Honeywell International Inc. - Q3 2007 10-Q Summary
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Honeywell International Inc. for the period ended September 30, 2007. Honeywell is a large accelerated filer incorporated in Delaware. The company operates through four primary segments: Aerospace, Automation and Control Solutions, Specialty Materials, and Transportation Systems. As of September 30, 2007, there were 746,769,613 shares of Common Stock outstanding.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Net Sales | $8,735 million | $7,952 million | $25,314 million | $23,091 million |
| Net Income | $618 million | $541 million | $1,755 million | $1,498 million |
| Diluted EPS | $0.81 | $0.66 | $2.25 | $1.81 |
| Gross Margin % | 23.9% | 23.2% | 23.8% | 23.2% |
| Operating Cash Flow (9M) | $2,471 million (vs. $1,970 million in 2006) | |||
| Cash and Equivalents | $1,787 million (as of Sept 30, 2007) | |||
| Total Debt (Long-term + Current) | $7,783 million (Long-term: $5,391M; Current: $415M + $2,047M CP/Short-term) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10% year-over-year for both the quarter and the nine-month period. Growth was driven by volume (6%), price (1%), foreign exchange (2%), and acquisitions/divestitures (1%).
- Profitability: Net income rose 14% in Q3 and 17% for the nine months. Diluted EPS increased 23% in Q3 and 24% for the nine months, aided by a reduction in shares outstanding due to stock repurchases.
- Segment Performance:
- Aerospace: Sales up 9% (Q3) and 10% (9M); Profit up 12% (Q3) and 17% (9M). Driven by commercial air transport and defense sales.
- Automation and Control Solutions: Sales up 12% (Q3) and 13% (9M); Profit up 13% (Q3) and 17% (9M). Driven by growth in Asia and energy retrofit projects.
- Specialty Materials: Sales up 6% (Q3) and 2% (9M); Profit up 43% (Q3) and 7% (9M). Strong UOP performance offset by weakness in Fluorine Products due to the U.S. housing market.
- Transportation Systems: Sales up 10% (Q3) and 8% (9M); Profit flat to down slightly due to inflation (nickel costs) and product development investments.
- Charges: Total repositioning and other charges were $104 million in Q3 and $408 million for the nine months. This includes $151 million in repositioning charges (severance for 2,489 positions) and $170 million in environmental liabilities for the nine-month period.
Guidance, Outlook, and Risks
- Acquisitions: Completed acquisitions of Dimensions International ($230M) and Enraf Holding B.V. ($264M) in July 2007. Entered an agreement in October 2007 to acquire HandHeld Products Inc. for approximately $390 million, subject to regulatory approval.
- Capital Allocation: The company repurchased $3,783 million of common stock in the first nine months of 2007. Dividends paid were $580 million. Management intends to maintain an essentially flat share count for the remainder of 2007.
- Debt and Liquidity: Issued $900 million in Senior Notes in July 2007 and $1 billion in Senior Notes in March 2007. Entered a $2.8 billion credit agreement in May 2007. Commercial paper outstanding increased significantly to $1,977 million.
- Legal and Contingencies:
- Asbestos: Significant liabilities remain for NARCO (refractory) and Bendix (friction) products. Total asbestos liabilities were $1.71 billion, with $1.16 billion in insurance recoveries recorded. The NARCO bankruptcy plan was confirmed in September 2007, but appeals by insurers are pending.
- Environmental: Ongoing remediation costs for sites in New Jersey (Chrome), New York (Onondaga Lake), and Maryland (Dundalk Marine Terminal). A $12 million fine was paid in September 2007 related to 2003 incidents in Baton Rouge, LA.
- Pension Litigation: Recorded a $35 million charge in Q3 related to a settlement in principle regarding the Allen, et. al. v. Honeywell Retirement Earnings Plan lawsuit.
Investor Verification Checklist
- Asbestos Liability Resolution: Verify the status of the NARCO bankruptcy plan appeals and the solvency of insurance carriers covering the $1.71 billion liability.
- Environmental Remediation Costs: Monitor the final costs for the Onondaga Lake and New Jersey Chrome sites, as actual costs could exceed current accruals.
- Stock Repurchase Program: Confirm the execution of the plan to maintain a flat share count for the remainder of 2007 given the $2.9 billion remaining authorization.
- HandHeld Products Acquisition: Track regulatory approval status and integration costs for the pending $390 million acquisition.
- Specialty Materials Volatility: Assess the impact of the U.S. housing market on Fluorine Products sales and the sustainability of UOP's project revenue growth.