Honeywell International Inc. - Q2 2008 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2008. Honeywell International Inc. is a large accelerated filer operating in diversified industries including Aerospace, Automation and Control Solutions, Specialty Materials, and Transportation Systems. The company reported 744,436,457 shares of Common Stock outstanding as of the period end.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Sales | $9,674 million | $18,569 million |
| Net Income | $723 million | $1,366 million |
| Diluted EPS | $0.96 | $1.81 |
| Gross Margin | 24.3% | 24.6% |
| Operating Cash Flow (6mo) | $1,763 million | |
| Cash and Equivalents | $2,204 million (as of June 30, 2008) | |
| Total Debt (Long-term + Current) | $6,893 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13% in Q2 and 12% year-to-date compared to 2007, driven by price increases (3%), volume growth (3%), favorable foreign exchange (3-4%), and acquisitions/divestitures (3-4%).
- Profitability: Net income rose 18% in Q2 and 20% year-to-date. Diluted EPS increased to $0.96 from $0.78 in Q2, aided by higher segment profits and share repurchases.
- Segment Performance:
- Aerospace: Sales up 8%; Profit up 15% (Q2) due to higher prices and volume.
- Automation & Control: Sales up 19%; Profit up 17% (Q2), driven by acquisitions (Norcross, Hand Held Products) and foreign exchange.
- Specialty Materials: Sales up 19%; Profit up 6% (Q2), benefiting from UOP volume and pricing pass-throughs.
- Transportation Systems: Sales up 6%; Profit down 5% (Q2) due to volume declines in Consumer Products Group.
- Charges: Total repositioning and other charges were $150 million in Q2 and $347 million year-to-date, including $62 million for asbestos-related litigation updates and $51 million for environmental liabilities.
Guidance, Outlook, and Risks
- Acquisitions & Divestitures:
- Completed acquisition of Norcross Safety Products ($1.2 billion) in May 2008.
- Completed acquisition of Metrologic Instruments ($720 million) in July 2008.
- Agreed to sell Consumables Solutions business to B/E Aerospace for $1.05 billion; expected to close in Q3 2008 with an estimated pre-tax gain of $600-$640 million.
- Liquidity: The company maintains strong liquidity with $2.2 billion in cash. In February 2008, it issued $1.5 billion in Senior Notes to repay commercial paper. Repurchases of common stock totaled $441 million in the first six months of 2008.
- Risks and Contingencies:
- Asbestos Litigation: Significant liabilities exist for NARCO ($1.1 billion) and Bendix ($546 million) claims. Insurance recoveries are estimated at $1.048 billion. Outcomes depend on bankruptcy proceedings and insurance solvency.
- Environmental: Ongoing remediation costs for sites in New Jersey, Maryland, and New York. Recorded liabilities are $782 million.
- Legal: Subject to antitrust investigations regarding automotive filters and export control reviews regarding gyro systems.
Investor Verification Checklist
- Verify the closing timeline and final consideration for the Consumables Solutions sale to B/E Aerospace.
- Monitor the status of the NARCO bankruptcy plan confirmation and the appeal by insurers regarding coverage.
- Review the impact of the $347 million in repositioning and other charges on future operating margins.
- Assess the sustainability of the 24.6% gross margin given inflationary pressures in raw materials.
- Track the resolution of the antitrust investigation into automotive filter pricing.