HON

Honeywell International Inc. - Q2 2010 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Honeywell International Inc. for the period ended June 30, 2010. Honeywell is a large accelerated filer operating globally in aerospace, automation and control solutions, specialty materials, and transportation systems. The company reported 772,209,603 shares of Common Stock outstanding as of the period end.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 8% year-over-year for the quarter and 5% for the six-month period, driven primarily by volume increases (6% and 3% respectively) and price increases (2% and 1%).
• Profitability: Net income attributable to Honeywell rose 4% for the quarter ($468M vs. $450M) and 1% for the six months ($854M vs. $847M). Diluted EPS remained flat at $0.60 for the quarter but decreased $0.04 for the six-month period due to higher pension expenses and increased share count.
• Margin Compression: Gross margin percentage decreased 1.7 percentage points for the quarter and 1.3 points for the six months, primarily due to higher non-cash pension expenses and other postretirement benefit costs.
• Segment Performance:
  • Transportation Systems: Sales up 30% and segment profit up 360% (quarterly) driven by turbocharger volume.
  • Specialty Materials: Sales up 20% and segment profit up 43% (quarterly) driven by semiconductor and refrigerant sales.
  • Automation and Control Solutions: Sales up 7% and segment profit up 16% (quarterly).
  • Aerospace: Sales down 3% and segment profit down 2% (quarterly) due to OEM payment adjustments and lower business jet deliveries.

Guidance, Outlook, Risks, and Unusual Items

• Acquisition Activity: Honeywell announced an intention to acquire Sperian Protection for approximately $1.4 billion. $859 million was placed in escrow during the quarter to fund this deal, expected to close in Q3 2010.
• Repositioning Charges: The company incurred $128 million in repositioning and other charges for the quarter ($270 million for six months), primarily related to severance, environmental liabilities, and asbestos claims. Management expects these actions to generate $300 million in pretax savings in 2010.
• Pension Contributions: The company made a $200 million voluntary contribution of common stock to U.S. pension plans in May 2010 and plans to contribute approximately $400 million total in 2010 to improve funded status.
• Legal and Environmental Contingencies: Significant liabilities exist for asbestos claims (NARCO and Bendix) and environmental remediation (e.g., New Jersey Chrome Sites, Onondaga Lake). Total asbestos-related liabilities were $1.706 billion as of June 30, 2010, with $970 million in corresponding insurance recoveries recorded.
• Market Risks: The company faces exposure to foreign currency exchange rates, commodity prices, and interest rates, managed through hedging strategies. Economic conditions in airline and automotive markets remain a risk factor.

Investor Verification Checklist

• Sperian Acquisition: Verify the regulatory approval status and final closing date of the $1.4 billion Sperian Protection acquisition.
• Asbestos Liability Estimates: Review the assumptions used for future NARCO and Bendix asbestos claims, particularly the projected resolution values and insurance recoverability rates.
• Pension Funding: Monitor the impact of the $400 million planned pension contributions on cash flow and the funded status of plans in subsequent quarters.
• Aerospace Segment Recovery: Track the recovery of business and general aviation original equipment sales, which were down significantly due to delivery cancellations.
• Environmental Remediation Costs: Assess the progress and cost estimates for major environmental sites, specifically the New Jersey Chrome Sites and Dundalk Marine Terminal.