depend in part on litigation and the finality of its reorganization plan; Bendix estimates and recoverability depend on claim patterns, insurance coverage, and legal developments.
- Other legal matters include the NARCO insurance dispute, Bendix asbestos claims, environmental investigations and proceedings, and purported auto-filter antitrust class actions. The DOJ closed its auto-filter investigation in January 2010. The company stated that adverse developments in contingencies could materially affect results or cash flows in periods recognized or paid.
- Management described forward-looking statements as subject to risks and uncertainties. The independent accountant conducted an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective.
Investor verification priorities
- Confirm whether operating cash flow remains supported by customer advances and working-capital timing; Q1 cash generation benefited from higher accrued expenses.
- Track pension expense, plan funding, and the planned 2010 U.S. and non-U.S. pension contributions.
- Monitor Aerospace demand, especially business and general aviation and aftermarket trends, alongside the recovery in Transportation Systems and other segments.
- Review asbestos liabilities and insurance recoveries, including the NARCO reorganization and disputed coverage, and assess changes in environmental and other legal exposures.
- Assess the impact of repositioning savings against the remaining expected 2010 cash costs, and monitor commercial paper usage following the $1 billion note repayment.